As the majority of British mortgage introducers work for themselves, they have a lot of empathy with self-employed borrowers. They know that running your own business can be tough, particularly balancing the needs of customers with the demands of administration and back office functions.
Most importantly, self-employed intermediaries will understand the financial pressures on people who work for themselves – if you don’t work or can’t work, then you don’t get paid. Unlike most employees there is no sick pay or holiday pay for the self-employed. Waged workers have a certain amount of protection if the work dries up and they are made redundant or are otherwise made unemployed. There are no such safeguards for the self-employed.
For many small businesses and sole-traders there is a minimal divide between business finances and personal finances, so any fluctuations in income for the self-employed can play havoc with personal commitments, such as mortgage repayments.
A growing and changing market
In 2006 the number of self-employed people and small businesses in the UK reached 3.6 million, with around 200,000 new start-ups every year. Self-employment trends are also changing, with more people pursuing freelance careers or contract employment. This means they could be working on a project for a period of time and then may have to wait for weeks on end before the next contract comes along.
These issues of fluctuating income and the lack of a cushion of protection for the self-employed will all be familiar to mortgage brokers and advisers who are used to getting up in the morning and setting out to find business for the day and ensure their income.
It is no wonder then that so many brokers and IFAs count self-employed people among their customer base. Research by Datamonitor found that for two-thirds of financial advisers, at least a quarter of their client base is made up of self-employed workers, whereas for a quarter of all advisers surveyed more than half of their customers work for themselves.
In addition, self-employed people are often greater users of the financial adviser’s services, wanting advice on protection products, business loans and even business mortgages. And because they are in business themselves, the self-employed are more likely to return to a trusted provider, so they offer a great opportunity for advisers and brokers to build up a strong client relationship.
When you look at the type of mortgages that many self-employed workers gravitate towards, then it is clear why they value the advice of mortgage brokers so much. According to research by Datamonitor, around 55 per cent of all self-cert customers are self-employed, borrowing a total of £5.5 billion. A further 34 per cent of the sector is made up of contract workers, agency staff and seasonal workers.
In the past, self-cert products have been the only option for a huge number of self-employed people. This is because many mainstream lenders have not been willing to lend to borrowers running their own successful businesses, and who have not been trading long enough to have the three years’ accounts that many providers demand.
In fact, until recently the UK’s self-employed, often seen as the lifeblood of the British economy, had been woefully underprovided by the financial services market when it came to mortgages and payment protection (PPI) products. That is changing now and recently there have been some new mortgages designed specifically for the self-employed.
These are home loans that are designed to be flexible and give borrowers more control over their mortgage repayments and ultimately enable them to manage both their personal and business finances better. For example, the option to make overpayments into the mortgage when income is strong, is ideal for the seasonal business or contract worker, and could potentially see them paying off their mortgage sooner, saving thousands of pounds in interest.
But the overpayment pot can also be used to enable the borrower to make underpayments or even take a holiday from their mortgage repayments in the future, again very useful for the seasonal business experiencing a not so strong income pattern or the freelance worker between contracts.
An overpayment facility in a mortgage can also be used as a tax-efficient savings vehicle for the self-employed who can use it to save towards business expenses such as tax or VAT, or for a major purchase of assets or equipment for their business. The overpayment pot helps offset interest on their mortgage and is a more efficient than a traditional business reserve account.
Lacking protection
The development of mortgages designed specifically for the self-employed is great news, yet it seems the availability of mortgage payment protection insurance (MPPI) that also caters for people that work for themselves is lagging behind somewhat. There are some insurance policies out there that claim to be suitable for the self-employed, but when intermediaries read through the detail they soon discover that a lot of the issues and protection needs that are unique to the self-employed are not covered.
Most mortgage intermediaries understand the benefits of MPPI for their clients, but they are also fully aware of the reticence many borrowers have for taking out such cover, particularly in light of the on-going debate about cost. In fact, sales of protection products are growing, yet according to the Council of Mortgage Lenders (CML), out of the 11.6 million mortgages currently in the UK, only 2.45 million of them are covered by payment protection, just over one-in-five borrowers.
The reasons for self-employed borrowers taking out MPPI are extremely compelling when you consider that of the four biggest causes of mortgage arrears, three of them are problems that the self-employed are not covered for by any statutory protection: reduced income, which accounts for 31 per cent of arrears; unemployment, the cause of 12 per cent of missed payments; and ill-health, also accounting for 12 per cent of mortgage defaults.
So what sort of benefits should brokers look for when searching for MPPI insurance for their self-employed and contract working clients? Ideally there should be a choice of cover with options that kick in as soon as possible – after 30 days at the most – as well as providing back to day one cover, if desired.
Because the self-employed do not have access to any statutory sick pay from the government, the protection policy should offer cover against accidents and sickness. According to the Health and Safety Executive, during the 12 months of 2004, 33 million working days were lost in the UK due to work-related ill health.
Getting back on your feet again after an illness or an accident is hard enough if you are employed, but if you work for yourself you will also need time to sort out your affairs, find new customers and get your business up and running. So a suitable insurance policy should offer long-term benefits, such as an option of 12 or 24 months’ cover.
Protection for the self-employed also needs to be able to cover a wide range of conditions, including some that the standard policies don’t cover, such as backache. Back problems are the number one cause of sick days in the UK, but for people working for themselves, especially in manual trades like construction, if you take a time off you lose work and therefore income. So mortgage intermediaries need to seek out MPPI cover that allows for backache for their self-employed clients.
Unemployment and loss of income is usually where most payment protection policies fall down when it comes to the self-employed because, in theory, the borrower is employing his or herself. There is no unemployment benefit for the sole-trader that loses a contract or sees their customer base dry up.
Providing the cover
However some new MPPI products for the self-employed do actually cover borrowers for lost income and unemployment. Cover is available, for example, if the self-employed borrower has a signed contract with a customer and that contract is terminated part way through, or even before the work begins. Benefits remain in place until the self-employed worker has found replacement business.
Another development in MPPI for the self-employed is cover that pays out if the borrower does not get any kind of income due to a lack of orders. For borrowers working for themselves, this option can be vital in giving them time to find new clients and income streams without having to worry about missing their mortgage repayments.
As anyone that has set up a business or struck out on their own knows, when you first become self-employed it is good to have a little help and support on your side. By finding the right mortgages and payment protection insurance policies for their clients, mortgage intermediaries can play an important part in helping Britain’s entrepreneurs succeed in business.
Ian Giles, Marketing Director at Kensington Mortgages
