How Do You Get the Best Mortgage Rate?
Now more than ever, borrowers are concerned about finding the best mortgage rate in the face of interest rate increases. To some extent interest rates are beyond your control but there are plenty of actions you can take to improve your chances of accessing a better mortgage interest rate.
This article explains the types of mortgage interest rate available and how you can improve your chances of obtaining the best mortgage rate possible.
Different Types of Mortgage Interest Rate
In the UK there are three standard types of mortgage interest rate. Almost all lenders in the UK offer all three types of interest rate in one form or another.
Fixed rates are offered as part of a mortgage deal, in a similar way to introductory deals on other finance agreements. The rate is set and locked in for a specific duration, normally 2 or 5 years. These deals are also known as product terms.
After the deal expires, the mortgage will revert to the lender’s Standard Variable Rate (SVR). To avoid a mortgage going onto the SVR you can remortgage onto another mortgage deal from a different lender or switch with your existing lender.
Fixed rates are normally competitive in the market. They are popular among borrowers as they are a low risk product, since the monthly mortgage payments will not change. However, the disadvantage of taking a fixed rate product is that they typically have early repayment charges for early redemption.
The Standard Variable Rate is the default rate your mortgage will revert to after a deal expires. However, there are lenders who offer deals on a separate variable interest rate – specifically if you have adverse credit and the lender requires flexibility to amend the rate to reflect the exposure of lending to high-risk customers.
Variable rates are uncompetitive interest rates, and you should seek to avoid being on a variable rate for portion of your mortgage. Unfortunately, there may be instances where a variable rate is the only option.
Variable interest rates are normally uncompetitive and most borrowers try to steer away from them due to their volatility. However, there are instances where remaining on a variable interest rate may be suitable. For example, as variable interest rates do not typically have any early repayment charges on redemption, you may wish to remain on a variable rate if you are planning on imminently clearing the mortgage.
Tracker rate mortgages are aptly named as they track the Bank of England base rate. The interest rate goes up and down accordingly with the base rate.
For example, if the Bank of England decreases the base rate 0.2%, you will find that your tracker interest rate will also fall by 0.2%.
A tracker rate mortgage is normally at least 0.5% higher than the base rate to create a profit margin for the lender. However, tracker rates will differ from lender to lender.
Tracker rates are a higher risk interest rate as the Bank of England can raise the base rate and your interest rate can go up. This can make your mortgage payment harder to budget for and in rare cases can make the mortgage unaffordable altogether. However, the significant benefit of a Tracker mortgage is that there are typically no early repayment charges.
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Tips to Access the Best Mortgage Rates
Finding the best interest rate can be exhausting if you are researching on your own. In the first instance, you should speak to a Whole of Market mortgage broker that can compare the market and interest rates being offered for you. Mortgage brokers are professionals and they have extensive experience in the market. Many brokers, like Boon Brokers, are also fee-free so there is no cost to you of accessing their advice and arrangement service.
Alongside enlisting the help of a mortgage broker, there are steps you can take to achieve the best possible interest rate.
Improve Your Credit Score
Your credit report will impact the interest rates available to you from mortgage lenders. The better your credit report, the lower the interest rate.
This is because your credit score reflects the risk of lending to you. Those with a poor history of repaying financial commitments are more likely to miss or default on mortgage payments to the lender. If the lender sees you as a higher risk, they are likely to charge a higher interest rate or not lend to you at all.
By improving your credit report and score, you may be able to access high street lenders who typically offer the best deals. Whereas, those with worse credit scores may only have access to niche sub-prime lenders who offer far more expensive mortgages.
Save a Larger Deposit
The greater deposit you can put down the less risk you are to a lender. If you only have a 5% deposit and the lender needs to repossess the property, they only have a 5% margin to recoup the amount that you have borrowed.
As a result, 5% deposit mortgages are likely to have a higher interest rate compared to 10% deposit mortgages. Lenders offer the best interest rates to those with sizable deposits. It is for this reason you may find your interest rate improves when remortgaging. This is because when you remortgage after owning a property for a number of years, assuming the property inflates in value over that period, your equity will have increased.
Build a Steady Employment Record
Lenders like to see a concrete career history because it indicates your ability to work consistently. Job instability is a concern for lenders, so you should keep your employment history as stable as possible. It is partially for this reason that lenders refuse to lend to those who have recently become self-employed, as there is no track record of a steady and consistent income to pay the mortgage.
Understand Debt to Income Ratio
Lenders reward borrowers who borrow within their financial means. Your interest rate may be higher if you are borrowing close to income capacity to repay the mortgage – commonly known as the debt-to-income ratio.
Every lender conducts an affordability calculation. The more affordable the mortgage is, the higher your chance being accepted. To avoid being declined for a mortgage on the grounds of your debt to income ratio, you should live within your financial means and not take on unnecessary debt.
Watch Out for Fees
Finally, obtaining the best interest rate is only part of the puzzle. You may find a mortgage broker who finds you a great interest rate but also charges a large fee for their service. Mortgage broker fees does not direcrly correlate to receiving better rates.
You may find the mortgage provider offering the attractive interest rate has a high mortgage application fee. A good mortgage broker will highlight the best mortgage product available for you based on your requirements. Professional mortgage brokers do not simply consider a mortgage product’s interest rate when making a recommendation. They consider all elements of the mortgage such as any additional fees, portability, early repayment charges, overpayment facilities, etc.
When you factor in broker or mortgage application fees you may be out of pocket despite having a great interest rate.
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