UK finance crisis: The impact on freelancers

FreelanceUK interviewed Tony Harris, managing director of FreelancerMoney, an independent financial advisory for self-employed freelancers and contractors.

What is the root of the financial upheaval in the UK?

“A credit crunch happened in the US because of some very dubious lending to poor customers in the United States. Literally billions of pounds worth of mortgages have been secured on property that is virtually worthless now.

“As the lending institutions have woken up to the fact that have lent money against dubious security, the (US) market for being able to help these poorer people with mortgages has completely dried up. This means there is nobody to buy those assets back off the lending institutions.

“The bigger problem is that the lenders who originally sold the mortgages then packaged the debt up into larger parcels of borrowing and sold them on to secondary financial institutions, and then ultimately on to the international financial systems.

“So a lot of this debt is now so widely spread throughout the global financial system that it is very difficult to know which institutions are actually left ‘holding the baby,’ in terms of this lending being based on very poor quality real estate.

“My belief is that, as is often the way, it will be the people who can afford to just the write this debt off that will end up being stung. By that, I mean there is a real concern that it may well be institutions in the UK, and globally, which were looking for relatively low-risk debt and didn’t realise that what they buying was, in fact, very high-risk.”

How far has the credit crunch spread into the UK?

“The knock-on effect has been that because in the UK banks didn’t understand or know their own exposure to the sub-prime mortgage debt in the US, they have pulled up a drawbridge in terms of lending money to each other. This has resulted in money on the wholesale market now being very difficult to secure.

“This led to the very high-profile collapse of Northern Rock. The lender was uniquely exposed to raising money on the international money market. This, partly, is because they have a relatively small number of branches supporting an enormous amount of mortgage lending. The way that they did this was by going out and buying funds, rather than having to necessarily attract them from savers.”

Will the credit crunch scare lenders into changing tack and, if so, how will borrowers or customers be affected?

“I think the net result is that lenders are likely to become far more risk averse in the UK. They will try to price out any fear of a subprime mortgage crisis mark II happening in the UK. There is therefore a real danger that perfectly legitimate borrowers become caught in the friendly-fire of this global credit squeeze.

“In the mortgage market, we’re seeing people with any glitch in their credit history are likely to be asked to pay far more for mortgages that just 2 months ago would have been available at virtually standard interest rates.”

Will financial shockwaves cause unwanted ripples for self-employed individuals eyeing self-certification mortgages?

“In terms of self-certification, I think lenders will become far more risk averse when it comes to actually allowing people to self-certify their income at the same margins or at the same interest rates as an ordinary borrower.

“In the past three to four years we’ve seen rates for self-certification mortgages have, more or less, fallen in line with standard borrowers, so there’s no risk premium being charged by these lenders, for what was basically a bit of a ‘leap in the dark’ in terms of a client’s income, and following on from the client’s ability to service the debt.

“Self-certification was supposed to be a panacea for the self-employed because most of them find it difficult to prove their income but had the income in the background though it wasn’t always quantifiable in terms of company accounts.

“Self–cert was a godsend to them. I think really what’s happening now is that lenders are becoming far more risk averse in terms of making that ‘leap in the dark’ by just asking a client to say what they earn. Lenders will either ask for more documentation to verify that income, or, what I think they’ll end up doing, they will just price in an increased amount of risk into their loan book. So rates will move up for self-certification mortgages and they will become tougher to achieve.”

Does the crisis threaten to impact an existing self-certification mortgage holder, say one whose on a variable rate after a two-year fixed rate?

“This customer would be able to remain with their existing mortgage company. But clients in the UK have grown used to what has become an incredibly competitive mortgage market, the most competitive mortgage market in Europe.

Therefore clients have been conditioned to think they can ‘jump ship’ as soon as the two-year scheme is up with their current lender and take the next special offer from the next lender. I think this will be tougher, in reality, to achieve, so there might be a lot less jumping between lenders in the future.”

How has your business been impacted by the financial turmoil?

“As a mortgage broker exclusively helping contract-based workers, what we’ve been able to do over the past eight years is tie a lot of the big high street mortgage lenders down to mortgage underwriting based on contract alone. We rarely go down the self-certification route, so ironically our own clients shouldn’t notice any change at all because they will still be able to prove their income and be completely up-front with the lender. This is because the underwriting is based on the contract.

“However less contract-focussed brokers would traditionally go down the self-cert route and I think that this door is going to become far tougher to open for people in general.”

If I don’t need a self-cert mortgage and don’t have a savings account with Northern Rock, will I feel any fallout from the crumble of Northern Rock?

“You should expect less credit from banks, building societies and credit card providers – all of this is very likely in the future, certainly in the short to medium term. Financial institutions will want to draw a breath and really take stock of what’s happening in the global financial markets but also, they’ll need to pay far more attention to their own exposure.

“Yet, as a mortgage broker, we’ve never been busier. In some ways the debate around lending is largely academic, given people’s desire to buy their own properties. Ironically, we’re seeing a pick up in terms of enquiries because people are sensing there are bargains to be had in the housing market at the moment.

“For the vast majority of our clients, they will still be able to secure a mortgage, certainly they’ll find it tougher to self-certify, but with our own contract–based underwriting I don’t actually see it having a huge impact on our clients. However in terms of the wider economy, there certainly seems to be a dip in overall activity.”

Are the US-sourced problems in any way beneficial in that they act as a warning to lenders in the UK to be more ethical in their lending decisions?

“It is definitely more positive for the UK economy that poor lending decisions were made in US, yesterday rather than over here, tomorrow. In terms of the long-term health of the financial system and the mortgage industry in particular, it is a good thing that they begin to price ‘risk’ into their loan book.

“But also, because of the use of pressure to grab market share, I think that lenders have become a little slapdash in terms of the lending decisions. Prudence had almost gone out of the window in certain cases with some lenders. Anecdotal evidence has shown some lenders had a collective breakdown in common sense in terms of who they were willing to lend to, and how much, particularly where people had poor credit histories.”

What’s your view on how the government has handled the financial woes at Northern Rock and in the wider economy?

“The government has sent out mixed signals: first, it said they weren’t going to do anything in terms of pumping liquidity into the financial system. Then when the problems continued with Northern Rock the government virtually underwrote the entire mortgage book, which is unprecedented. After it’s refusal to act, the government then gave the all-clear to pump £10billion of liquidity into the banking system.”

Is it right for the state to intervene and pledge a guarantee of savers’ deposits up to £100,000, as Alistair Darling, the chancellor, did yesterday?

“In terms of the national increase in wealth generally, the £31,700 (guaranteed under the Financial Service Compensation Scheme) is looking increasingly out of sync with the general increase in wealth in the population. So ironically, out of huge negative we may end up with a silver lining.”

FreelanceUK interviewed Tony Harris, managing director of FreelancerMoney, an independent financial advisory for self-employed contractors. Free financial review for Freelance UK visitors here.


25th September 2007

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