Mortgage rates:
Everything you need to know

What affects mortgage rates?

There are a number of factors that directly affect how mortgage rates are decided. These include:

 

The economy

The health of the economy has a huge impact on mortgage rates by virtue of affecting how confident a lender can be. Consequently, if the economy is weak, lenders will increase interest rates to mitigate the higher threat of a borrower defaulting on their repayments. A strong economy however, means lower interest rates from lenders.

How the lender funds mortgages

A lender needs to find a way to fund the mortgages they loan, whether this is from wholesale markets or deposits from savers. How cheaply they can get that funding, from wherever that may be, determines how low they are able to set the rates. Additionally, the Bank of England base rate does play a part, however there isn’t a clear link between this base rate and what lenders need to pay to get their funding.

Lender competition

Competition plays a big part in interest rates because businesses rarely have exactly the same goal or position in the market. For example, a business ahead of their lending schedule might choose in increase the rates they’re offering, because they don’t need to attract as many borrowers. Conversely, a business looking to dominate the mortgage market is likely to offer lower rates to attract more borrowers. With this in mind, it’s a smart idea to shop around for mortgages.

Credit history

Borrowing money in the past has an effect on your credit report, either positive or negative. For example, missing a payment or two (credit cards, personal loans, etc.), means your credit report will be negatively impacted. This has the nasty knock-on effect of mortgage lenders maybe being unwilling to offer you larger loans.

Product fees

Most mortgage products have fees attached to them, which are usually around £1,000. You can either pay this fee up-front or add it to your total mortgage, though the latter will add to your total interest payments. There are some lenders offering products without these fees, but of course the catch is a higher overall interest rate.

How can I reduce my mortgage rate?

Reducing your mortgage rate is often a balancing act between your personal circumstances and what you need from a mortgage. Regardless of this, you should always spend a decent amount of time comparing mortgages and shopping around; never opt for the first loan you see because a better deal might be just around the corner.

Pick a mortgage that works for you

For your initial mortgage, you should consider avoiding a standard variable rate (SVR) mortgage. This is because an SVR mortgage has a rate set by the lender themselves, one which they can change at will. Whilst some lenders are honest with their rates, others might be more reluctant to trust their borrowers. As a result, they hike the interest rate up (as a sort of insurance policy).

Overpaying on your mortgage

You could also think about overpaying on your mortgage repayments when interest rates are low. In a nutshell, larger payments made with lower interest rates reduces the overall amount you need to pay on your mortgage. A brief word of caution though; don’t forget to check with your lender before you overpay because there is the possibility of an early repayment charge. This charge can be incurred by overpaying because the lender still needs to make a profit from the mortgage loan. As a result, overpaying means they lose out on revenue generated from your monthly repayments.

Interest-only deals

An increasingly popular choice is what’s known as an interest-only mortgage. What this means is that you only pay the interest on a mortgage, rather than the mortgage itself. The catch is that you must have, or expect to have, a lump sum of money (inheritance, a big bonus, etc.) ready to pay off the mortgage when it expires. Otherwise you might have to sell your home to repay the mortgage, because you will have to pay eventually.

Interest-only deals are synonymous with buy-to-let mortgages, where landlords purchase property to rent to tenants (with the tenant’s rent covering the monthly payments).

Lengthier repayment period

Increasing the length of your mortgage means you pay less per month, although the interest rate will go up so your total mortgage expenditure is larger overall. Opting for a lengthier mortgage term can make it more manageable if you have lower capital and/or other monthly payments to consider.

Keep an eye out for mortgage insurance

Something most lenders won’t tell you is that you might have been sold private mortgage insurance (PMI). This can add thousands onto your mortgage each year, increasing the total cost of your mortgage to sometimes unmanageable levels. Be wary of lenders selling you building insurance too, because an initially reasonable amount can soon become a prison. Lenders have no legal obligation to keep insurance premiums stable, meaning they can increase it as and when they feel like.

Pay a larger deposit

Paying a deposit of around 5% of the property value leaves you with fewer competitive mortgage deals. These deals often come with skyrocketing interest rates. For that reason, we advise pushing your deposit to around 10%, where you’ll start to get a greater choice of mortgages. For the best and most varied choices however, deposits 25% and above will give you access to mortgages with very competitive interest rates. Anything over 40% pretty much guarantees the cheapest mortgage deals possible.