The UK finance market offers a broad range of mortgage products to borrowers. The interest rate charged on those products can vary quite widely for different borrowers. Generally, the interest rate charged by a lender is a reflection of their view of the risk the borrower poses and the scale of loss the lender might run into should that happen.
As a result of these different risk profiles, some of the preferential deals that may be available to one borrower may not be available to another – and vice versa. So, what are some of the factors that affect the interest rate that you may be offered on your mortgage and how can you get the best rate for your personal circumstances?
Make sure your credit score is in good health
Lenders look at your credit score as one of the indications of how much risk you pose as a borrower. Your credit history is seen as a reflection of your money management skills. For this reason, having a good credit score is a really important part of lowering your risk profile and therefore being able to access a better deal on your mortgage.
If you do have a poor credit score, it’s certainly not impossible for you to be accepted for a mortgage. It just means that you may miss out on some of the more preferable interest rate deals which otherwise might have been available. To a lender, a low credit score generally indicates a history of poor financial management. This indicates a greater probability of defaulting on mortgage payments. This greater perceived risk may result in a borrower being excluded by some lenders.
If you are concerned about your credit score, there are a few ways that you can improve it over time. Firstly, ensure that you are registered on the electoral roll at your current address. Lenders use information from the electoral roll to confirm things like your name, address and residential history. If they can’t find you on the register at your current address, it can harm your application as well as hurt your credit score. Some lenders may even choose to decline your application if they are unable to match your details with the register.
Of course, it’s important to ensure you pay all your bills on time and keep to the conditions that you’ve agreed to in any finance agreement. You should also close off any credit accounts that you no longer use. It’s a good idea to keep an eye on your credit report to make sure that all the information on there is correct. Errors do happen. Make sure that you follow up on anything that doesn’t look quite right and get it corrected if necessary. You can access your credit report for free using Clear Score.
Put down a large deposit
Of course, this can be easier said than done. However, putting down a larger deposit means that you’ll borrow a smaller percentage of the property cost. This will make the lender’s risk of loss lower. Lower risk should result in a lower interest rate.
Lower loan-to-value (LTV) mortgages generally attract much lower interest rates. This is because the risk of loss to the lender is much lower. For example, if a lender has to repossess a property that they originally lent 90% of the purchase price (90% LTV) of, they can then only afford to reduce the property price by up to 10% to sell it before they start making a loss.
If however, they only lent 75% of the original purchase price, then they can afford to see the property sell for up to 25% less and still recover all of their money. The larger the deposit you are able to contribute towards the purchase, the lower the LTV of the mortgage you will need. In turn, the cheaper the deal you should be able to secure from your lender.
The best deals on the market are generally reserved for those who put down a deposit of 40% or more. However, very good deals can also be found with deposits of 20%+.
If saving such a large amount of cash is unrealistic for you, then you may want to look into government schemes such as the Help to Buy Equity Loan scheme. With this scheme, the government lends you up to 20% of the cost of a property. You’ll only need a 5% cash deposit and a 75% mortgage to make up the rest. That’s your 25% deposit sorted. The scheme is open to first-time buyers only and is only available on new build properties, and regional price caps do apply.
A joint application for a mortgage is often viewed as a stronger proposition than one from a sole applicant. This is because it generally means that there are two incomes that can be relied on to help with repayments. Two incomes should also enable you to borrow more. This is because lenders usually work on lending a multiple of your overall income.
However, if one of the applicants has a poor credit record, then this could negatively impact the application. This means that you may be better off applying in just the sole name of the stronger applicant. Of course, that might restrict the amount you are able to borrow. Lenders will assess affordability based on just one income.
A guarantor mortgage might also be an option to help reduce risk to your application and to secure better borrowing rates. You will need to find a suitable individual to act as your guarantor. They will need to meet certain criteria in terms of their age and financial status in order to be acceptable to most lenders.
Find out more – ‘What is a mortgage guarantor?’
The stability of your employment is another factor to consider. Ideally, lenders will want to see that all applicants are in secure long term employment. This indicates that their income can be relied on. Whatever you can do to show that you have a sustained track record of regular employment will strengthen your application.
The timing of your application for a mortgage can have an impact. Waiting until you have secured a promotion, signed up to a new contract or completed a probationary period might make a difference to the deals you might be offered. A chat with an experienced mortgage advisor and broker, such as us here at Mortgage Light, might just help you with deciding the best time to submit an application for finance.
Find out more – ‘What happens to my mortgage if I lose my job?’
The wider market
The mortgage market and interest rates can, and will, be affected by wider financial, economic and political conditions. It makes sense to try and keep up to date with these things when considering purchasing or remortgaging a home.
If the economic outlook is particularly poor for example, you can expect lenders to be more cautious in their assessment of applications. They may view the housing market to be particularly volatile. Therefore, they will be reluctant to provide some high LTV mortgages, or at least increase the cost of these products.
The government may be concerned about inflation in the economy. This might result in pressure to increase interest rates via a change in the Bank of England’s base rate. Being aware of these issues may help you to anticipate some of the market changes.
Sometimes, timing is everything within the mortgage market. Whilst you have no control over most of the factors that affect the wider market, you can sometimes use knowledge of these things to your advantage to secure the best deal for you at that time.
Of course, understanding this complex market is easier said than done. That’s why it is a good idea to lean on a mortgage advisor and broker to offer expert advice. We are always up to date with the wider market and the impact it can have on current and future interest rates. We are well equipped to help you time your mortgage application right.
Use a mortgage advisor and broker
The UK mortgage market covers a very wide range of lenders whose lending appetites will constantly be changing. Most lenders will offer a range of deals to suit different types of applicants. The price (interest rate) for those deals will also be constantly changing. It’s almost impossible for individuals to keep track of all the options open to them.
For this reason, we would always recommend enlisting the expert help of a mortgage advisor and broker to do the leg work for you. Not only will they advise you on how to present the strongest application, but they will also help you approach the right lenders at the right time to give you the best chance of securing the best deal for you.
Here at Mortgage Light, we have access to the whole of market and have highly experienced and qualified advisers available to guide you through the property buying or remortgage process. This means that we may be able to find deals for you that you may not otherwise have access to. Plus, by understanding your personal and financial circumstances, we’ll be able to identify the most appropriate lenders to turn to in order to find you the best rates available.
Ready to start looking for a mortgage and need a helping hand? We’d love to chat and find out how we can help you! Contact us via our website or give us a call on 01908 597655.