Tax efficient investment for business owners

"The credit crunch all stems from events in the US. As a result of some very dubious sales practices in the poorer communities, to customers who invariably had bad credit ratings, literally billions of pounds worth of mortgages have been secured on property on which the borrowers have little ability to repay the debt".

"Initially low repayments have rocketed as interest rates have increased and the lending institutions have woken up to the fact that they have lent money to clients with little ability to repay the debt. The knock on effect is then that the willingness to help the poor with mortgages has completely dried up and this means that when the mortgage companies eventually foreclose on the initial debt there is nobody to buy those assets back off them".

"The reason why this sorry state of affairs is an issue for us in the UK is because 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 system.

"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 least 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 bought 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 don not know their own exposure to this sub-prime mortgage debt from the US, let alone the extent that competitor banks are exposed, 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 because they have a relatively small number of savings branches supporting an enormous amount of mortgage lending. When the former building society became a PLC they funded a rapidly expanded market share by taking a short cut and instead of building a larger branch network to attract savings they went out and bought funds in from other institutions."

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 sub prime mortgage crisis mark II happening in the UK. There is therefore a real danger that perfectly legitimate borrowers in the UK 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 being 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 allowing people to simply 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 virtually fall in line with standard borrowers rates and this means 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".

"Self-certification was supposed to be a panacea for the self-employed because many find it difficult to prove their income which isn'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 taking the clients word for their ability to repay. Lenders will either ask for more documentation to verify the stated income, or, what I think they'll end up doing will be that they price in a perceived increase in risk into their loan book. So interest 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 who's 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 in Europe."

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 to achieve in future and borrowers may have to stay with the existing lender 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 solely on that all important contract."

"However less contractor-focused brokers would traditionally go down the self-cert route when talking to freelancers 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 variable rate mortgage with Northern Rock, will I feel any fallout from the troubles at Northern Rock?

"You should expect a tightening of credit available generally from the banks, building societies and credit card providers - all of this is very likely 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 to bad debt."

What about the housing market?

"As a mortgage broker, we've never been busier. In some ways the debate around the credit crunch is largely academic to many buyers. We live on a small island with massive constraints on new build and a steadily increasing need for more housing units due to demographics, immigration and second home ownership. Ironically, we're even 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 as jittery homeowners who may feel overexposed put their homes on the market."

"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 contractor clients."

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?

"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 some 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."

Will more cautious lending hurt the buy-to-let market?

"I don't think the credit crunch will have a huge impact of lending to buy-to-let purchasers. If anything, it may work in their favour especially as there is talk that interest rates have peaked. One of the biggest problems in buy-to-let is that as interest rates have crept up this has made the multiple of rent versus mortgage repayments required much tougher to achieve. Ironically if we see interest rates come down again, then that means rental cover, paradoxically, improves, so if anything; the crunch may have a positive impact as many contractors view buy to let as a useful additional income stream and a sound pension fund for their retirement."

Alan Greenspan, former Federal Reserve chairman, predicts the US economy to slowdown in 2008, with a 50% chance of recession. IMIS believes the financial jobs market will be uncertain for at least the next 18 months. What does the future hold for the jobbing contractor?

"Paradoxically another result of the crisis is that the Fed has dropped half a percent off interest rates (to 4.75%), and that has proved to be a boost to stock markets globally."

"If you look at the number of contractors working for mortgage lenders, it is relatively small. Lots of them, however, work for investment banks. In this context booming investment markets are more important contractor employment, it's just whether something derails the global equity markets in the future. Certainly at the moment, the markets are incredibly buoyant but I can't say much more without needing a crystal ball!"

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

"The Bank of England and the government have sent out very mixed signals throughout: 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 their entire mortgage and savings 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 ensure 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 prosperity in the population. So ironically, theres a definite silver lining to come out of all this if savers are to gain greater security"

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