The types of contractor friendly mortgage on offer can confuse the hardiest contractor veteran. Here we explain what products are available, and what they mean in practice.
Before we explain what each product really means, we should look at how mortgages of all types are repaid.
Repayment vs. Interest
When you repay your mortgage loan, the instalments will be used to repay the interest charged on the loan (interest-only), or be used to pay off the capital itself (the amount borrowed) as well as the interest payable to the lender.
Interest-only mortgages were popular before the credit crunch, but since 2008/9, lenders have been forced to abide by stricter lending criteria, so these days you are most likely to be offered loans on a repayment basis only.
Factors which affect the mortgage type you choose
There are over a dozen commonly-used labels for mortgage products – including ‘tracker’, ‘offset’ and ‘flexible’ mortgages. And confusingly, many are simply variations of the same type of fundamental product.
Which type you choose will be determined by a number of factors, such as:
- The mortgage term
- The interest rate payable
- Any initial charges
- The method of repayment
- Special situations (such as Buy to Let/using Government assistance)
Most contractor mortgages are of one of two types:
- Fixed Rate– where the interest rate you pay is fixed over a specific time period
- Variable Rate– where the interest you pay may change – for example, if the Government changes the central rate of interest (bank/base rate)
Fixed Rate Mortgages
You will pay a fixed rate of interest for the full mortgage term (often between 2 and 5 years). The rate will often be higher than a variable-rate mortgage, but you will have the security of knowing exactly what your monthly repayments will be.
When the fixed term expires, you will be moved to your lender’s standard variable rate (SVR) – which will often be significantly higher. So, make sure you secure a new deal several months before your fixed term comes to an end.
A good contractor mortgage broker will contact you usually 6 months before your term ends to arrange a new deal for you, thereby avoiding you from going onto the higher SVR.
In the current climate of steeply rising interest rates, our preferred partner Broadbench, is offering contractors a flexible option. They can help you secure a rate now with a new/current lender based on the market rates today. The new deal won’t go live until your current rate expires, so if a better mortgage deal becomes available before your current rate expires, they’ll switch you to this deal. In this way, you’ll ensure that you get the best interest rate no matter how the market changes.
Watch out for early repayment penalties, or other charges.
Variable Rate Mortgages
There are many variants of variable rate mortgages – where the interest you pay during the mortgage term can change – either upwards or downwards (most typically when the Bank of England changes the base rate).
Standard Variable Rate (SVR)
This is the ‘standard’ rate your particular lender charges. The SVR will vary between lenders.
As the name suggests, lenders offer loans at a discount to their Standard Variable Rates, for a specific length of time. Make sure you compare the final rate you will pay after the discount… not the amount of the discount.
These types of loans track the Bank of England’s bank rate, plus a fixed additional chunk of interest charged by the lender. If the bank rate increases by 0.25%, your interest rate will rise by the same amount.
Although your mortgage can rise, this type of agreement limits the amount by which your interest rate can rise during the term of the mortgage. Additionally, the level of the cap will often be fairly high compared to other products.
This product links your savings account to your mortgage account, so the value of any savings you have at any one time will offset the total amount of your mortgage loan.
Things to Consider
- Make sure you compare like with like when choosing a mortgage product. Consider things such as the SVR when an initial discount period expires, as well as additional charges and fees which may be payable.
- Watch out for introductory fees, which sometimes run into thousands. They will make the real cost of your mortgage higher. Look up the Annual Percentage Rate of Charge (APRC) for your loan to establish the real cost.
- Find out if there are any early repayment penalties on your loan. Again, these can sometimes run into many thousands – and could be a nasty shock if you need to change lenders for whatever reason, before the end of the term.
Find out more about your Mortgage options
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