Since the financial crisis the number of people working as self-employed has swollen with 800,000 joining their ranks in the past seven years. This accounts for nearly half of the total increase in employment in the UK since the financial crisis, and is part of a structural shift since the recession of 2000.
Lenders traditionally have found it difficult to assess people who are self-employed, in part, because the category covers so many different business types, and different levels of income. They struggle with the fact that self-employed people often minimize their earnings on the instructions of advisers in order to pay less tax. This reduces income but will also reduce the amount that can be borrowed to buy a house. So if a self-employed person is sensibly paying more into a pension in order to receive a more efficient corporation tax treatment, there may be few employed people working for lenders that will understand this. The lender prefers to see more tax paid in order to underwrite the loan, thereby implying that the best thing a self-employed person can do to get a mortgage is to increase the amount he or she gives to HMRC.
Without the expertise and experience of manual underwriting, the financial accounts understanding within many lenders reflects a time gone by, and fails to accommodate the choices and complexities of modern living. The self-employed therefore might be excluded from the mainstream mortgage market when they possibly represent a better risk than some employed people. Ultimately it becomes too expensive and difficult for most lenders to contemplate this fragmented yet valuable sector other than in a one size fits all set of criteria.
It’s time to look again at self-employment. Just as the government has grasped that increasingly this is an employment choice that cannot be ignored, so too lenders must go beyond financial stereotypes and flex their approach to account for this growing sector.
It’s not enough just to be able to look at a set of accounts, it is about understanding the figures in the context of self employment, together with the motivations of the person with whom they are dealing. This is what brokers understand. Being self-employed is a major part of our employment profile as a nation. People are working this way because by and large they want to and it is for us to respond to that.
Steve Carruthers is head of mortgage distribution at Newcastle Building Society