Final steps to a prosperous 2012 as a contractor

(Continued from yesterday)

Step 6: Keep your monthly borrowing costs down (and save £500)

With uncertainty in the eurozone continuing to push up borrowing costs for UK banks and building societies, historically low base rates are not protecting mortgage holders from a potential spike in monthly borrowing costs.

In the past few months, thousands of borrowers have found their standard variable rate increase as financial institutions play a colossal game of snap, with tranches of borrowing passing around the market.

As a contractor, your mortgage is almost certainly your largest monthly outgoing. It’s therefore vitally important that you ensure that you pay as little as possible in interest on this debt.

Since the start of this year, we have been inundated with clients wanting to remortgage, often to a fixed deal, and invariably to a lower discounted rate now to avoid any hike in borrowing costs in the future. Contractors have confirmed that some brokers actually still charge for remortgaging advice, often as much as £500! Our other appeal which contractors cite is our mortgage affordability tests being based solely on their gross contract income. This avoids the difficulties that freelancers and the self-employed traditionally face when approaching lenders directly.

Contractors are also expressing interest in releasing money from their home, often eyeing the windfall to fund debt consolidation, a deposit on a buy-to-let investment or home improvements. For equity release or remortgaging, CUK readers should reference ‘Miranda Francis.’

Step 7: Home insurance check-up

With household expenses set to rise again in the coming months, it’s never been more important to shop around for services, particularly buildings and home contents insurance.

Remember, the endless adverts for comparison websites only tell part of the story because some savings can turn out be a false economy at the time of the claim. More often the sting in this area comes from freelancers paying over the odds, even when they may be dangerously underinsured. Like general insurance, the home contents insurance market can often feel like a maze, but keep your head navigating it because you need to read the small print. Will, for example, the provider stand by you in the event of a claim? Reference for CUK readers is ‘Luke Somerset.’

Step 8: Protect against state benefit cuts

Your income is totally reliant on you being fit and healthy enough to work tomorrow. With state benefits offering a subsistence level of support and becoming increasingly hard to qualify for as austerity cuts bite, it is essential to protect yourself against illness or injury.

Even if you have income protection already in place, in light of new contract rate-based cover that is available, we would recommend reviewing your existing cover to ensure that it is still fit for purpose, and competitive.

Step 9: Avoid NHS queues

Health insurance packages are best when they include private hospital cover at reduced rates. Also look into the ease of making claim well before the event. In the case of a contractor, time avoided waiting in an NHS queue that, enables you to get back to work with a minimum of delay, could literally make any monthly premiums self-financing. Interested CUK readers should reference ‘Ray Lamb.’

Step 10: Mitigate investment volatility

The credit crunch and eurozone crisis has brought into sharp relief the need for investment management to focus as much on volatility and mitigating downside risk, as on growth.

Too often in the past it was considered enough to simply set up a pension or ISA for instance; have your adviser pick a range of investments and then leave these funds to do their work. However we live in very different times and this approach is no longer sufficient to always meet long term goals.

What we recommend (indeed; what we will shortly be offering) is constant monitoring and management of your funds. For us to do this, a quarterly investment committee set up by ContractorFinancials will meet. It will call on outside expertise where necessary to closely monitor funds and decide on the allocation of client monies across the various asset classes, to ensure that each investor remains on track. Clients will have their investments regularly rebalanced to mitigate risk. Back testing of this approach has shown significant reduction in volatility.

The second in a 2-part series by Tony Harris, founder of ContractorMoney, an independent financial adviser to contractors.

Friday 3rd February 2012