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What kind of Mortgage is best for an IT contractor or Independent Consultant?
Interest Rate options
The rate generally goes up and down in line with the Bank of England base-lending rate. Often lenders calculate the variable rate as the base rate plus an additional percentage rate. The rate might go up and down as soon as the base rate changes or less frequently, e.g. once a year, reflecting interest rate changes during that period.
Although the change is usually small increments (maybe 0.25 percentage point), the change may have significant impact on your monthly payments over time.
Loans with a standard variable rate usually have no completion or booking fees and no penalties if you pay off or move the mortgage early.
The interest rate is fixed for an agreed period. The rate is typically set for two to five years, although it may be anything between six months and 25 years.
Unlike variable rates, fixed rates let you budget your monthly home expenses with accuracy since you know how much you will have to pay each month. You are also protected, during the set period, from any increases in interest rates, although equally, you will not benefit from falling rates.
Lenders usually charge a booking fee to commit to a fixed rate and penalties are incurred if the loan is paid off early, or within the early repayment charge period which may exceed the fixed rate period.
The rate has a guaranteed maximum, or cap, for a specific time period. This will protect you from an unexpected rise in interest rates.
Unlike a fixed rate, if the lender’s variable rate falls below the cap, you will benefit because your rate will decrease too, and if interest rates rise, you will not be charged more than the capped rate.
Lenders will normally set a higher capped rate than their best fixed rate alternative at that time.
Discounted interest rate.
The lender can guarantee a discount, normally up to five per cent, off your interest rate. This means the interest you pay will still vary up or down but at a lower rate than the general interest rate. Normally, this is for a set number of years. Once this period has expired, your mortgage will revert to the normal variable interest rate.
There are two ways of re-paying capital:
Monthly repayment: Paying off capital as you go
Investment: Using an investment to pay off the mortgage at the end of the term. Either an endowment or ISA portfolio.
The only way to guarantee that you will be able to pay off the mortgage at the end of the term is with a Repayment mortgage.
ISAs are more tax efficient than endowments, with lower charges and pay lower commissions, but you should buy a separate life insurance policy if needed.
For a 25 year mortgage for an investment oriented person is normally an ISA mortgage with either a floating interest rate, or one fixed for the first few years.
The following types of mortgage are becoming increasingly popular:
Ways of repaying an interest-only mortgage
With an interest-only mortgage your repayments only cover the interest on the amount you borrowed whereas with repayment mortgage you pay off the interest and some of the capital each month, guaranteeing that the mortgage will be cleared at the end of the term. You must be able to show the lender how you’ll repay the mortgage at the end of the term and are responsible for putting in place and maintaining a credible repayment plan to repay the original loan.
Examples of repayment vehicles include: Cash saved in a savings account or ISA, Stocks and Shares ISA, Pension, Investment bond, Shares, Unit trusts, endowment policy, sale of property or asset
If you expect to use bonuses or commissions for mortgage payments, or your financial circumstances vary and you want to change monthly payments from time to time, look for flexible, or no early repayment charge period mortgages and loans with daily interest rate calculations.
Which one is right for me?
We can talk you through the right one for you. Call 07771 717989, or use our free, no obligation Mortgage Finder service
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