Mortgage Decision Time for Freelancers

With base rates expected to rise in the coming months, we explore some of the options available to Contractors and how to compare the best deals.

The next few months will be a nail-biting time for home owners with Financial Analysts predicting another rise in the Bank of England base rate. Recent hikes in the cost of borrowing seem to have done little to dampen the UK’s enthusiasm for property ownership but in our role as Independent Financial Advisers we have seen an increase in the number of Freelancers opting for our fixed rate mortgage options.

In a fix over whether to Fix?
A fixed rate mortgage will provide the security of knowing the exact level of monthly repayments throughout the scheme period and will ensure that you are not adversely affected by interest rate fluctuations. It is the ultimate peace of mind choice because you know exactly where you stand.

On the downside, if you tie yourself in to a fixed rate for a long period and then the base rate falls you could end up paying well over the odds for your mortgage.

However if certainty is the goal then a fixed does the trick. The next question is how does a Freelancer find the best deal......

And the winner is...the lender!

In an increasingly competitive mortgage market, many lenders have learned to cynically exploit the explosion in use of self service financial comparison websites.

The mortgage companies offer headline grabbing, best buy table topping, market leading deals to lure the innocent borrower into an online application. Sadly its often too late when that juicy headline rate is finally exposed as having the bitter aftertaste of a massive arrangement fee or an extended tie in period at the lenders uncompetitive standard variable rate.

Arrangement fees have edged ever higher in the past 12 months as lenders seek to offset some of the cost of low margin deals. There are some schemes available from High Street lenders (i.e. not back street loan sharks !) with fees as high as 1.5% of the amount borrowed and whilst these charges can often be added to the loan, it is imperative that you or your financial adviser do the necessary calculations to work out the overall cost to you of that seemingly low interest rate as a higher headline rate could well represent better value overall.

The Devil in all that detail
The irony of the current mortgage market is that, as a prospective borrower, you are provided with a mountain of paperwork that illustrates each mortgage scheme that you wish to consider.

This is all thanks to the Financial Services Authority, who took over responsibility for regulating the mortgage market in 2004. In a classic piece of Whitehall inspired overkill, the typical mortgage illustration increased from 2 to a bewildering 12 pages and consumers were often left less clear as to the details of a particular scheme than before regulation. The FSA encouraged consumers to ‘simply’ use Annual Percentage Rates (APRs) to compare mortgage schemes.

These crude APR measures are arguably more relevant when looking at short term borrowing such as personal loans rather than a mortgage over, say , 25 or 30 years.

APRs assume that the borrower will remain on a standard variable rate after any initial fixed or discounted scheme expires. In reality any relatively astute borrower will shop around or approach their mortgage adviser who will look to help clients exploit the system and move onto the next attractive rate, either with the current lender or, using a remortgage, to a new lender as soon as the current scheme expires.

APRs also have the effect of spreading the impact of high initial charges over the 25 year life of the loan.

The path to ‘Rate Tart’ heaven
The way to effectively play the mortgage lenders at their own game is to look to switch schemes as regularly as it is financially in your interests to do so.

The lenders will refer, in derogatory terms, to smart borrowers as ‘Rate Tarts’ but you are merely playing them at their own game by exploiting the market for your own gain.

The trick is for Freelancers to take account of all costs, both initial and any exit fees levied when you eventually leave a particular lender. Calculate these expenses and then overlay these with the interest payable during the scheme period. Only in this way do you have a realistic comparison to use.

Decisions, decisions
There are a myriad of different mortgage options to consider. Whilst fixing may make sense for those borrowers looking for short to medium term security, it may well transpire that a good discounted variable scheme could follow rates up in the short term but then slide back down as inflationary pressures perhaps subside later in the year, saving you money over the typical 2-3 year term of the average mortgage scheme.

To further complicate matters many of our clients ignore short term schemes altogether and exploit Offset and Flexi loans instead but whatever scheme is right for you, its vitally important that the total costs of the borrowing are properly considered if you are to effectively play the lenders at their own game.

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