IFAs need to start plugging the knowledge gap among small business owners on self-certification mortgages.
Despite an increasing number of mortgage lenders providing self-cert products, this option is little understood by a large proportion of its target market – the owners of small businesses.
There are around 15 lenders offering self cert mortgages through intermediaries. With nearly 3.2 million self-employed people in the UK, this would seem a healthy market for self-cert loans, which have been designed to meet the needs of people who find it difficult to provide sufficient proof of income to get a mainstream mortgage.
Official statistics are one thing but the actual market conditions for intermediaries to introduce self-cert loans are another. We did some phone research among the owners of small businesses recently to find out what they know about mortgage opportunities available to them. We questioned 200 business proprietors across the UK covering all types of small business with an annual turnover of £250,000 or less. The research included retailers, building contractors, engineers, and businesses in the car industry. The results reveal that mortgage lenders and intermediaries still have a big task ahead of them when it comes to spreading the word on self-certification mortgages.
The first major issue is lack of awareness about the self-cert option. Our survey showed that 76 per cent of small business owners are not aware that lenders allow the self-employed to certify their own income. This is a huge untapped market for the industry, which clearly needs to organise itself better as an efficient communication channel to this sector.
Another specialist mortgage option which could be useful for small business owners is being able to release existing capital from the accrued equity in their residential property, to invest in their business and/or seize opportunities for growth.
Raising capital via a residential mortgage can often cost two or three percentage points less than most other types of business loan so homeowners looking to raise business capital can gain real savings by taking up this option.
The interest paid on the proportion of the mortgage loan which is used for business investment can be taken into account as an expense for tax purposes – so long as the proper accounting rules are observed. However, our survey also revealed low awareness and take up of this option. Eighty-one per cent of those questioned had not considered the capital-release option and 61 per cent were not aware that the interest on such a loan can be offset for tax purposes. The research also showed that 51 per cent of small business owners did not know that business capital raised by remortgaging their home would be charged at a lower interest rate than other types of business finance such as commercial loans.
Ninety-seven per cent believe they would be putting their home at risk if they remortgaged to raise business capital. The reality is that better awareness of the safety factors which lenders put in place would give more small business owners the confidence to raise business capital on their residential property at highly competitive rates. For example, nearly half of those surveyed (43 per cent) did not think it was very important to keep total mortgage borrowing to within a reasonable proportion of the property's value, say an LTV of 75 per cent.
This ignorance about how to manage mortgage borrowing prudently, while still benefiting from the lower interest rates that a residential mortgage loan could offer, needsto be addressed.
The survey did show that small business owners are keen to take independent advice before they raise business capital on their homes. Seventy-seven per cent said they would consult an accountant or financial adviser before taking such a step, with only 20 per cent saying they would seek advice direct from the mortgage lender. The most popular source for advice was accountants, with 47.5 per cent of those questioned saying that they would consult their accountant when looking to change their mortgage. Here, once again, financial advisers looking to grow their business in the self certification mortgage market could seize this opportunity by forming business alliances with local accountants – very few of whom are qualified or registered to advise on or sell residential mortgages.
The owner-managers of small businesses occupy the “no man's land” between private individual and commercial enterprise, and it is clear that their mortgage information needs have been poorly addressed so far.
Perhaps it is time to stop taking the self employed sector for granted and to start thinking a little more seriously about what the self employed need to know in order to make informed decisions about mortgages. After all, those lenders and advisers who can find a way to communicate the benefits of a self-certification mortgage to this target group will also be assured of improving their own businesses.
Mel Dring, Marketing manager, Verso