Mortgage interest rates are one of the most important parts buying a home, and will affect how much you pay on a monthly basis for your new house.
Therefore, if you’re in the process of buying your first home, or remortgaging, it’s really important to get to grips with mortgage interest rates, understand how they’re calculated, what you can afford, and what a change in rates can do to your financial situation.
What is a Mortgage Interest Rate?
A mortgage interest rate is essentially a percentage fee charged on your mortgage loan by a lender. This is basically the ‘cost of borrowing’ allowing you to have the home without purchasing it outright for the property price.
It’s really important to know about mortgage rates because this impacts what comes out of your pocket every month. There are a few main factors that can affect this interest rate:
- How big your deposit is how much you’ve borrowed
- The type of mortgage you’ve opted for
- The offer given to you by the lender
How to Know if You Got a Good Mortgage Deal?
A really good metric for looking at whether you got a good mortgage rate based on all of your personal circumstances is by checking the Annual Percentage Rate of Charge (APRC).
This shows you the total cost of interest and fees over the entire term. Thus, to see if you’ve got a good mortgage deal, compare the APRC with current rates based on your deposit and credit score.
Try to beat the average for your specific Loan-to-Value (LTV), and always compare full costs, as a low rate with high fees can work out worse than a slightly higher rate with no fees.
What Are the Different Types of Mortgage Interest?
There are a few common types of mortgages that you can choose from that will affect what your mortgage interest rate is. Here are the most frequent options:
#1 Fixed-rate Mortgages
Fixed rate mortgages are mortgages that have a fixed interest rate that won’t change throughout the products term. For example:
Let’s say you lock in a deal for a 3-year fix at 4.8%. Your monthly repayments would stay steady no matter what the market does, as you’re on a fixed rate. These deals typically last between 2, 3, 5, or 10 years, with 2-year and 5-year deals being the most common.
Fixed mortgages help a lot with consistent budgeting and keeping track of your finances, but you could also miss out when interest rates drop, effectively paying more than some other options.
#2 Variable-rate Mortgages
The second option you have is a variable-rate mortgage. This is where the interest rate changes throughout the product’s term based on either the Bank of England’s base rate or what your lender’s criteria is. Here’s an example of how this could look:
Your rate starts at 4.5%, then rises to 5% when the Bank of England puts rates up, and your payment therefore increases every month (it can also work in the opposite way).
What to remember with variable rates is that you can take advantage of lower interest rates when they drop, but you will also be paying more when they’re higher.
#3 Tracker-rate Mortgages
Tracker rate mortgages work similarly to variable rate mortgages, but it solely depends on the Bank of England base rate and no other factors.
Thus, similar to variable rate mortgages, it’s harder to budget, but you can also take advantage of the mortgage interest rates when the Bank of England base rate is low.
What Causes Changes in Mortgage Interest Rates?
As to what can cause a change in your mortgage interest rates, it’ll either be one of two things:
- Bank of England has changed the interest rates
- Or, your lender may change it based on competition, BOE base rates, risk, and funding
Ultimately, although the lender wants to earn as much as they can, they also want to make sure they’re competitive in the property market; otherwise, no one will choose to lend with them. They have to find that balance between helping customers repay their mortgage on time, but also running a profitable business.
How are Mortgage Interest Rates Calculated?
Once again, it is a mutli-faceted approach on how your personal mortgage rates are calculated, and what you receive will differ from person to person. Yet, as a whole, here’s what lenders look at when they calculate your mortgage interest rate:
- The duration of your mortgage
- How much your deposit is
- What your credit score is
- The type of mortgage you opted for
Then, once you’ve got back your offers and deals, this is exactly how it works, displayed as an example:
How to Best Prepare to Get the Best Interest Rate
To ensure that you get the best interest rates you can for your specific situation and the house you’re looking for, here are some steps you can take:
- Improve your credit score - This includes making sure to pay all your credit cards back on time, registering for the electoral roll, checking your credit report for errors, managing your bank accounts well, and generally showing you’re reliable with debt.
- Saving a larger deposit - A larger deposit can show lenders you have the financial responsibility to save money and can reduce the loan-to-value ratio as much as possible, giving you access to better deals on the market.
- Show a reliable source of income - To be offered the best mortgage rates, lenders just want to know if you can pay back your mortgage repayments on time. So, if you can show good employment history and a trustworthy source of income every month, they have every right to go with you.
- Knowing/improving your personal debt-to-income ratio - If a lender sees that most of your monthly income is required to pay down debts, then you won’t be seen as a reliable customer. Whereas, if you only have a very small portion of your income every month going towards any form of debt, and the majority is income of your own, you’re more likely to get a better mortgage deal.
Overall, the way you’re going to impress a lender is just showing them undeniable proof that you can pay the mortgage repayments back over a long period of time. This puts them under less stress and you under less stress too.
What Happens if My Mortgage Rates Changes?
Unless you have a fixed mortgage term, a variable rate mortgage or tracker rate mortgage will very likely change depending on whether interest rates are going up or down.
If the interest rates go up, your mortgage payments will most likely do so, and if they go down, so will your mortgage payments.
Therefore, it’s always good to take this into consideration when choosing your mortgage type and speak to a professional to see what they think would best suit your financial situation.
Getting the Best Deal for Your Property
If you’ve found a dream home that you’d love to move into, or you’re looking to downsize and assessing your options, giving yourself the best chance and making it as affordable as possible is what everyone wants.
And, hopefully, using the information in this blog, you’re able to find the property for you at the best rate. If you want access to mortgage deals that you won’t see high street banks offer that may be more suitable for you, getting in touch with a reliable mortgage broker is your best bet.
We’ve been fortunate enough to have some of the best customers in the world giving us a 5-star rating overall for our service, and we’d love to help you secure the best mortgage possible for you as well. Get in touch with us at 0161 791 4757 or book an appointment online.
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