Banking and FinanceIssue 04 - 2024MAGAZINE
GBO_ mortgage interest rate in UK

How to secure the best mortgage interest rate

A fixed-rate mortgage ensures that your interest rate remains the same for a specified period, typically between two and ten years

Navigating the world of mortgages can be challenging, especially in the United Kingdom market where thousands of products, fluctuating interest rates, and various lender offers create a maze for buyers.

Whether you’re a first-time buyer, remortgaging, or moving home, securing the best interest rate deal is crucial for minimising costs and making your property dream more affordable. This guide provides practical insights, strategies, and expert tips on achieving that.

What affects mortgage interest rates?

Loan-to-Value Ratio (LTV) is the amount you need to borrow relative to the property’s value, expressed as a percentage. The higher the deposit you put down, the lower your LTV, resulting in better interest rates. Typically, lenders provide the best rates to borrowers with an LTV of 60% or less.

Your credit score also tells lenders about your financial reliability. The better your score, the lower the perceived risk, leading to lower interest rates. It’s important to monitor your credit score and ensure its error-free before applying for a mortgage.

The Bank of England’s base rate and the overall economic environment have a significant impact on mortgage interest rates. When the base rate changes, it influences how much lenders charge on their mortgages. Lenders also assess your income stability and existing debts. Higher income with fewer financial liabilities positions you better for competitive mortgage deals.

Before applying for a mortgage, try to reduce your existing debts. Lenders want to see that you can responsibly manage credit, and having a lower debt-to-income ratio improves your chances of qualifying for a mortgage with favourable rates.

Nicholas Mendes, a mortgage technical adviser at John Charcol, recommends minimising debts and refraining from taking on new credit commitments in the months leading up to your application. This demonstrates to lenders that you’re financially disciplined, which translates into a lower risk for them.

Credit record and incentives

Lenders will scrutinise your credit record to understand your financial history and determine the level of risk you present. This is why it’s advisable to review your credit report before applying.

Errors on your credit report, such as incorrect missed payments or inaccuracies regarding your credit limits, can negatively impact your score. Correcting such mistakes before applying can help you qualify for better rates.

A larger deposit can significantly improve your mortgage prospects. The lower the loan-to-value (LTV) ratio, the lower the interest rate lenders will offer. For example, a 20% deposit results in an 80% LTV, which typically attracts more favourable rates compared to a 95% LTV.

With property prices increasing, saving for a larger deposit can be a challenge, but doing so allows you to access better deals. A bigger deposit reduces the lender’s risk and opens up a wider range of mortgage options with lower interest rates.

Online mortgage calculators serve as a helpful starting point for estimating your borrowing potential. However, it is crucial to conduct detailed budgeting to ensure you can comfortably afford mortgage payments over time.

David Hollingworth, from L&C Mortgages, emphasises the importance of creating a comprehensive budget plan that includes all income streams, such as bonuses and overtime, and breaks down essential and discretionary expenditures. Lenders will use this information to assess your affordability, in terms of how much you can borrow without overextending yourself financially.

If you’re a first-time buyer, you’re in luck, many lenders offer incentives like cashback, free property valuations, and reduced fees for your “first home.”

For example, Yorkshire Building Society offers a mortgage with a £5,000 deposit requirement, allowing up to 99% LTV for first-time buyers with at least £5,000 saved. Skipton’s track record mortgage also provides 100% financing if you can show consistent rent payments equivalent to the expected mortgage payments.

These incentives can reduce the upfront costs of buying a property and make the process a bit easier for those struggling to save for both a deposit and fees.

Fixed rate vs tracker mortgages

A fixed-rate mortgage ensures that your interest rate remains the same for a specified period, typically between two and ten years. This option offers stability, as your payments remain consistent, making it ideal for those who value predictability.

Tracker mortgages, on the other hand, are tied to the Bank of England base rate, meaning your interest rate fluctuates depending on whether that rate goes up or down. While they can be cheaper during periods of low interest rates, they come with the risk of increased payments if rates rise.

Currently, many borrowers are favouring shorter-term deals as interest rates are trending downward. However, short-term fixes are often priced higher than their longer-term equivalents. For instance, Nationwide’s five-year fixed-rate deal is available at 3.83%, while a two-year deal costs around 4.35%.

The problem is that the future trajectory of interest rates remains uncertain. Therefore, it might be better to plan based on your personal life events rather than market predictions. For example, if you know you’ll pay off debts in a couple of years or your LTV will drop, you might choose a shorter fix to take advantage of potentially better rates later.

Lenders also offer mortgages that include either a lower rate of interest with an arrangement fee or a fee-free mortgage with a slightly higher rate. Calculating the total cost over the fixed term can help you determine which option is cheaper.

Ensure flexibility for overpayments

If you plan on overpaying your mortgage to reduce the total interest paid over time, you need a mortgage that permits this without penalties. Most lenders allow up to 10% of the outstanding balance to be overpaid each year without charges, but the terms can vary significantly between lenders.

Nicholas Mendes warns borrowers to understand how the 10% allowance works, whether it’s based on the original loan amount, the balance at the start of the year, or the balance at the time of overpayment, as these details will influence how much you can repay without incurring fees.

Given the wide range of mortgage products in the market, navigating this landscape can be overwhelming. Using a reliable broker can save time, provide access to the best deals, and streamline the mortgage process.

While estate agents often suggest using their in-house brokers, they typically work with a limited panel of lenders, which means you may not get the best deal available. A whole-of-market broker, by contrast, will have access to a wider range of products, offering more choices.

Ensure you understand how your broker is paid, as some charge a fee to clients, while others receive commission from lenders. Either way, it’s good practice to clarify potential costs before proceeding.

When you’re ready to start looking for a property, getting an Agreement in Principle (AIP) can help demonstrate your credibility as a serious buyer. An AIP is an indication from a lender regarding how much they might lend you, based on your current financial situation.

While it’s not a formal mortgage offer, it can help with negotiations and reassure estate agents and sellers that you have the finances available. An AIP isn’t binding, so once you find a property, you should still shop around to see if better deals are available before proceeding with the formal application.

Role of economic trends

The Bank of England’s base rate is a key driver of mortgage interest rates. When the base rate is high, borrowing becomes more expensive, and mortgage rates rise. Conversely, when the base rate drops, lenders typically follow suit, making mortgages more affordable.

In recent times, the United Kingdom has seen considerable shifts in the base rate, reflecting the economic uncertainty caused by factors such as Brexit, the COVID-19 pandemic, and ongoing financial pressures. Borrowers need to be aware of these trends and plan accordingly.

Opting for a fixed-rate mortgage during times of rising interest rates can lock in a favourable rate, protecting you from potential hikes. When rates are expected to fall, it may be worth considering a shorter-term deal with a plan to remortgage once rates improve. However, always weigh the potential cost against the possibility of better deals in the future.

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