Mortgages can be complicated. Should you go for a fixed rate, and if so, over what period of time? Alternatively, what about a tracker mortgage? What is a good interest rate to be paying and what charges, penalties and restrictions apply should you decide to pay your loan off early or move it somewhere else?
The choice may be restricted if you are self-employed
If you are self-employed you may just be grateful that a mortgage company will actually lend you money at all. The balance of power tends to lie with the lender, as you may be seen as having a less reliable income and therefore a higher risk of default. You could find yourself settling for the lowest rate available from a relatively limited number of lenders. Oddly, it is the other financial bane of the self-employed, twice yearly Self Assessment tax bills, which may give you an advantage when it comes to meeting the costs of buying your home.
Freelancers and those running their own businesses need to put aside a proportion of earnings to meet their tax bills and that money, which otherwise could not be used for anything else, may actually help pay off your mortgage.
Offset mortgages – a clever alternative if you are self-employed
The idea behind offset mortgages is not complicated, but it is different to standard mortgage arrangements. Very simply, an offset mortgage allows you to link a savings account to your mortgage. Instead of receiving interest from money deposited in the account, the balance is deducted from the amount of your mortgage that you pay interest on. For example, if you were to borrow £200,000 but hold £40,000 in the linked savings account, you only pay interest on £160,000.
This can have a big effect on how quickly the loan is paid off which in turn can save many thousands of pounds in interest payments. Offset mortgages may therefore be very effective for those who need to save money for much of the year in order to pay HMRC. This money could be offset against your mortgage and so help pay back your mortgage sooner.
Lowest rate is not always the best rate
Most people are naturally drawn towards the lowest interest rate when choosing a mortgage, but with an offset mortgage, if you hold savings in your linked account, you don’t pay the advertised rate on the whole of the loan, so such loans could actually deliver a less expensive option.