Looking to get your first contractor mortgage or lock in a new one? Let’s take a look at the pros and cons of the different types of mortgages available.
Mortgages aren’t the most thrilling of conversations. However, it is important to realise that understanding contractor mortgages is essential and conducting thorough research on them is crucial to ensure you secure the very best option available.
It is essential to ensure that the right mortgage choice does not overly burden your monthly income, as it is important to have disposable income for leisure activities. To guarantee that you secure an affordable deal, let us examine the various options available to you as a contractor.
As a comprehensive broker, My Contractor Broker collaborates with over 70 lenders many of whom offer bespoke criteria for contractors. Now, let us delve into the disparities between fixed, tracker, and variable rate mortgages.
Most repayment mortgages, which involve gradual loan repayment over the mortgage term, fall into one of three categories: fixed-rate, tracker, or standard variable rate. So, what sets them apart?
Fixed Rate Mortgages Contractor Mortgages
Fixed-rate mortgages involve a predetermined interest rate that remains constant for a specified duration. This means that you will have a clear understanding of the exact amount you will be allocating towards your mortgage each month for the agreed-upon number of years.
Fixed-rate deals can span two, three, five, or even ten years. While they provide certainty and peace of mind regarding stable monthly payments, they may be more expensive than tracker mortgages, and you may miss out on potential interest savings if rates decline.
Additionally, early repayment charges may apply if you wish to settle a fixed-rate loan before the agreed-upon term concludes.
Tracker Rate Contractor Mortgages
Tracker mortgages, on the other hand, are linked to the interest rate set by the Bank of England, known as the Bank of England base rate. Rather than matching the interest rate, tracker mortgages move in line with it.
For instance, if your tracker deal is priced at 1% above the base rate and the base rate increases from 4% to 4.5%, your mortgage rate would rise from 5% to 5.5%. Some tracker mortgages offer a discount below the Bank of England base rate.
Tracker deals tend to be particularly popular when interest rates are low or decreasing. They typically come with an introductory period of two, five, or ten years, after which you would transition to the mortgage provider’s standard variable rate. Although rare, it is possible to obtain a “lifetime tracker” mortgage that tracks the base rate for the entire duration of the loan, which could span up to 25 or 30 years.
The advantage of a tracker mortgage is that you may pay less if the interest rate decreases. However, there is less certainty compared to fixed-rate mortgages, as your monthly repayments could increase at any time.
It is important to consider your monthly affordability and assess whether the potential risk is worthwhile. While tracker mortgages may have lower arrangement fees compared to fixed-rate deals, early repayment penalties may still apply, so it is crucial to review the terms and conditions.
Standard Variable Rate Contractor Mortgages
Standard variable rate mortgages come into effect when the initial deal expires. While they offer greater flexibility for remortgaging or short-term moves, they are typically more expensive than other mortgage types.
The average standard variable rate mortgage tends to be a few percentage points higher than the most competitive mortgage rates available.
The advantage of a standard variable rate mortgage is that if interest rates decrease, your payments will become more affordable. However, if interest rates rise, your payments will increase as well. Once you transition to the standard variable rate, it is usually advisable to seek a better deal.
While standard variable rate mortgages do not typically incur arrangement fees when transitioning from a fixed-rate or tracker mortgage, they are generally considered more unpredictable and riskier, especially in a low-interest-rate environment where tracker deals are more cost-effective.
In conclusion, it is crucial to carefully consider the different types of mortgages available and their respective pros and cons. By conducting thorough research and seeking professional advice, you can make an informed decision that aligns with your financial goals and circumstances.
My Contractor Broker was formed exclusively for contractors. Our consultants have over 15 years of experience in assisting contractors to obtain mortgage funding based on their contract rates regardless of how they have chosen to pay themselves. Speak with the team today on 02394 211122 or calculate how much you could borrow using the link below.