The advent of the flexible mortgage was hailed by the lending industry as a breakthrough for borrowers, enabling them to have access to a mortgage that can deliver the type of individual approach borrowers say they seek. From the simple ability to make overpayments without incurring penalties to the totally integrated current account mortgage, borrowers can now choose a product to suit their lifestyle.
However, the picture is not entirely clear on what borrowers should expect from a mortgage labelled ‘flexible.’ And recent research reveals that some of the prime target markets for flexible mortgages ‘ the self-employed ‘ have a disturbing lack of knowledge on the subject.
Tapping into the market
This presents an obvious opportunity to brokers. If you can tap into the pool of self-employed workers and help them understand how a flexible mortgage would suit their lifestyle and earning patterns, then you could not only sell more mortgages, but also form good client relationships, which should ensure a stream of future business.
So what is the ‘flexible’ proposition? A quick definition would include at least: the ability to make underpayments; overpayments; a draw-down facility; and daily interest calculation ‘ before we even touch on the intricacies of offsetting savings against borrowings, or paying the borrower’s salary in to the account.
The first task is to understand the essence of flexible mortgages ‘ and this should not be underestimated. In the first place, not all the 60 or so mortgage lenders who currently offer a flexible product offer all of the features listed above ‘ and the industry is still formulating a benchmark standard for what a flexible mortgage should contain. Flexible ‘CAT marks’ have been suggested and the Council of Mortgage Lenders (CML) is currently preparing a major research report on the subject, due out later this year. This could initiate the process of defining the terms that all borrowers and mortgage advisers should be able to expect from a product labelled ‘flexible.’
All flexible products offer at least the ability to make overpayments without incurring a penalty and a favourite topic in the personal finance pages of the national press at the moment is the huge difference regular mortgage overpayments can make on the overall interest paid by the borrower.
For example, it has been calculated that by paying an extra £50 a month on a £70,0000 loan over 25 years you can save over £18,500 in interest and cut the length of the loan by five years. Similarly, making a lump sum payment of £5,000 in the second year of the loan could save just under £18,000 and cut the term by nearly four years.
For the self-employed who may have a bumper year for earnings, or a specially large one-off contract, paying a lump sum off the mortgage could be a smart financial move ‘ but only if they have a mortgage which allows them to do this.
However, the complementary feature of underpayments is of equal importance to the self-employed.
Many self-employed businesses are independent retailers whose trade can be seasonal and who would welcome the facility to overpay the mortgage in the high season if they could underpay in the leaner months. This facility is especially advantageous as daily interest calculation means the overpayments have the effect of immediately reducing the outstanding balance on which the interest is calculated.
Not all lenders offer underpayments, however: of the 60 lenders currently offering flexible products, 13 offer no underpayments and three offer underpayments only after the first 12 months. So borrowers wishing to use the underpay facility need to be made aware that only certain lenders’ products offer this.
Similarly ‘ and this is of major importance for self-employed borrowers ‘ only a quarter of these lenders offer self-certification of income as an option. The self-employed and owners of small businesses would be the first to admit business income is like a roller coaster with some good years and some bad. The problem is that a mortgage lender who does not offer self-certification can only make an offer to a self-employed applicant with a consistently high enough business income over the past three years, and even then only if this can be proved by audited accounts. This historical proof of business income excludes a lot of mortgage applicants with sound and growing businesses.
If we agree that flexible mortgages are the ideal product to sell your self-employed clients, then it has got to be worth doing the homework to be clear on where you can source the right flexible products and this will necessarily include a self-certification option.
However, this will not be your only task, as it will probably also be an uphill struggle educating your self-employed clients on why their needs can be best satisfied by a flexible deal.
Educating your clients
This can be illustrated with the results of a survey we conducted among small businesses and the self-employed. These make sober reading, especially when you consider the size of the self-certification market. There are now 3.2 million self-employed workers in the UK. And this figure is set to grow, as traditional employment patterns break down, and technology makes the one man/woman business a feasible option to many more workers, who value their independence and want to be in control of their working life.
The seasonal ups and downs experienced by the self-employed provide a prime flexible selling point for the self-employed. However, although 63% of business-owners questioned in the survey (covering all industry sectors) said they were seasonal businesses, 94% had never considered taking out a self-certification flexible mortgage. Perhaps even more significant from the point of view of the mortgage education job that still needs to be done, 72% did not even know about the ability to self-certify their income when applying for a mortgage. Multiplied across the three million-plus self-employed, this could represent a huge untapped market to be opened up for lenders and advisers who deal in self-certification business ‘ especially when the synergy of self-certification and flexibility is understood by the client.
The other key set of survey findings was the level to which certain ‘flexible’ product features appealed to small business owners and the self-employed, once they were made aware of them.
When asked about the ability to make under and overpayments, 79% rated this at the high end of the importance scale, as did 89% when questioned about paying off lump sums and 71% on the subject of a draw down facility. It follows that, once the significant benefits of flexible mortgages are fully understood by potential self-certification borrowers, the market will easily be opened up ‘ offering intermediaries and lenders access to increased sales opportunities.
All lenders and intermediaries who work in the self-certification market need to campaign the benefits of flexibility and above all, work to educate the borrower when marketing themselves to their target customers. From the lender’s perspective it is clear that simple explanatory literature and mailshots could be the first step in addressing the knowledge gap in consumers’ perception.
Mortgage advisers should be careful about assuming a base level of knowledge about both flexible mortgages and self-certification, and develop some easy-to- follow explanations of the key points which can both put borrowers at their ease and point out how various product features can meet their individual needs.
The fluctuating income patterns associated with self-employment can be accommodated by flexible mortgages.
It is essential to check underpayment restrictions if a self-employed client intends to rely on this feature.
Developing easy-to-follow guides to flexible mortgages can be useful in helping clients understand product features.