We look at the factors that can affect your mortgage rate and take you through 5 steps you can take to get the best deal possible.
1. It starts with your credit score and report
Your credit score and report are a crucial part of getting a great rate on your mortgage. This is simply because lenders will use this information to measure how much risk you pose as a borrower.
A lower credit score means a lender may think there’s a greater chance you’ll default on your mortgage payments. This means lenders could charge you a higher rate of interest to cover this risk. A high credit score, on the other hand, could be seen as an assurance you’re more likely to pay your debts on time. As a result, lenders are likely to be more comfortable giving you a better rate.
There are various ways you can act to improve your credit score. One of the easiest actions you can take is to check your credit report regularly and make sure you fix any mistakes. You could also register to vote. Being on the electoral roll could boost your credit score as this helps verify you are who you say you are. Lenders like to see this kind of stability and reassurance, so it’s likely it’ll give your credit score a boost.
Most importantly, try to avoid behaviours that could damage your credit score, such as applying for a lot of credit in a short space of time, or repeatedly missing payments.
ClearScore gets your credit report information from our partner Equifax. They use the following ratings:-
Very Poor: 0 - 278
Poor: 279 - 366
Fair: 367 - 419
Good: 420 - 466
Excellent: over 467
2. Pay the largest deposit you can reasonably afford
The larger your deposit, the less you need to borrow. Your mortgage lender will also perceive you as less of a credit risk. In turn, you’ll usually get a lower interest rate.
Lenders tend to offer the best deals to those who put down 40% or more. However, you can usually find good deals with a deposit of 20% to 25%. Pay less, and interest rates will start shooting up.
If saving 25% is unrealistic, check if you’re eligible for a government help to buy scheme. The equity loan programme in particular allows you to borrow up to 20% of the purchase price interest-free for five years, provided you pay a 5% deposit - that’s your 25% deposit right there. And if you’re in London, the scheme allows you to borrow up to 40%.
3. Shop around
Your bank is often your starting point if you’re thinking of taking out a mortgage. But while many banks offer loyalty discounts if you’re already a customer, you still may not be getting the best deal possible.
A mortgage is one of the biggest financial commitments you’ll ever make, so you owe it to yourself to shop around. Alternatively, ask an independent mortgage broker for advice. The key is to find a broker whose advice is based on the whole market, rather than a limited list of lenders.
That said, some mortgages are only available from lenders directly, so a broker won’t be able to point you in their direction. Keep your eyes open to the wider picture by looking at individual lenders or using an online comparison website.
4. Watch out for fees
The interest rate will have a huge impact on your monthly repayments and on the overall cost of your mortgage. But it shouldn’t be the only thing you consider. Mortgages come with many fees. And, sometimes, their overall cost may outweigh the benefits of agreeing to a mortgage with a low interest rate.
There are three fees in particular to look out for when choosing a mortgage: the arrangement fee, overpayment fees and early repayment fees.
The arrangement fee
This is what you pay your lender to cover the administrative cost of setting up your mortgage. In general, mortgages with high arrangement fees have a low interest rate and vice versa. The fee can be upwards of £2,000.
As a rule of thumb, if you have a big mortgage it’s worth paying a higher arrangement fee in exchange for a low interest rate. If your mortgage covers less than 70% of the purchase price, however, it’s probably better to go for a higher interest rate and a lower arrangement fee.
Overpaying your mortgage can save money in interest and help you repay your mortgage sooner. Many lenders will allow you to overpay by up to 10% of the outstanding amount each year during the initial term of a fixed rate mortgage, with no restrictions thereafter.
However, some mortgage providers will try to dissuade you by charging an overpayment fee. Fees amounting to 5% of the amount overpaid aren’t unheard of. This could make overpaying an extremely expensive mistake.
Early repayment fees
Like overpayment fees, early repayment fees exist to dissuade you from paying off your mortgage early, as this means your lender loses out.
Early repayment fees don’t always apply, so check your mortgage’s terms and conditions carefully. Typically, they’ll be higher at the beginning of the term and decrease (or are waived altogether) as the term progresses and your mortgage amount decreases.
5. Keep your options open
While you might think you’re stuck with your provider for the duration of your mortgage, this doesn’t have to be the case. You may be able to get a better deal simply by remortgaging down the line.
Remortgaging isn’t always a smart option. The cost will usually outweigh the benefit if it’s still very early on in your term or if you’re very close to settling your debt.
Typically, the best time to do it is when the term on a fixed rate mortgage is about to expire. When this happens, your mortgage switches to a standard variable rate; and this tends to be higher than what you could probably get if you remortgaged.
Whether remortgaging is worthwhile will also depend on what fees apply. It’s worth choosing a mortgage with low early repayment fees in the first place, as this will make it cheaper and easier to switch in future.