Hopefully, the worst of the COVID19 pandemic is now over and those who have survived it can now get on with rebuilding their lives and their livelihoods. Part of the transition to the “new normal” will have to involve dealing with the financial consequences of the Coronavirus. The financial-services sector will have a role to play in this and mortgage-lenders in particular will need to think carefully about how they balance flexibility with risk management.
The challenge of managing the UK’s flexible workforce
Flexibility may be great for many employers and it can work well for many individuals, but it can pose a huge challenge to risk assessors. The basic issue is that flexibility is effectively the opposite of predictability. This makes it much harder for risk assessors to do their job of making educated guesses of what the future might hold for someone.
In these situations, the cautious approach is to play safe and either refuse to lend at all or lend on very strict terms. To a certain extent, this protects both lenders and (potential) borrowers. The problem is that lenders need to lend to stay in business and borrowers often need to borrow to buy key assets such as houses. This means that being over cautious can actually wind up harming both parties.
The growing number of flexible workers
There has been growth both in the number of self-employed workers and in the number of workers on zero-hours contracts. Putting the two together they account for almost a fifth of the UK’s workforce.
Additionally, there are occupations where people may earn a baseline salary, but have the opportunity to earn extra money as a part of their job. For example, people in sales roles may earn commission, people in leisure roles may earn tips and people paid on an hourly wage rather than a salary may work overtime. Depending on the nature of the job, these extra payments could be anything from a “nice to have” to a significant source of extra income.
While some of these people may be happy to rent, others may want to buy. Mortgage lenders will therefore need to work out a fair way to deal with them.
Options for helping flexible workers
Possibly the single, biggest step mortgage lenders could take to help flexible workers is to take the time to understand each person’s situation on an individual basis, rather than relying on broad-based rules.
One way to implement this could be to have applicants initially go through a standard screening process to see if they can meet the usual acceptance criteria. If they cannot, however, then applications from flexible workers could be referred to humans for further analysis rather than being rejected outright. This would not mean that the application would necessarily be accepted. It would just be a recognition that standardised processes do not always do justice to people in non-standard situations.
Another option would be to offer products which had some degree of in-built flexibility, albeit with reasonable safeguards. For example, lenders could look to offer offset mortgages which allowed borrowers to make overpayments during “feast” periods, knowing that they could withdraw some of them money if they needed access to it during the “famine” periods. Lenders could place limits on how much could be withdrawn to ensure that a minimum level of repayment was met.
These measures could entail both extra work and some degree of extra risk for lenders. To counterbalance this, lenders could look at insisting on larger deposits and/or charging higher interest rates. Lenders might also want to place restrictions on the type of property which could be bought with these mortgages and focus on properties which have clear potential to be sold on (relatively) quickly and easily, even in slow markets.
Your property may be repossessed if you do not keep up repayments on your mortgage.
The FCA does not regulate some forms of buy to let mortgages
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