Alan Cleary - Managing Director of Precise Mortgages
Earlier this year the government revealed plans to introduce policy nudges to support retirement saving among the self-employed. According to the government’s own figures1, just 14 per cent of the UK's near-5million self-employed workers were saving into a pension in 2016/17 - a dramatic fall from the 30 per cent doing so in 2007/08.
It’s an interesting move, and one that makes a lot of sense in the context of recent years’ moves towards auto-enrolment into workplace pensions for those in PAYE employment. It is also encouraging to see the government adjust its approach to reflect the changing environment.
The rapid growth of self-employment has been a pronounced feature of the UK labour market in recent years. According to the Office for National Statistics2, the number of self-employed workers rose from 3.3 million people (12 per cent of the labour force) in 2001 to 4.8 million (15.1 per cent of the labour force) in 2017.
Yet, on the ONS’ own admission, there is very little robust data and analysis of the income patterns among the self-employed. What data there is, from the Labour Force Survey3, indicates that the increase in self-employment over this period has been driven by those who work on their own, with a partner but no employees. This group now accounts for 4 million workers in 2016 compared with 2.4 million in 2001.
Meanwhile, data from the Family Resources Survey4 shows that self-employment earnings are volatile - unsurprisingly. This survey looked at weekly earnings and also found that, on average, self-employed incomes were lower than employed incomes at around £240 a week compared to £400 a week.
For mortgage brokers dealing with self-employed borrowers, these dynamics are par for the course. To pay yourself most tax-efficiently often results in taking a minimum salary income and maximising the amount you take out of the business in dividends. More often than not self-employed earners will also leave significant capital in the business, deliberately so as to minimise gains and tax payable.
But the flipside to this strategy is that it hurts affordability assessments considerably. On paper, which is where it matters, self-employed borrowers cannot afford higher mortgage payments. And yet, as many lenders and most brokers know, this is often not the reality.
It can be enormously frustrating for both borrowers in this situation and for their brokers. Common sense should always prevail in the mortgage assessment process, but we all know that sometimes applications get stuck in the system, particularly at larger and more mainstream lenders where this type of specialist business isn’t really what they’re focused on. We have a pricing war in the mainstream market at a time when base rate has risen because the pool of potential borrowers that fit the more vanilla PAYE profile is not getting any larger.
But this is why niche lenders have chosen to focus on serving these types of borrowers. We have the capacity to underwrite cases on an individual basis if needed and we don’t have blanket terms that prohibit the newly self-employed from taking a mortgage from us. We’re not alone in this approach, many of the smaller building societies have also chosen to make manual underwriting a competitive advantage.
Interestingly in the mortgage market, private companies and providers have been quicker to step up and adjust to the shifting structural makeup of our workforce in the UK than have some other sectors, witness the need for policymakers to get involved in how self-employed pensions could be delivered to encourage take up.
One of the great advantages of self-employment is flexibility. It is the power to choose how you work, who you work for and when you work. The downside is that this often means lumpy income and unpredictable financial needs and constraints.
One of the big barriers to saving into a pension for the self-employed, identified in the government-commissioned Taylor Review5, has been the penalties imposed on them should they need to take their money out before retirement. But easy access to savings is paramount to good financial planning for the self-employed, precisely because of the inherent volatility in the structure of their earnings.
It is a conundrum that also exists for lenders when assessing affordability for the self-employed. The nature of flexible working and therefore changeable income makes it harder to justify lending decisions, particularly where affordability looks stretched or income histories are not as long as they might be.
At Precise Mortgages, we are already doing our bit to support lending to the self-employed. But it is interesting to see the Government start to look at how this contingent of society might be better helped by financial services. Watch this space.
Alan Cleary - Managing Director of Precise Mortgages
A report1 by the Centre for the Study of Financial Innovation has cast further light on one of the housing market’s longer term and most challenging trends – how we deal with housing an increasingly ageing society in the UK.
There are a number of contributing factors to this growing crisis, the report suggests, with changing occupancy patterns as multi-generation households have dwindled and older ones increased being one of the biggest. The report finds the average household size has fallen from 2.48 in 1980 to 2.36 in 2018, largely due to the ageing population.
While a growing population inevitably means that more homes must be built, just as pressing is the need to align housing supply with actual household needs. I won’t comment on how policy could be adjusted to support more, older households, but I will say that these findings chime with our own sense of the market - that there is often a mismatch between the type of homes available in certain locations and the type of homes needed.
We often talk about the bridging market in terms of the unregulated deals done to support refurbishment and bringing investment properties back into the market – it’s a vital role played by the sector. But there is also a significant wedge of the market that falls into the regulated space and this is particularly relevant in light of the report’s findings.
Of those regulated deals we write, a growing number relate to the downsizing conundrum. Older couples whose adult children are starting their own families are often keen to move into smaller homes closer to their kids and grandchildren. Yet there is a shortage of this type of housing – often two-bedroom, accessible and with outside space - in areas with jobs and good schools.
Selling off larger family homes, at higher values and the consequently higher stamp duty costs, takes longer than shifting two-bed flats, which have a much broader demand base of landlords, young professional couples and older couples.
This can be a hugely frustrating experience for people in this situation. When they find their perfect downsized home, they don’t want to be stuck waiting around for the sale of their previous home for months. They want (and often need) to secure it and this is where bridging is increasingly stepping in.
The challenges highlighted by the report are not new. The industry has been aware that the number of older homeowners – including those who must remain borrowers for more of their lives - is growing. It is a complex picture - it is not simply a function of society’s ageing. The fallout from endowment mortgages, the lending boom in the early 2000s on interest only terms and the Mortgage Market Review affordability assessments at a time when very low interest rates have made annuities less attractive as a source of income in retirement – all these have made the landscape that much harder for older homeowners to navigate.
The research is a welcome reminder that a healthy housing market means more than just making it easier for first-time buyers to get a foot on the ladder. But there are options available for last-time buyers who need to make the move to more convenient accommodation sooner rather than later – they just need a good broker to help them do it.
Source: 1 https://www.propertywire.com/news/uk/think-tank-says-that-just-building-more-home-is-not-the-solution-to-the-housing-crisis/
Precise Mortgages, the UK’s leading specialist lender*, has appointed a new Key Account Manager to further strengthen the relationships with its key account and distribution partners.
Jonathan Mann will work closely with the lender’s Head of Key Accounts, Liza Campion, and its networks, clubs and packagers.
As a former Business Development Manager, Jonathan brings more than a decade of experience and knowledge to his new position, including roles at Secure Trust Bank and Cambridge Building Society.
Liza Campion, Head of Key Accounts at Precise Mortgages, said: “We are very excited to welcome someone of Jonathan’s calibre to Precise Mortgages. His appointment reinforces our commitment to our Key Accounts and he will act as a vital link between us and all the networks, clubs and packagers that we’ve been working with for a number of years.”
Jonathan added: “I’m honoured to be joining a lender that offers so much to the broker community. I’m looking forward to further developing Precise Mortgages’ broker proposition and helping to enhance brokers’ knowledge of the specialist lending market.”
Source: *BVA BDRC: Project Mercury Q3 2018
Alan Cleary - Managing Director of Precise Mortgages
Landlords have had a bumpy ride over the past three years what with the introduction of the stamp duty surcharge and the phased loss of tax relief, but they’ve proved a resilient bunch.
The latest English Housing Survey1 from the government, published in late January, showed that the proportion of households in the private rented sector has not changed for five years. In 2017-18 the private rented sector accounted for 4.5 million - equivalent to 19 per cent - of households in the country. This is double the size of the private rental sector in 2002, but is a proportion that has remained steady since 2013-14, despite the challenges set in front of landlords.
It’s interesting timing as 31st January was the first time landlords had to file their self-assessment tax returns to include a 25 per cent reduction in tax relief on their buy to let mortgages. It’s also the first time that this reduction will have resulted in a bigger tax bill to pay.
In other words, the crunch on landlords is beginning to bite.
While we deal with mainly professional and portfolio landlords, we are aware of there still being a contingent of smaller scale landlords who hadn’t fully accepted that their finances were about to change. Presumably now, reality will have hit home.
This is likely to prove a kick for those landlords who are still to adjust to the new market dynamics. It’s funny how the loss of cool hard cash can focus the mind. This year’s tax return will have included the loss of just 25 per cent of their relief; it’s going to get worse from here on in.
We would expect there to be a further sell-off of properties, largely in areas of the country where capital values remain high and yields are harder to maintain with the loss of relief.
But this is no bad thing. The property market suffered back in 2008 when a flood of buy to lets hit estate agents’ books as amateur landlords sold out, often at a loss, following a boom in buy to let lending and inner city developments built specifically to cater to landlord demand as opposed to tenant demand.
This time around is not like that. For a start, tenant demand is strong across the country, supporting the commercial argument for continuing to be a landlord. Capital values are softening in London and the South East, but house price inflation continues to be positive further north where capital outlays are lower for new investors. Affordability criteria is sensible and builds in more than a sufficient buffer, even should the ongoing Brexit negotiations (or lack thereof) depress economic growth in the UK this year.
We are seeing a redeployment of capital in the private rented sector; not the end of buy to let.
Professional landlords are reshaping their portfolios, spreading capital more evenly to bring down portfolio loan-to-values and minimise mortgage costs. Use of other income is increasingly incorporated into affordability calculations to allow landlords more flexibility on how and where they use their capital.
They are seeking out more profitable properties to replace those that have been or are being sold. Semi-commercial, multi-lets and houses in multiple occupation have seen a big uptick in popularity over the past couple of years.
Limited company buy to let has dominated the purchase market for obvious reasons, something we expect will continue this year and next.
It may sound contrary to the lending figures coming out of UK Finance2, which show a drop in the number of new purchase buy to let approvals in November, but the buy to let market in this country is growing. Perhaps not in size, but in maturity, its development is undeniable.
With headlines claiming the imminent demise of buy to let, it can be easy to worry that the market is dying a slow and painful death.
Nothing could be further from reality. Markets go through phases, just like people. Buy to let was born only 20 years ago. Quite rightly, it’s learning to be more grown up. That is not only good for landlords, it’s also good for lenders, brokers and stability in the wider market.
Source: 1 https://www.gov.uk/government/collections/english-housing-survey
Alan Cleary - Managing Director of Precise Mortgages
If there has been one thing that has dominated the news over the past couple of months other than Brexit, it’s been the high street.
Nearly every day brings yet another admission from the boss of a ubiquitous high street name that sales have slumped and jobs will be lost.
Debenhams, John Lewis, House of Fraser, Coast, Patisserie Valerie… the list goes on. Research from the Centre for Retail Research1 suggests that job losses on the high street are expected to rise by 20 per cent this year, leaving more than 160,000 people out of a job.
For those who are facing redundancy, it’s a far bigger worry than simply the closure of shops and increasingly ghostly high streets.
Forgive the gloom, but this raises a really important consideration for both lenders and brokers.
The three Ds - death, divorce and debt - are a reality that all of us have to deal with at some point in our lives, whether directly or through someone we know.
Each of these circumstances can throw off even the best laid financial plans. The most stringent affordability assessment in the world cannot foresee the breakdown of a marriage in five years’ time or the loss of a job held for the past 20.
How lenders deal with the changes in circumstances for borrowers who must deal with these challenges is fundamental to our responsibility to treat all of our customers fairly. The Financial Conduct Authority has been assiduous in its encouragement of forbearance and repossessions have been extremely low for more than a decade as a result.
In the majority of cases where customers lose their jobs, they will find another one and avoid arrears or manage to get their finances back on track after a few months. But this leaves them in a really disadvantaged position, especially when it comes to getting approved for a mortgage – or, more often, a remortgage.
It requires careful and sensitive underwriting to assess these borrowers’ affordability and it never makes sense to give a borrower a loan they cannot afford to service (at Precise Mortgages we require a customer to have been in their job for at least 3 months and be able to demonstrate a 12 month continuous employment record), but there are tens of thousands of people in the UK whose credit is inadvertently damaged temporarily who are nevertheless financially responsible.
A blip in credit is just that, a blip. Customers must be aware that there is help out there and brokers are ideally placed to advise as to how they can access that help.
Source: 1 https://www.thisismoney.co.uk/money/news/article-6538509/164-000-jobs-face-axe-disaster-high-street-Store-closures-hit-22-100.html