Choosing a Mortgage: Navigating Fixed vs. Variable Rates with Confidence
Cracking the code of mortgages might feel like a complex puzzle. Don’t worry. Broadbench is here to unravel the ambiguities and translate the terms. As an independent professional, you deserve a mortgage that suits your specific needs, so in this article, we’ll explain the basics, look into the difference between ‘fixed rates’ and ‘variable rates,’ and highlight some of the potential pitfalls for independent professionals.
Repayment vs. Interest: A Primer
Before we delve into the mortgage product types, let’s clarify the basics. Mortgage repayments either cover the interest on the loan (interest-only) or pay off the capital along with interest (repayment). While interest-only mortgages were common pre-2008, stricter lending criteria now make repayment mortgages more prevalent.
Factors Shaping Your Choice
With labels like ‘tracker,’ ‘offset,’ and ‘flexible,’ mortgage options might sound perplexing. Your decision depends on factors like mortgage term, interest rate, charges, repayment method, and specific situations, such as Buy to Let. However, to make things easier for you, most contractor mortgages fall into two categories. With a Fixed Rate Mortgage, you benefit from a consistent interest rate over a specific period (usually 2 to 5 years) but normally pay a higher rate. A Variable Rate Mortgage means the rates may change during the mortgage term, often in response to shifts in the base rate set by the Bank of England.
So, Which Should You Choose?
Which mortgage type you go for largely depends on your circumstances, as well as an understanding of where interest rates are headed, which can be a tricky topic. Let’s take a look at the two options in more detail to determine which might be better for your needs.
Fixed Rate: Secure and Predictable
Opting for a fixed rate means you’ll pay the same interest throughout the mortgage term. While the rate might be higher than a variable-rate mortgage, the certainty of steady monthly payments is a major advantage. When the fixed term ends, you’ll transition to your lender’s standard variable rate (SVR). To avoid this often-higher rate, ensure you secure a new deal before the fixed term concludes. A knowledgeable specialist mortgage broker, like Broadbench, can help you navigate this process seamlessly.
Variable Rate: A Spectrum of Options
Variable rate mortgages come in various forms and understanding them is key. Here are the main types and the differences between them.
Things to Think About When Choosing a Mortgage:
Standard Variable Rate (SVR): The standard rate charged by your lender. This will differ between providers, so it’s worth evaluating a range of options.
Discount Rate: A temporary discount on the SVR. It’s important to consider the final rate post-discount and compare that with others, not the discounted rate alone.
Tracker Mortgages: Tied to the Bank of England’s base rate, with a fixed additional interest from the lender. If, for example, the base rate rises by 0.25%, so will your interest rate.
Capped Rate: This means your mortgage rate could rise, but there’s a limit to how much it can.
Offset Mortgages: By linking your mortgage and savings accounts, the value of your savings can offset the total amount of your mortgage loan.
- 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 that 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.
Ready to Explore Your Mortgage Options?
Broadbench specialises in contractor mortgages and has helped hundreds of independent professionals just like you to find the right product for their needs. Book an appointment to speak to one of our expert mortgage advisers to find out more about the process today.Speak to an expert