All the lonely people

Anthony Bailey reports on the financial isolation faced by the growing army of self-employed and contract workers All the lonely people
DOWNSIZED, rationalised, flexible working, going freelance, between jobs. Call it what you will, but today's changing employment patterns mean potential financial problems, and not just the obvious one.

Take mortgages, most people's biggest financial commitment.Lenders have fought for market share in the past year or so, with some astonishing "loss leader" deals available. It should be a buyer's market, but Britain's growing army of self-employed and short-term contract workers could find they get the cold shoulder when applying for a new loan. There may be nothing they can do about this if self-employment or contract work has been forced on them through redundancy. The lesson to learn is that anyone planning to give up full-time employment should include their mortgage arrangements in their plans.

If you hope to move home or to switch your loan to one of the many competitive remortgage deals on offer, your priority should be to act before you leave full-time employment, so you can get a loan based on your current income. Otherwise, you may have problems. Someone who has been self- employed for less than three years and who wants to borrow 95 per cent of the value of a property will find it very hard to get a loan.

"It's not just the lender who should be taking a step back and looking at that sort of loan," says Ian Darby of mortgage broker John Charcol. "It's also the borrower. If you've been self-employed for only 12 months, you may not know whether the income will be there in another 12 months. Should you be entering into a financial arrangement based on that lack of knowledge?"

Lenders can be flexible if you borrow no more than 75 per cent of the value of your property. One option is to go for a "non-status" mortgage. The lender accepts your stated income without requiring proof, but you may be charged an extra 1 per cent for a non-status loan.

To avoid this premium, you may be able to hunt down a lender which is prepared to consider you with proof of income even though you have fewer than three years' accounts.

However, such lenders can be hard to find for those wanting a loan of more than 75 per cent. Proof of income becomes harder to avoid and there can be an extra hurdle, even if you have accounts for three years.

"A lot of building society managers don't understand accounts," says Patrick Bunton of broker London & Country Mortgages. "They might stick to a formula that allows you to borrow no more than three times your net profits. But people can deduct certain expenses to arrive at their net profits, such as depreciation on cars or employing a wife. We argue that lenders should add these things back into the profits."

When looking at your three-year record, some lenders will base a loan on the average of three years' income, but others are prepared to take account of just the past 12 months if there is a clear upward trend.

It's not only the self-employed who may have difficulty getting a mortgage. Contract workers normally need to show that they have an uninterrupted history of work in the same sort of job (not necessarily with the same employer) for two years.

"If, for example, you are with the BBC, where many people work on contract, and you have a couple of contracts renewed, then you can be treated as being permanent," says Mr Darby. "But where people have had breaks between contracts, they are more likely to be treated as self-employed."

Another mortgage pitfall awaits some self-employed people. If you conduct business on the premises and clients visit your home, a lot of lenders will turn you down on the grounds that they will be taking a commercial rather than just a residential risk. Others might add an interest rate premium.

It is not only mortgages that require careful consideration. Other important areas include the following:

o Mortgage repayment protection policies, which are probably a waste of money. "The sickness, accident and redundancy cover which building societies try to sell are not worth the paper they are written on for most self-employed people," says Mr Bunton. These policies pay your mortgage if you lose your job, but a self-employed person would usually have to be made bankrupt before the company paid out.

o Loan protection insurance, which covers the monthly payments on a personal or other loan. It has similar drawbacks to those with mortgage repayment

protection policies. With credit cards, this sort of insurance isbought by doing little more than ticking a box on the credit card application form. But if you find a claim turned down because the insurance is not valid, the premiums you have paid won't be returned.

o Permanent health insurance, which pays an income if you can't work through illness or disability. This is often more important for self-employed people than those who work for employers with generous sick pay schemes. You should get advice on the most suitable policy, to make sure it will pay out when you really need it.

o Private medical insurance. This is something even those who dislike the concept of private medicine should consider. Take, for example, a freelance photographer who can't do his job because of a hernia. A long wait for treatment on the NHS could devastate his finances. Private treatment may be the lesser evil.

o Pensions. Pension planning is more important for the self-employed and contract workers than for those who have access to a company scheme. However, it is easy to sign up for the wrong contract. Go for a single premium rather than a regular premium plan, which could carry penalties if you fail to keep up payments.

o State benefits, which are more restricted for the self-employed. One big benefit they lose is the state earnings-related pension (Serps). Self-employed National Insurance contributors earn the basic state pension, but they aren't entitled to unemployment benefit, incapacity benefit or maternity allowance.

o Household insurance. Most policies won't cover your computer, fax and other office equipment, but if a burglar takes your television and video, you may find the policy has been invalidated because you work at home. It is vital that you tell your insurer you are working from home. Home Run magazine, aimed exclusively at home workers, includes advice on getting insured in its fact sheets. Ring 01291 641313 for details.

o Next week, we begin a series of articles giving financial advice for the self-employed and others not in traditional full-time employment. This will include the new system of tax self-assessment, which gets under way on 6 April, the new tax year.