This week I’m making it crystal clear which mortgage types are which, and what one I prefer for myself…
My favourite mortgage type is a fixed rate. With this option, you know where you stand. Your monthly payment will not change for the next x amount of years and they are generally cheaper than long term fixed rates, as of now 15/11/16.
I’m cautious to an extent, I like to budget and know where I stand. I have 2 spreadsheets, 1 for personal and 1 for business. My spreadsheets break down every expense, which I then review at the end of each month to keep on top of my finances.
Working out which option is cheapest can be a nightmare… avoid this by coming straight to a broker, my team do all the hard work for you.
I find that with my self-employed clients, they prefer to know EXACTLY what is going out for a given period, making it much easier to budget. We should all be taking this approach, whether you’re employed or self-employed.
Roughly 90-95% of my self-employed clients end up going for a 2 year fixed rate. They are usually cheaper than 3, 5 or 10 years on a fixed rate. I find that most of you self-employed people “want the cheapest.” Who wouldn’t?
I always warn them (and you) that the market may change over the next 2 years. Interest rates maybe higher or lower when the deal expires and we look to review it. However cheapest rate generally still wins.
The other mortgage rate options that are available are:
- Tracker – this type of rate will fluctuate in line with the Bank of England base rate. For example, the Bank of England base rate is 0.5%. If your tracker is 1%, you will be paying 1.5%. This means if the bank base rate increased to 1.5%, you would be paying 2.5% If the bank base rate reduced to 0% then you will be paying 1%. And so on… Generally this rate type comes with unlimited overpayments.
- Discount – simply means a discount off the lenders standard variable rate (SVR) in the early years of the mortgage. It works in the same way as a tracker rate, it can fluctuate as the lender’s SVR fluctuates.
- Capped – this means that the mortgage is capped. The rate can’t rise above a certain point… but it can fluctuate up and down below that limit. This offers a bit of security for you as there’s a guarantee that it can’t rise above a certain point.
- Offset (this is generally a tracker, but can be any of the above) – this rate allows you to link your mortgage to a savings or current account. Let me explain. If your mortgage balance is £125,000 and you have £25,000 in a linked current or savings account, the mortgage lender only calculates the interest you pay you based on the £100,000 instead of the full £125,000. To really get the benefit of paying less interest, advisers recommend you keep your offset amount above 10%.
A fixed rate nearly always seems to win. I explain all the differences between the above and sourcing interest rates with the customer, but the differences between them are so small. A fixed rate is secure; that’s what people want.
There are many other considerations when finding the perfect type of mortgage for your circumstances. They vary from lender to lender. This has just been a general overview; when it comes to your mortgage we will discuss all the options available to you.
I want to give YOU the chance to get the answers you need. Post a comment with any question you may have (no matter how specific it is to your circumstances) and I will write a blog post explaining everything, plain and simple.
If you want to talk to me directly about this, send me a message on Facebook, Twitter or LinkedIn.