What options are there for self-employed clients as mortgages skyrocket?

The self-employed will be hit particularly hard when fixed-rate mortgages rise or they need to arrange new funding.

On 22 June, the Bank of England raised the base rate to a 15-year high of 5% in an attempt to curb inflation. Analysis by Octane Capital revealed that, as a result, those looking to remortgage could pay an additional £20,000 just in interest over the next five years.

And analysis by the Labour Party warned that even before the latest hike, mortgages were on average £2,000 more than on the continent.

In fact, it’s been suggested by Public First consultancy that the mortgage crisis could ‘dwarf’ the energy bill crisis – particularly for middle earners.

Mortgage lenders are reportedly pulling – and then repricing – deals to reflect soaring rates, affecting both first-time buyers and remortgagers across the board.

What this means in real terms is that 800,000 UK households looking to remortgage and 1.6 million homeowners will see their mortgage rates skyrocket. The National Institute of Economic and Social Research (NIESR) last week warned that 1.2 million households struggling with new rates could see their savings depleted by the end of 2023.

The Government have since launched a new Mortgage Charter signed by 32 lenders, including Barclays, Santander and Nationwide Building Society to offer some degree of protection to homeowners. Signatories agreed:

• From 26 June: not to forcibly evict homeowners in less than a year from their first missed payment – unless in exceptional circumstances.
• From 10 July: borrowers approaching the end of a fixed-rate deal can ‘lock’ in a new deal up to six months ahead and will have the right to request a similar deal.
• To offer a new deal that will allow homeowners to switch to interest-only payments for six months or extend the mortgage term to reduce monthly payments if borrowers have been previously up-to-date with mortgage payments.

While soaring rates will affect most, if not all, homeowners in Britain, self-employed individuals will be one of the groups hit the hardest.

We spoke to accountants across the UK to see how they are supporting their self-employed clients.

High allowable expenses and low tax liability will be a double-edged sword

Clare Bowen, Partner, Monahans

The current interest rate hike will affect those who are on variable rates and when self-employed people renew their mortgage, either because they’ve reached the end of a fixed fee or are reviewing their variable rates. Banks have much more confidence in the continuity of the income of someone who is employed versus the variable income of someone self-employed.

The self-employed also face a catch-22 when looking to get their tax liability as low as possible within the rules set by HMRC. It’s common to log all allowable expenses because this reduces the amount of tax payable on profits. Yet this also brings income down, especially in years where the business invests in assets, and this can be prohibitive when viewed by a bank, which will want to see income as high as possible to offer favourable mortgage rates. This leaves the self-employed stuck between a rock and a hard place.

To support self-employed clients with high mortgage rates and increasing bills, we are advising our clients to seek advice from a financial advisor who will consider the entire financial picture.

When it comes to tax advantages, only a small percentage of self-employed people have significant savings. Those who do should be looking at opportunities to take these out of the tax system and into ISAs, for example, or using them to potentially pay off any high-interest debt.

Advisors will also consider whether taking a self-employed position is the best fit or whether working in a partnership or via a limited company would be more beneficial. Again, this is where the value of an advisor should not be underestimated.

Verdict: Self-employed who keep their tax liability as low as possible by logging allowable expenses bring their income down, making it difficult to get a favourable mortgage rate.

Explore fixed-rate mortgage payments and alternative lenders

Bev Flanagan MAAT, Director, Bev Flanagan Financial

I’m hearing a lot of financial concerns from self-employed clients around higher monthly repayments starting to affect cash flow and reduce disposable income.

There is also the potential impact of increased mortgage rates on their business expenses. Higher mortgage payments could affect overall financial stability, reducing the available capital for business operations or investment.

Self-employed clients are also worried about the potential impact on their ability to secure mortgage loans. Lenders typically assess affordability based on income, and an increase in interest rates could affect how much they can borrow.

Clients may have to juggle their expenses overall, prioritising which are necessary and which they will ultimately have to sacrifice.

As an accountant, I’m trying to help clients with budgeting and financial planning. I often recommend setting aside funds to cover any future increases in mortgage payments to ensure financial stability. Also, some clients may want to explore fixed-rate mortgages to lock in lower interest rates or consider alternative lenders who cater specifically to self-employed individuals.

Verdict: clients should set aside funds now to cover future increases in mortgage payments. Some may also want to explore fixed-rate mortgages or consider alternative lenders.

Putting aside money each month to help cover costs will always be the most appropriate advice

Stuart Crook, Partner, Wellers

There are certainly worries surrounding mortgage rates. Our self-employed clients becoming increasingly concerned as their respective terms and deals come to an end.

For the majority of people, we see and speak to regularly, the main struggle is the uncertainty of costs, both within their sector and from a personal perspective. It is the accumulation of costs rather than specific ones that are proving challenging.

We are looking at time-to-pay options on tax, and some calculations on expected profits, but we have always advised self-employed clients to put aside money for tax each month on a prudent basis. We still see this as the best and most appropriate advice we can offer people.

Of course, if people have been doing this, but these savings are already being used for other working capital purposes, alternative measures are needed.

Verdict: Uncertainty of costs is the main struggle – putting aside money each month to cover costs will always be important.

Annie Makoff is a freelance journalist and editor.