Self-employment needs flexible underwriting
22 April 2021
22 April 2021
John Truswell, Newcastle Building Society
Self-employment has always needed a more flexible approach – John Truswell believes this market is only going to increase and lenders must meet the challenge.
It’s hard to define self-employment but the Office for National Statistics' (ONS) research into the sector included people who define themselves as working for themselves, rather than receiving a wage or salary from an employer. According to their findings, by the fourth quarter (October to December) of 2019, there were more than 5 million self-employed people in the UK, up from 3.2 million in 2000. Self-employment has continued to contribute strongly to employment growth in the labour market ever since, with self-employed people representing 15.3% of employment, up from 12% in 2000.
But the pandemic has changed everything. Millions of people with mortgages and hopeful first-time buyers have been furloughed all or part of the past 12 months. As we approach the end of lockdown three and the vaccination programme continues, we are going to see considerable change in the economy and in society. The UK labour market includes those who work for themselves, who like many of their employed counterparts have seen their working lives change, virtually overnight.
The nuances of self-employment
There are differences in the way that self-employed people receive their income, and this makes a difference to the financial support individuals might receive from the Self-Employment Income Support Scheme (SEISS). Each self-employed respondent to the Annual Population Survey is asked to record up to four types of self-employment. These categories do not align precisely with the eligibility criteria for the SEISS but are indicative of which types of self-employment are most common in the labour market.
Self-employed people may have multiple ways of paying themselves and so may have multiple self-employed statuses. For example, someone who works as a builder independently building houses, may also have contracts to maintain company buildings or do freelance paid jobs in their local community.
Self-employment is complex because it is not only difficult to define, but because its prevalence alters according to demographics and geography too. The ONS again highlights ethnicity, sex and age all have a bearing on a person’s proclivity to be self-employed. At 19%, Greater London Authority had the highest proportion of self-employed people amongst the working resident population, followed by Swansea Bay City Region (16%), West of England Combined Authority (15%) and North of Tyne Combined Authority (14%).
The lowest proportions of self-employment were found in Glasgow City Region (10%), Cardiff Capital Region (11%) and Sheffield City Region (11%) with only 1 in 10 of the workers living in these city regions identifying themselves as self-employed.
But self-employment is also growing. There has been a surge in ‘solo’ self-employment in recent years, according to the Institute of Fiscal Studies, with many people taking the option because they had lost their job and could not find alternative employment, rather than pursuing appealing business opportunities. With furlough due to end we might yet see more ‘reluctant entrepreneurs’. Solo self-employed, as opposed to the self-employed people who employ other workers, have become an “increasingly marginalised group” over the past two decades.
In 2000, the solo self-employed were no more likely to have been recently unemployed or economically inactive than employees, but by 2019 they were 45% more likely to have been. Nearly a quarter (23%) of new solo self-employed workers were unemployed in the previous quarter, and a further 31% were inactive. Last year, 14% of the workforce was self-employed, with solo-self-employment accounting for more than a third of all employment growth in the UK since the 2008-9 financial crisis – the highest across the Organisation for Economic Co-operation and Development countries.
Furthermore, the difficulties facing many of these people will be compounded by the introduction of IR35 which will drive companies to hire differently as they endeavour to avoid falling foul of the new directive themselves.
Why intermediaries can help
Brokers know only too well that where a borrower’s income pattern looks even a little bit less than vanilla, building societies remain a more nuanced option than applying for through the machine-driven apparatus of the high street.
The manual approach to underwriting that many smaller building societies still take may seem old-fashioned when we all have apps and artificial intelligence bots coming out of our ears, but in some ways, it’s the best thing for borrowers in our modern times.
There will be potentially more redundancies with the end of furlough in September and more positively, one hopes, lots of new jobs that the pandemic has created by virtue of its impact on how and where we live and work.
With this comes multiple and complicated ramifications for borrowers’ incomes. Assessing the risk that person poses when it comes time to underwrite a mortgage application is now even less likely to fit into a neat algorithm. Those with the resource already in place in underwriting departments will be best placed to offer these loans from the off.
Brokers, surveyors and solicitors know as well as lenders just how incredibly busy the market is at the moment. With the return of 95% LTV lending and the extension of the moratorium on stamp duty until the end of June at £500,000 and September at £250,000, it’s likely that 2021 will be a pretty bumper year for lending.
But if we are all to play a meaningful part in helping fulfil this demand for lending we must have mechanisms that account for the evolving circumstances of borrowers and that means lenders must understand a self-employed opportunity from a risk.
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.