What are mortgage interest rates?
A mortgage interest rate is the amount of money charged in return for lending money to buy a home. This is expressed as a percentage of the total money loaned, and does not include fees. Variable rates are usually set to something 2% above the Bank of England rate, and move with it. Fixed rates do not move, but for this reason are usually set higher than initial variable rates.
Types of Mortgage available
There are several categories of mortgage available, but each of them calculates interest in one of two basic ways.
Fixed Rate Interest
Fixed rate mortgages carry the same interest rate for the duration of the fixed rate period. This can be anywhere from two years to ten or more. Rates are set at a certain percentage above the Bank of England rates at the time, and revert to variable rate after the fixed period is complete.
Variable Rate Interest/Tracker Mortgages
The rates are set a certain amount above the Bank of England rate at the time of the loan, and can fluctuate periodically as the Bank of England rate changes (Tracker mortgages are tied to exactly a certain percentage above the Bank of England base rate, Variable rate mortgages follow roughly the ups and downs of the rate). For this reason, the cost of the loan and the monthly payments can go up or down over the course of the loan – often both.
Residential Mortgage
This is a loan to buy a property in which you intend to live. This is also sometimes available for a property you intend to rent to an immediate family member.
Remortgage
If your circumstances have changed since you first took out your mortgage, you may want to get a different one – from the same lender or a new one. Perhaps your credit rating has improved, or you have been promoted and are likely to get a better interest rate than you did the first time. Remortgages can also be used to pull equity from a property.
Buy to Let
Buy to Let mortgages are for buying a property that you don’t intend to occupy yourself. Rates and down payments are usually higher than for Residential mortgages.
Mortgage fees explained
Fees that are charged, in addition to the interest, can include arrangement and booking fees (often non-refundable). These can be as high as £1000 or more.
What else should I consider when looking for a mortgage?
How much you ultimately pay for your mortgage, and how much you pay month to month, are important factors in choosing the right mortgage. These costs are determined by the interest rate (and fees) charged, and how long the period of the mortgage is. The longer the mortgage, the smaller the monthly payments, but the higher amount you pay overall. Reduce the period and you increase the payments per month, while reducing the overall cost.
How to find the best mortgage deal
The surest way to find the best deal is to take your time and shop around. Star about 15 weeks from when you hope to buy, and visit more than one bank to see what is available. Ultimately, you may go with your usual bank, as you will have a history there, but knowing what deals are out there, and being willing to take your business to the bank that gives you the best mortgage deal, will carry some weight.
Remember that a higher credit rating and a higher down payment will always help you to get a lower interest rate. Whatever you can do to demonstrate that you are a lower risk to the lender, the better.