One could argue that in taking out a contractor mortgage, safety should be the number one priority. So a five year fixed rate would be the best way to go….or would it?
The question remains as to whether or not there is another way that would best suit borrowers in the current market. Or to put that another way, is it possible to take out a lower rate mortgage deal and still come out on top?
Due to their high interest rates it could be assumed that five year fixed rate contractor mortgages would not be so appealing. However, recent surveys show that this is not the case. In fact, one in four borrowers would now choose this type of mortgage over a variable rate product.
One of the reasons behind this could be due to five year fixed plans experiencing a recent fall in interest rates. This in turn has brought about the idea that now might be the right time to take advantage of fixed rate deals.
4.5 % seems to be around where most good fixed rates reside, with First Direct mortgage propping up many best buy tables. However, this still remains more expensive than two-year fixed or tracker mortgages that offer rates of around 3% and fewer than 2.5% respecttively. Yet there are those who believe that there will be a rise in interest rates after the election and that now is a good to to fix.
Thus, no one can really be 100% sure as to which way the market will turn, due to the fact that mortgage interest rates are so unpredictable. There is much speculation right now that rates are at the lowest that they can go. If that is the case, then people who opt for a two-year deal now will find themselves on the receiving end of higher rates and more expensive monthly payments when it runs out.
So what can a borrower do to try and come out on top? Well if extensive research into borrowing plans and trying to predict the rise and fall of interest rates do not seem appealing, there is always the option of choosing a cheaper plan and banking the money saved.
Instead of taking out that expensive five-year mortgage, borrowers can invest in a two year fixed rate product, saving on average around £125 a month. Provided they save the difference, even if rates do rise, they should have a healthy war chest to combat the need to remortgage. And if rates do not rise, they have just saved up a large amount of cash. A total win, win situation some may say.
There is still also the option of taking out an offset mortgage. This way, borrowers simply put the money saved into a linked savings account. In this instance, they have the balance of the savings account subtracted from their mortgage amount and instead of receiving interest on this cash; they only pay interest on the balance.
But it must be remembered that in both circumstances fees would have to be paid for remortgaging. This has to be kept in mind, as each individual has to determine whether the higher rate or the amount in fees would be easier on their pocket.
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Image: Juggling On The Altiplano by Andy Hares
