Alan Cleary - Managing Director of Precise Mortgages
Zero hours contracts are a point of contention for many people. One side (typically the employers) argue they’re flexible and provide employees with choices; the other, the workers themselves, claim they have reduced rights as a result.
There have been several high profile court cases on the subject, most notably brought by Deliveroo couriers and Uber drivers. Uber drivers won the legal right to be treated as employees, thereby qualifying for sick pay, maternity cover and holiday pay among other things. Uber meanwhile is appealing.
Politicians have also waded in. Labour’s shadow chancellor John McDonnell has been very vocal about his wish to ban zero hour contracts, laying out his proposals at last year’s party conference.
And last month the zero hour contracts debate reared its head again after the TUC claimed1 that those working on the contracts are typically paid a third less than other workers and they get all the worst shifts. The TUC polled 3,287 workers - 300 of them zero hour staff – and called on government to ban zero hour contracts, as well as take ‘further action to tackle exploitative and insecure work’.
Theresa May’s government meanwhile looks unlikely to act any time soon. Responding to the TUC in February2, the government said a ban would ‘impact more people than it would help’. A business department spokesman told the BBC: ‘They provide flexibility for both employers and individuals, such as carers, students, or retirees.’
In February, the Office for National Statistics (ONS)3 published estimates showing around 844,000 people were in employment on zero hours contracts in their main job in the UK in 2018 - some 57,000 fewer than for a year earlier. However, long-term there has been a significant rise in the number of people in this type of work. The ONS Labour Force Survey reported just 147,000 people in employment in October to December 2006 were on a zero hour contract. In the same period last year, that number was 844,000.
Much has been written about the growing need for mortgage finance for the self-employed and we at Precise Mortgages, along with various other building societies and specialist lenders, have worked closely with brokers to develop our criteria so that we can help more self-employed mortgage applicants.
There are several challenges when it comes to assessing affordability for the self-employed, but particularly for those on zero hours contracts. For example, the TUC research found that on average, zero hours workers work 25 hours a week, compared to the average employed worker, who works 36 hours a week. The TUC figures also show that one in seven zero hour workers (16 per cent) do not have work every week, while the ONS figures show that a third of zero hours workers have been with their current employer for less than 12 months.
However, just because these people choose to work in this way, doesn’t mean we can’t lend to them. We have developed criteria specifically aimed at supporting borrowers who choose to work on zero hour contracts, and recently extended our criteria to include second applicants.
Zero hour contracts are now permitted when the secondary applicant (i.e. not the main income earner) is employed on this basis. In order to be as flexible as possible, we only require payslips covering the last six months and the borrower’s latest P60. Eligible income is the lower of the average pay from the last three months or last six months.
Whether or not zero hours contracts should be banned is up to others, but while they exist, there is a responsibility among lenders not to unfairly exclude these workers from the chance to own a home with a mortgage.
Alan Cleary - Managing Director of Precise Mortgages
Landlords have seen a lot of change over the past few years – the introduction of the Stamp Duty surcharge, the reduction in tax relief, and tougher affordability and stress-testing by lenders.
The latest UK Finance figures1 show there were 5,100 new buy to let home purchase mortgages completed in December 2018, some 5.6 per cent fewer than in the same month a year earlier. By value this was £0.7 billion of lending in the month, 12.5 per cent down year-on-year. In 2018, there were 66,400 new buy to let home purchases completed, some 11.5 per cent less than in 2017. The £9 billion of new lending in the year was 15 per cent less than in 2017.
But regardless of the new buy to let environment, the savviest landlords have adapted and survived.
It’s been interesting to see the different approaches they have taken to protect and even improve their yields over the past three years. The movement of capital out of high value areas such as London and the South East of England towards regional hubs has been well documented.
But property types, what you do with them and how you finance your portfolio has also been a strategy that many larger scale landlords have adopted. Here are the three trends we’re seeing more and more of as landlords rebalance their portfolios to maximise yields.
After the Bank of England introduced stricter stress-testing on affordability for buy to let mortgages, nearly all lenders hiked their interest coverage ratios from a standard 125 per cent at 5 per cent to 145 per cent at 5.5 per cent. After a few months, and some tentative toe-dipping, several lenders began to relax this back, particularly where landlords were paying basic rate income tax.
Precise Mortgages believes that affordability should be considered for a borrower’s holistic financial position. To that end, we brought in top slicing on buy to let remortgages, allowing customers to secure the buy to let loan size they need by using their excess disposable income to top up any rental shortfall. This has proved to be a really popular option for landlords looking to maintain properties, particularly in London and the South East where rents are already very high.
This type of flexible approach to income assessment has also helped to support the buy to let remortgage market. The UK Finance figures showed 12,400 new buy to let remortgages completed in December 2018, some 25.3 per cent more than in the same month a year earlier. By value this was £2.0 billion of lending in the month, 25 per cent more year-on-year.
In 2018, there were 169,100 new buy to let remortgages completed, some 11.2 per cent more than in 2017. The £27 billion of new lending in the year was 11.6 per cent more than in 2017.
Rather than buy a property ready-made to let – at a premium – increasingly landlords have opted to purchase sub-standard properties at a lower market value and then refurbish them to add capital value, improving yields by maximising the rental income possible.
There are various ways to finance this approach, but bridging finance has proved very popular with landlords looking to expand their portfolios. We spotted this trend around a year ago and, in the autumn, launched our Refurbishment Buy to Let proposition with selected brokers to see how it went down.
The answer is – it went down a storm. The product works by combining a short-term bridging loan that rolls up interest while the refurbishment is undertaken. When the property is ready to let and meets the expected valuation, the borrower exits on to a standard buy to let term mortgage – but the beauty of it from the borrower’s perspective (and the broker’s) is that there is no need to resubmit an application for the buy to let loan. The whole deal is underwritten at the outset. Naturally there are two procuration fees, given it is two separate loans.
We have seen a gradual shift in the profile of landlords we are lending to. There has been a noticeable exit of smaller scale amateurs from the market, freeing up properties for first-time buyers to purchase (this shows in the UK figures for 2018, which put the number of first-time buyers at its highest for 12 years). We’ve also seen larger scale landlords offload lower yielding properties in favour of reinvesting capital into larger scale options.
Houses in multiple occupation and multi-unit buy to lets have seen a real uptick in popularity following the tax changes for landlords. Not only do these more complex property types allow landlords to maximise rental incomes, they also offer greater protection for landlords from void periods.
So the buy to let market may be down, but it’s definitely not out. In fact the level of professionalism has improved the quality of deals being done, something that should be seen as a positive.
Source: 1 https://www.ukfinance.org.uk/press/press-releases/number-first-time-buyers-reaches-12-year-high-2018
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