Understanding how to get the best mortgage rates can be quite confusing, especially for first-time buyers. Mortgage rates are quite complex, as there are many variables considered, which can cause mortgage rates to increase or decrease. Comparison sites help with this, but they can only go so far. Many lenders and brokers offer great rates, but choose not to appear on expensive comparison sites.
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Here is some useful information about how mortgage rates are calculated to help you understand how it works and get the best possible deal.
When buying a property, all lenders require a deposit which is a percentage of the value. This deposit is one of the two assurances the lender requests, that proves you are able to cover repayments. The percentage of your deposit will determine the LTV percentage you require to meet 100% of the property value. Therefore, a greater deposit means a lower LTV, which results in a better mortgage rate.
Similarly, the longer the mortgage term, the lower the interest rate. It’s important to be aware however, while a longer-term reduces monthly repayments, the overall total to pay will increase.
Example: A buyer with a 10% deposit applies for a 90% LTV mortgage over 25 years. If they want a better mortgage rate they could increase the deposit to 20% and ask for a 80% LTV mortgage, or they can extend the term of their mortgage to 30.
The other assurance lenders request is that named mortgage holders submit to a credit check. This informs them about your current financial situation and spending habits so they can determine the most suitable mortgage product. Naturally, those with a better credit rating will receive better mortgage rates, as they have shown the bank they are reliable. Most lenders also take other personal details such as demographics and proof of employment into consideration.
Learn more about bad credit mortgages.
Fixed Rate mortgages
This is as simple as it sounds. The lender will fix the mortgage rate temporarily for 2,3 or 5 years regardless of whether interest rates increase or decrease.
Variable rate mortgages
This means that the interest rate you pay can change on a monthly basis, meaning that when interest rates increase or decrease, your repayments also move in line. There are 3 types of variable mortgages:
Tracker mortgages – The rate moves inline with the Bank of England base rate
Standard variable rate mortgages (SVRs) – The rate set by the lender and is the default mortgage rate following the conclusion of a term.
Discount rate mortgages – A discounted SVR mortgage
With an interest only mortgage, you pay only the interest that applies to your mortgage deal during the term. Your monthly payment does not reduce the debt on the amount borrowed, as this is paid back in full at the end of the term. To be eligible for this type of mortgage, you need to have a solid savings plan to prove you will be able to pay off the debt.
This type of mortgage might suit those who are self employed and likely to earn more in some months and less in others. For months when earnings are not likely to be as high, the repayments are more affordable, and in months when earnings are high, they can continue to chip away at their debt.
There can also be tax advantages for buy-to-let investors.
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Friends Capital is one of the UK’s leading brokers with over 30 years experience of finding the best possible policy to suit your needs at the lowest possible price.
We search the market with all the best providers so that you don’t have to.