Mortgages: everyone needs a long-term plan

As much as half the UK workforce could work for themselves by 2011, according to research commissioned by Vodafone. Already one in eight Britons run their own businesses, and up to a third of the population are thinking about opting for self-employment.

An equally large group of people is working on either short- or fixed-term contracts, as employers and employees look for more flexible ways of working, without actually setting out to run a business.

Contractors have been somewhat overlooked by mortgage lenders. As they are neither employees nor self-employed, they might not have the evidence of salary and job status to get a normal mortgage, but nor will they have the accounts and paperwork of a self-employed person.

According to Cath Hearnden, of MyMortgageDirect, contractors account for around 15 per cent of all loan applications; 15-20 per cent come from the self-employed and the remainder from salaried workers. And the percentage of contract workers is rising.

Hearnden points out that the picture is complicated by the growing number of homebuyers who have full-time jobs but no permanent contract. As well as "serial" contractors in industries such as IT, who move from client to client, more and more people are being employed on fixed-term contracts in sectors as varied as local government, financial services and education.

"We are seeing more blue-collar workers on 12-month contracts, working for organisations such as councils," she says.

How does this affect my mortgage?

Although lenders are becoming more flexible in the way they treat homebuyers on contracts, the options open to a contract worker might be more limited than those for either an employee or the self employed.

An IT professional or other specialist who has worked on short-term contracts might find it easier to arrange a mortgage than a public sector worker with a job that is for a fixed term, especially if it is the first time the homebuyer has held a contract position.

"Most lenders will want to see a contract has been renewed at least once or even twice," Hearnden explains. "If you are looking for a low loan-to-value, it might not be a problem, but if you want to borrow a higher percentage of the price it can be difficult. It is also a problem if your contract is not renewable."

The length of the contract will also be a factor, as will any track record of employment in the field. Someone moving from permanent employment to contracting may be able to convince a lender to give them a loan on their standard, employed terms. But a career move into a different sector will be trickier.

Another factor is length of contract. According to David Hollingworth of London & Country, a contract with two years or more to run will satisfy most lenders. Shorter contracts, or those with a year or less left to run, may well mean an application is refused. "If you are coming to the end of the contract and there is no sign of it being renewed, that is a problem," he says.

What are the options for contractors?

The first step is to check the terms of the contract, and then talk through the options with a mortgage broker. As terms and lenders' policies differ widely, this is one area where good advice is essential. Some companies, such as Abbey and Halifax, have a reputation for being sympathetic to contract workers in IT and other professional services.

Homebuyers who do not have a track record of working as an independent contractor, or are on a fixed-term employment contract, may have to look beyond a regular mortgage. According to Cathy Hearnden a self-certification mortgage is an option, albeit at a cost.

"If someone has a history of stable employment and income, but has worked on several contracts or moved between jobs a lot, self-certification can suit. We can look at other proofs of income, such as bank statements," she says.

But self-certification should never be a first port of call, she cautions. Even the best deals will be 0.5 per cent costlier than a regular mortgage, and arrangement fees can be higher too.