When looking for a mortgage, various factors come into play to determine the rates and deals you can secure. Your deposit size or the amount of equity you’ve already built up in your home plays a crucial role in determining the mortgage rates available to you. A larger deposit means you’ll need to borrow less relative to your home’s value, leading to lower loan-to-value (LTV) ratios, which typically result in better rates.
Other important factors that influence mortgage approval are your monthly income, outgoings, and credit score. Additionally, you must consider the type of mortgage you need, the desired repayment period, and whether you prefer a fixed or variable interest rate.
Before proceeding, it’s essential to carefully assess the implications of securing debts against your home. Failure to keep up with repayments on a loan or any secured debt may result in repossession.
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Thoroughly researching and comparing mortgages is key to finding the right one for you. We cover all the essential information to help narrow down your search.
How to Get a Mortgage
Obtaining the right mortgage deal is crucial as it involves a long-term financial commitment and a monthly expense for years to come. To start the process, you need to determine the type of mortgage you require based on your specific needs. You may fall into one of the following categories:
- First-time Buyer: If you’ve never owned a home before, a first-time buyer mortgage is typically what you’ll need. These mortgages often have lower deposit requirements and offer deals with minimal upfront fees.
- Remortgaging: If you already have a mortgage but want to switch to a new one, you are looking to remortgage. People often remortgage to avoid moving onto their lender’s higher standard variable rate after their fixed-rate or discounted term ends. Other reasons for remortgaging include raising funds for home improvements or taking advantage of better rates due to falling interest rates or an increase in property value.
- Moving Home: If you plan to move home but already have a mortgage, you can either take your current mortgage with you (called porting) or arrange a new mortgage, either with your current lender or a different one. Always consider the costs of porting or exiting your current deal and any potential fees associated with a new mortgage.
- Buy-to-let Mortgages: If you’re purchasing a property to rent out to tenants, you’ll need a buy-to-let mortgage. These mortgages usually require a higher deposit than residential mortgages, and the rental income must cover the monthly repayments.
Mortgage Rate Trends
Mortgage rates have continued to rise in July, following a trend that started in May and intensified in June. According to Rightmove, the average rate at every loan-to-value monitored on two- and five-year fixed mortgages recorded a notable increase in the week ending 18th July.
The primary reason behind rising mortgage rates is the Bank of England’s regular increases in the base rate of interest, aimed at controlling UK inflation. The most recent increase occurred on 22nd June 2023, raising the base rate by 0.5 percentage points to 5%.
The Latest Mortgage Rates
As of 18th July, the average rate on two-year fixed-rate mortgages, with a 25% deposit/equity, is 6.29%, up from 6.09% the previous week, according to Rightmove data. Similarly, the average five-year fixed-rate mortgage, with a 25% deposit/equity, has also increased to 5.79% from 5.56% a week earlier.
Potential Savings with Lower Mortgage Rates
A lower mortgage rate can significantly reduce your monthly mortgage repayments. For example, taking out a £150,000 repayment mortgage over a 20-year term at a 5% interest rate results in a monthly repayment of around £990. However, finding a mortgage deal with a 4% interest rate for the same mortgage amount and term would reduce the monthly repayment to approximately £909 – saving you around £81 per month.
How Mortgage Rates Work
Mortgage rates are the interest rates that lenders charge on your mortgage balance, directly impacting your monthly payments. Fixed-rate mortgages offer stability, with the same repayment amount throughout the fixed term, even if interest rates rise. On the other hand, variable-rate mortgages may have fluctuating interest rates based on changes in the Bank of England base rate. This means your monthly repayments can change, potentially working in your favor if rates fall, but increasing if rates rise.
Choosing between a fixed-rate and a variable-rate mortgage depends on several factors:
- Do you want predictable monthly mortgage costs?
- Are you comfortable with fluctuations in repayment amounts?
- Do you want to take advantage of potential interest rate drops?
- Are you willing to remortgage after your fixed-rate period expires?
Types of Mortgages
Several types of mortgages cater to different needs:
- Fixed-Rate Mortgages: These mortgages maintain a fixed interest rate for a specific period, keeping monthly payments and interest rates constant. After the fixed term ends, the rate usually shifts to the lender’s standard variable rate (SVR).
- Tracker Mortgages: These variable-rate mortgages usually follow a certain percentage above the base rate, offering flexibility for borrowers.
- Discount Mortgages: This type tracks a lender’s SVR at a discounted rate for a set period, potentially leading to lower monthly payments initially.
- Interest-Only Mortgages: With these mortgages, you only pay the interest each month and none of the original loan amount. At the end of the term, you’ll still owe the full borrowed amount.
- Offset Mortgages: These mortgages allow you to set your savings against your borrowing to reduce the interest you pay.
Understanding Loan-to-Value Ratio
The loan-to-value (LTV) ratio is the amount you borrow against the property’s total price after deducting your deposit. For example, if you’re buying a £200,000 home with a £20,000 (10%) deposit, you’ll need a lender offering a 90% LTV.
LTV can affect the interest rate you’re charged, with lower LTVs generally resulting in better rates. Hence, it’s crucial to find a lender offering an appropriate LTV for your financial situation.
Interest-Only vs. Repayment Mortgages
Interest-only mortgages involve paying only the interest owed on the loan each month, leaving the capital amount unchanged. At the end of the term, the full borrowed amount remains outstanding. Repayment mortgages, on the other hand, gradually reduce the borrowed amount over the chosen mortgage term, alongside interest payments. This ensures that the debt is fully repaid at the end of the term.
When considering interest-only mortgages, it’s crucial to have a clear repayment strategy for the capital. Some lenders may require evidence of your repayment plan.
Factoring in Mortgage Fees
In addition to mortgage rates, consider any fees charged by the lender for arranging the mortgage. The Annual Percentage Rate of Charge (APRC) helps borrowers compare mortgages by factoring in initial rates, arrangement fees, and valuation fees, along with follow-on standard variable charge rates.
If you plan to make overpayments