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If you’ve been renting for years and have never bought a property before, buying a house can be exciting and overwhelming.
Understanding mortgages takes a little bit of know-how, and that’s why we’ve pieced together this guide.
Average mortgage rates in the UK have seen many fluctuations over the years, and with some understanding of how they work, you can ensure you secure the best deal available to you.
Below, you’ll learn more about mortgages, how the repayments are determined, how to determine the amount you’re borrowing, and the interest rate you’ll be faced with.
When putting your first footstep onto the property ladder, the mortgage is the most important aspect to understand.
You’ll want to know what you can afford to spend – or what the bank will offer you.
Certain factors influence mortgage repayment amounts, with two factors being the most important:
- Actual amount borrowed
- Interest rate offered
What Are the Factors that Influence Mortgage Repayment Instalments?
When you purchase a property using a mortgage, three things come into play to determine the amount you’ll pay each month in instalments.
These three things include the total amount you borrow (the cost of the house), how much interest the bank or financial institution adds to the borrowed amount (usually a percentage of the total called “interest”), and the term that’s agreed.
While you may be drawn to the seemingly cheaper monthly instalments when taking out a lengthy mortgage, keep in mind that you’ll pay the loan back over a longer time, which means you’ll end up paying more in interest over the total of the loan contract.
Interest is the tipping scale. Your property could cost you thousands less if you get a good interest rate.
You could pay thousands more if you don’t have the best credit score or can’t get a good interest rate.
There are several reasons why a mortgage provider might offer you a high-interest rate.
If they consider you a risky borrower, you don’t meet all the criteria, if the property market is under stress, or if you’ve had financial hiccups that show on your credit record – these are just a few reasons.
While you don’t have to use a mortgage broker, you may find that a professional with industry knowledge can secure you the best possible interest rate and mortgage deal.
Understanding Interest Rate Calculations
You’ve found the house, and you think you can afford it, but when you apply for the mortgage, you find that the interest rate offered pushes the monthly cost of the house way out of your budget.
Now what? It’s a good idea to understand how interest rates are calculated and how you can get the best possible offer, before you apply for any mortgages.
The interest rate you’re presented with will be determined by the product you choose and how risky the lender sees you as.
You can, of course, reduce the level of risk perceived by the mortgage provider by doing certain things, including:
1. Increase the deposit you pay
In the UK, most mortgage providers expect you to pay a 10% deposit upfront on your buying property. This is the minimum.
You can expect to receive a better interest rate if you’re willing to pay more.
2. Take care of old debts
If you’ve got a credit card you haven’t paid, a store account you’ve forgotten about with instalments racking up, or any bad credit, get it sorted out as soon as possible, so it can be cleared from your credit record.
If your credit history shows you’ve been responsible enough to sort out outstanding debts and correct the wrongs, your interest rate may be better.
3. Understand the risk factors
Unfortunately, sometimes, it’s not easy to avoid a higher interest rate.
For instance, if you’re self-employed or have a complex income or contract and don’t have proof of income in payslips or an employment letter – the lender may see you as a risk, which will reflect in the interest rate.
Sometimes, there’s a way around this, such as having a co-signatory, but it can’t be avoided in other instances.
4. Get a professional mortgage broker on your side
Using a professional mortgage broker takes the guesswork out of getting a good mortgage deal.
They know the different mortgage packages, understand how to negotiate the best interest rates, and can assist you with finding the right product for your financial situation.
The Type of Mortgage You Choose Will Impact the Overall Cost
The following types of mortgages are available, each with their own impact on interest rates.
· Variable Rate Mortgages
Variable-rate mortgages come with interest rates that fluctuate throughout the contract term.
· Fixed Rate Mortgages
These mortgages feature an interest rate that doesn’t fluctuate for a specific period. It could be 5 years or 10 years, depending on the lender.
For many, there’s security in knowing exactly how much the monthly instalments will be, but this can result in an interest rate higher than the variable because you’re paying for that peace of mind.
· Tracker Rate Mortgages
Tracker rate mortgages are a version of variable rate mortgages. The interest rate is linked, in most instances, to the Bank of England’s base rate.
· Interest-Only Mortgages
For many, these mortgages are the most attractive because the monthly instalments are the lowest. The low instalment is due to only paying the interest amount each month.
You can pay more towards the capital amount – that’s your choice.
Once the term of the mortgage comes to an end, the capital amount must be paid off.
The mortgage agreement will stipulate how this is to be done.
· Part-and-Part Mortgages
This type of mortgage involves paying a portion into the capital debt and a portion into the interest over the term of the contract.
Examples of Mortgage Costs
Using a mortgage broker’s mortgage calculator or asking for assistance in running calculations is a step in the right direction when trying to calculate mortgage costs.
Some examples below are based on mortgage interest rates.
1% Mortgage Rate
On a property of £100,000, you can expect to pay £598,49 per month over 15 years, £459,89 per month over 20 years, £376,87 per month over 25 years, and £321,64 per month over 30 years.
3% Mortgage Rate
On a property of £100,000, you can expect to pay £690,58 per month over 15 years, £554, 60 per month over 20 years, £474,21 per month over 25 years, or £421,60 over 30 years.
Consult with a Mortgage Broker
Of course, the above estimations are just estimates. Several factors will play into the final interest rate and instalment amount on your mortgage.
For more personalised advice and guidance when seeking out a mortgage deal, consult with a professional mortgage broker today.
Call us today on 01925 906 210 or contact us to speak to one of our friendly advisors.