Thinking Cleary: Set the self-employed straight

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The industry needs to keep challenging the prevailing myth that self-employed people are locked out of borrowing

Chancellor Philip Hammond’s spring Budget raised the hackles of hard-working people across the country. Not only did he announce a tax hike for the self-employed in the form of increased National Insurance contributions but he also hit small business owners and pensioners by cutting the short-lived tax-free dividend allowance.

From a government that has repeatedly promised to support the so-called ‘JAMs’ (families ‘just about managing’ financially), it was slightly unexpected.

Within a week, Hammond had U-turned on the decision to raise NICs – prompted by an overwhelming public backlash and the apparently late realisation that the Tories had actually promised in their last election manifesto to leave NI frozen until 2020.

There was no such U-turn on dividend tax. And those hit by cuts to the dividend allowance are also largely self-employed. If newspapers are to be believed, they remain pretty bitter about what they perceive as a backhanded swipe at hard-working individuals who have provided jobs and incomes to hundreds of thousands of people.

There will be implications for homeowners, whose incomes will drop as their tax liabilities on dividends rise after April. This is already an issue for those who need to remortgage now because their income will be affected within the term of any mortgage they take today.

Lenders are obliged to consider affordability in the future as well as now, and the Government’s recent to-ing and fro-ing on taxes that affect this is unhelpful. It causes confusion and fear among borrowers.

In practice, I doubt it will make a huge difference for most borrowers – the tax-free allowance is falling from £5,000 to £2,000, meaning the loss of income will be only the tax payable on the difference. But it further muddies the perception thousands of borrowers have of today’s market: that variable income and self-employment make it more difficult to get a mortgage.

Good brokers know this is just a perception. It may take more experience and effort to place a case with a more complex income profile, but it is not impossible. In fact, I would argue that it is not even difficult.

Leaps forward

In the three years since the MMR rules came in, specialist lenders and building societies have made leaps forward to offer self-employed borrowers mortgage finance they can afford. The perception that these borrowers are locked out is nonsense – a fire fuelled by those who rely solely on a rate-sorting sourcing system or going to their high-street lender, only to be turned away by an automated message.

It is true that underwriting mortgages for the self-employed and business owners is less straightforward – some lenders struggle to deal efficiently with the variety of borrower circumstances – but there are 5.5 million people in this position in the UK and they are not all living on the streets.

At lenders where there is experience of reading financial accounts and SA302 statements – and understanding a borrower’s business income – writing these loans is just another day at the office.

Brokers sit at the coalface of this, with the opportunity to help or hinder clients. In a market where reliance on technology is becoming more and more obvious, they have a responsibility to highlight just how many choices these borrowers have, even when technology does not always bring them up within a few seconds.

The Budget highlighted how hard done by the self-employed and small business owners are feeling at the moment. Inflation is rising, the pound is weak and we are on the brink of Brexit. But they continue to form the powerhouse of Britain’s economic growth. Some lenders are supporting them, so make sure your clients know it.

Alan Cleary is managing director at Precise Mortgages