Should UK Investors Choose Fixed or Variable Rate DSCR Loans?


Updated on:

fixed or variable dscr loans

As a real estate investor in the UK considering a non-recourse loan, one of the biggest decisions you’ll need to make is whether to opt for a fixed or variable interest rate. DSCR (Debt Service Coverage Ratio) loans allow investors to qualify based on the property’s projected cash flow rather than their own income and credit score. With this type of financing, you’ll need to weigh the pros and cons of rate variability versus a fixed rate when structuring your loan.

Balancing Predictability and Potential Savings

When it comes to fixed vs variable rate DSCR loans in the UK, the central trade-off is often stability on one hand and the possibility of paying less on the other.

Fixed rate loans offer the reliability of having the same mortgage payment month after month for the full term, regardless of external factors. You get peace of mind knowing exactly what your expenses will be. However, fixed rates also tend to be higher, so you lose out on any dips in interest rates over the years.

With an adjustable or variable rate, you take on some risk that your payments could rise over time in exchange for lower costs at the start and the chance to benefit later if rates fall. You’ll need to be comfortable with unpredictability and okay with your payments fluctuating.

So do the potential savings outweigh the risks of an unknown future payment? Look at current rate trends and projections to make the best decision for your investing goals.

Considering Your Risk Tolerance

Are you a risk taker who sees opportunity in uncertainty? Or do you prefer the security of knowing exactly what your monthly costs will be?

If unpredictable mortgage payments would cause you stress or make it hard to budget effectively for expenses, then a fixed rate is likely the safer choice. Yes, you may miss out if rates fall, but you also protect yourself against increases.

On the other hand, if you’re willing to take a gamble on lower rates in the future in exchange for variable payments, an adjustable loan could mean significant savings long-term. But you also open yourself up to potential rate hikes down the road.

Evaluate your own risk preferences and ability to comfortably adapt with changing mortgage costs before deciding between fixed or variable options.

Historically, fixed rate mortgages averaged around 4-5%, while variable rates tended to be 1-2% lower. However, current Bank of England base rates impact available deals.

As of July 2023, the BoE base rate sits at 1.75% and is projected to rise further in the coming months to combat high inflation. This outlook points to variable rates soon exceeding fixed options. Locking into a fixed rate now could mean securing a lower rate than you’d get later this year.

On the other hand, if base rates peak soon and then begin falling in 2024 as inflation cools, an adjustable rate could allow you to take advantage by refinancing at lower future rates.

Pay close attention to expert forecasts for UK rate trends when deciding between fixed and variable DSCR loans. Consider potential savings against the risk that projections are wrong.

Choosing the Right Loan Type and Term

Most lenders offer fixed and variable rate options on both interest-only and repayment loans. Interest-only DSCR loans mean lower monthly payments, but you won’t be paying down principal and will need to repay the full balance at maturity.

Repayment loans have higher payments since you’re gradually paying off the loan over time, but this can also mean long-term interest savings. Review whether interest-only or repayment loan structures make more sense based on your investing objectives and cash flow.

You’ll also need to choose your loan term, such as 5-year or 10-year fixed rates. A longer fixed term gives you certainty for a greater portion of your loan lifespan. But shorter terms let you take advantage of refinancing if rates fall.

Find the right loan type and fixed term length to pair with a fixed or variable rate depending on your goals. A mortgage broker can help assess your options.

Comparing Fixed and Variable Loan Quotes

To get a clear picture of potential costs, you’ll want to get multiple DSCR loan quotes for both fixed and variable rates. Be sure to get quotes from both banks and alternative commercial lenders.

Alternative lenders often offer lower rates but charge higher origination fees. Look at the APR, not just the headline rate. Do the math to see total costs over the lifetime of each loan option.

A lower variable rate may look good at first glance. But a slightly higher fixed rate over a shorter term may actually save you more in interest when you run the numbers. Don’t rely on ballpark estimates – crunch the figures to do an accurate comparison.

Understanding the Fine Print of Your Loan

Whether you opt for fixed or variable, read all the loan documents closely to ensure you understand associated fees, prepayment policies, and any conditions orgotchas.

For instance, there may be rate adjustment caps that limit how high (or low) a variable rate can fluctuate. There is sometimes a prepayment penalty if you want to refinance a fixed rate loan before maturity.

Knowing the terms in detail lets you avoid surprises and ensures you choose the right loan product for your needs. Don’t hesitate to seek clarification from your lender on any unclear or complex points.

Consulting an Expert Mortgage Broker

Navigating the pros, cons, and fine print of DSCR loans is complex. Working with an experienced mortgage broker simplifies the process.

A good broker will explain fixed and variable rates in depth, assess your situation, and help identify the most advantageous loan products. They’ll negotiate with lenders on your behalf to make sure you get the perfect rate and terms.

Relying on a broker’s expertise can ensure you get an optimal DSCR loan to match your risk preferences, investing style, and financial goals. Their guidance provides invaluable peace of mind.

Weighing the Trade-Offs of Fixed or Variable DSCR Loans

At the end of the day, deciding between rate stability or potential savings comes down to your own priorities as an investor.

If you prefer predictability and can accept possibly higher consistent payments, then locking into a fixed rate mortgage provides risk-free consistency. Or if you don’t mind fluctuating payments and want to gamble on lower future rates, a variable loan could provide long run savings.

Carefully assess your own risk tolerance and evaluate current and forecasted rate conditions. Talk to a knowledgeable broker. However, be sure to crunch the numbers and read the fine print yourself as well. Doing your own research ensures you end up with the perfect DSCR loan to match your investment style and achieve your goals as a real estate investor.


Hello! My name is Luna, and I am a freelancer in the finance niche. I have a passion for helping people understand their financial options and make informed decisions about their money. My website, DSCR Loan UK, serves as a resource for those looking for information on loans, budgeting, saving, investing, and more. I strive to provide practical and easy-to-understand advice that can help people make smart financial decisions.