For the self-employed individual with an impaired credit history, the mortgage market has not, in the past, been the place to go for a warming welcome and a vote of confidence. Lenders were not keen to deal with ‘high-risk’ borrowers, and advisers were often hard pushed to find appropriate products for their clients, that offered both reasonable and affordable terms. However, things have improved, and the range and availability of the products on offer today would have been unimaginable even two or three years ago.
According to the Office of National Statistics, there are 3.2 million self-employed people in the UK, from a total of 28.5 million people in employment. Self-employed numbers have stayed relatively constant over the last 10 years, peaking at just under 3.4 million and not dropping below 3.1 million.
What is encouraging about the growth in the self-employment mortgage market is that lenders have started adapting and innovating their products to access existing markets, and provide for those with different histories and needs, such as impaired credit. This approach to widen the spectrum of products and their provision from lenders can only be good for advisers and their customers.
Self-employed individuals are involved in occupations across the board from construction to craft to service (see graph 1), and changing working patterns and technology will keep increasing the options for people considering self-employment.
However, the nature and reason for the credit problems are often similar whether the individual is employed or self-employed, and so being self-cert with a chequered history is not necessarily indicative of future bad debts.
Socially, divorce has become a major factor and subsequent costs and maintenance payments often create credit problems for individuals. Professionally, the self-employed are not as robust as larger institutions and failed suppliers and creditors are business-threatening problems. For those working on a freelance basis, seasonal differences in income, or unforeseen and uncontrollable economic influences can also prove disastrous. However, none of the above are proof that an individual is a serial debtor and as such lenders need to look beyond basic credit scores.
For advisers, it is imperative to get the full details behind a poor credit history to enable the lender to view all circumstances. It is in this sort of arena the adviser can show their worth.
As Richard Hurst, communications manager at Future Mortgages, says: ‘The circumstances of debt are rarely black and white and it is here the adviser can make a difference offering a specialised service.’
Ray Boulger senior technical manager of Charcol, accepts this, but says advisers must not assume self-employed people with credit problems can only be serviced through the sub-prime market.
He says: ‘Advisers have to recognise some lenders will accommodate a certain amount of adverse credit. Some brokers who specialise in the sub-prime market may not be aware the case can be done in the mainstream market.’
If advisers get it wrong, then the consumer can be left with a high price to pay. Boulger comments: ‘The price of the wrong deal in the sub-prime market is high with higher interest rates and redemption penalties to be faced. It is important to get the right deal.’ However, he concedes those with credit problems will have to accept higher interest rate products with larger deposit requirements.
While advisers should be aware of what the mainstream market has to offer, Boulger is quick to point out some lenders in the sub-prime market should also be avoided. In the early 1990s, he says the sub-prime market ‘was occupied by lenders we were not prepared to deal with.’
However, the arrival of Kensington in 1995 gave advisers a solid option in the market, and led the way for other specialist lenders such as Future Mortgages, Verso and Mortgages plc to start operating.
Even so, Alastair Pate, head of marketing for Kensington Mortgages, says advisers should choose their sub-prime lenders carefully. ‘The introducer needs to be comfortable the lender is in the market for the long haul,’ he says.
Nor is it just lenders that customers should be selective over, according to Kevin Patt-erson, managing director for intermediary Park Row. He feels there are some brokers all too willing to take advantage of a customer’s difficult circumstances and use them as a way of charging an unacceptable premium for their services.
He warns that customers are becoming wary of those brokers who make ‘the case fit the [lender’s] criteria due to increased fees.’ Products can be over-inflated compared to the risk the customer represents and he feels anything within 2.5% of base rate is reasonable for the self-employed.
The worry comes not only from what might be seen as some less reputable firms trying to turn a quick profit, but also from some high street lenders. While conditions are good, the sub-prime market offers the potential of expansion for the high street, but as soon as conditions turn it could be seen as non-core business and cut.
The development of the niche market has led to self-employed customers being able to access the same products that are available on the high street, albeit it at an increased rate.
For the self-employed flexibility is important, particularly when it comes to payment schedules, and the choice of self-cert products is popular. Bernard Clark, communications manager for the Council of Mortgage Lenders, says: ‘This is useful where the potential borrower does not have sufficient trading history to satisfy the lender’s requirements for income verification, or where the borrower’s accountant has maximised tax efficiency, or where income is derived from a variety of sources.
‘Perhaps the most obvious feature that attracts a self-employed person is payment flexibility ‘ the option } to make over or underpayments compared to the standard monthly amount. In theory this type of feature should make it easier to ensure the contractual obligations of meeting mortgage payments are met ‘ even if income takes an unexpected dip.’
Indeed the self-employed seem to be as good a risk as any. Steve Sandiford, head of borrowing products at Birmingham Midshires Solutions, says: ‘Advisers will be keen to ensure they are not referring poor business to lenders that is likely to result in default. Data from the Survey of English Housing 1999/2000 indicates the number of self-employed in arrears with their mortgage was 2% ‘ exactly the same as those in employment. This suggests the self-employed sector is unlikely to experience a significantly higher incidence of mortgage arrears and difficulties than the employed.’ (See graph 2 on page 23).
To help protect themselves against misinformation from customers, lenders have access to data from reference companies such as Experian. However, the market would work more efficiently if this was available to advisers as well.
Boulger says this is a problem: ‘The law has been designed with good intentions and it serves its purpose, but it does not act in favour of customers because it can cause time delays and problems.’
For the self-employed with a poor credit history, it may be best to avoid lenders that use credit-rating systems as this tends to pigeon-hole them, and not take into account the circumstances of their situation. Guy Batchelor, sales and marketing director of Platform Homeloans, says: ‘Credit scoring puts people into ‘buckets,’ so we underwrite every case manually.’
Further growth will come in the market as individuals with credit problems realise they will not be excluded from taking out a mortgage, according to Boulger, although he accepts the growth potential in this is limited. He sees any real further growth coming from a change in the economic climate. If things become more difficult then more self-employed people are likely to find themselves with credit problems and need to turn to lenders prepared to take them on.
For lenders, providing for the self-employed also offers the opportunity to provide them with other products they are unlikely to have such as pension, life assurance and accident cover, so each customer can end up more valuable than the average client.
The task that lies ahead for lenders and advisers is to ensure non-conforming borrowers realise what options are open to them, and continue to develop their offerings as working patterns and circumstances change.
Edward Murray is news editor
Self-employed people represent around 10% of the working market.
The right deal is vital as sub-prime market rates and penalties are higher, but may not be necessary.
Flexible products are good for self cert as they can allow for a dip in income.