How to get a lower interest rate on your mortgage
As the most expensive purchase you are ever likely to make, your mortgage will probably be your biggest financial commitment. You will be paying it off for a good few years, so finding ways to save yourself money in the long run is a necessity.
Nobody likes to pay over the odds. In fact, getting a good deal is a national pastime. There’s no point in paying more than we need to for something. Better to pay the right price and have spare cash left over for things that that really matter.
Mortgages are no different. So, to help you keep your mortgage interest rate as low as possible, we have highlighted a few things to consider:
• Check your credit score
• Have you got a long and consistent work history?
• Save a deposit – the larger the better
• Shop around for the best deal
• Weigh up fixed rates versus variable rates
• Look at repayment versus interest-only mortgages
Check your credit score
First things first – make sure you are on the electoral roll and that all your bills and financial commitments tie in with your address. Lenders will check this.
You need to make sure that your credit rating is as good as it can be. (You can get a credit check from a credit scoring agency such as Equifax, Experian or Noddle – it won’t affect your credit score.)
Then work on improving your rating. Paying off credit cards and existing loans is a good place to start. Also, make sure that any finance payments such as car loans and hire purchase agreements are up to date.
For the time being, don’t apply for other loans or credit either – you want to keep your score as good as it can be. Because, the better your credit score, the better deal you’re likely to get on your mortgage.
The advantage of a long and consistent work history
Lenders like to see that your employment history is solid. The steadier and more consistent it is, the better. It’s one of the ways a lender’s underwriters will assess you as a risk. Stability suggests to them that you’re a lower risk and will have the means to make your mortgage repayments regularly over time.
This means that a lender is more likely to make you their more attractive offers – including favourable interest rates on mortgage loans.
Save for a deposit – the larger the better
By saving up a big a deposit, you can to reduce the amount you need to borrow for your mortgage. The lower the amount you borrow, the less interest you will have to pay. Simple isn’t it?
Also, the larger the deposit you have, the better your choice of mortgages. A small deposit will restrict the mortgages available to you.
If you’re a first-time buyer, you can get government help with saving for a deposit on your first home. If you save money into a Help to Buy ISA, the government will boost your savings by 25 per cent. So, for every £100 you save, you can get £25 from the government, up to a maximum of £3,000.
Available from a range of banks and building societies, Help to Buy ISAs are available to each first-time buyer, not each household. This means that if you are planning to buy with your partner, for example, you could receive £6,000 towards the deposit on your first home if you both get the maximum £3,000 government bonus. Happy days!
Do your research. Check the money advice sites on the internet and have a look at mortgage advice.
Seriously consider seeking the advice of a mortgage broker. Make sure that they are independent. Some may be tied to specific lenders while others may only offer a limited range of mortgage products.
Weigh up fixed rates versus variable rates
With a fixed rate mortgage your interest rate is fixed so that you know exactly how much your repayments will be. You may be able to fix your rate for two, three, five or even ten years. Generally, the longer the time for which you fix the payments, the more those payments will be.
Most banks and building societies offer a standard variable rate (SVR) mortgage. The interest rate (and therefor your payment) goes up and down – generally in line with the Bank of England base rate.
Repayment mortgage versus interest only mortgage
With a repayment mortgage, your payments go towards paying off the capital and the interest. Over time, as the amount of capital you owe reduces, so does the amount of interest you pay.
With an interest only mortgage you only pay the interest on the loan each month. This only covers the cost of the loan, it does not reduce the capital debt, which must still be paid in full at the end of the mortgage period. To cover the debt, you will need to take out a savings plan of some kind which will enable you to pay off the debt in a lump sum at the end.
For more information on mortgages and to work out interest and capital repayments use our Mortgage Calculator.