Rate cuts and sub-4% mortgages are making headlines, but Gemma Bennett of The Mortgage Mum fears these are misleading for many borrowers. Here she explains how you can determine which mortgage suits you best
Mortgage interest rates have been front page news for over a year and we saw the first one in August of this year Bank of England base rate cut since March 2020.
We expected this drop to happen around August or September and we were grateful to see it. Moreover, experts also predict that another reduction may occur before the year is out.
When the BoE changes its interest rate – whether it is an increase or decrease – this can have a direct and immediate effect on tracker mortgages – these are the deals that follow the BoE interest rate. In many cases this can also affect variable rate mortgages as lenders may choose to adjust their own standard variable interest rate as a result.
If you currently have a fixed rate deal, the BoE changes will not directly affect you until it is time to look for a new mortgage deal.
However, if you are currently looking at the best mortgage options for your purchase or remortgage, you may be wondering what is the best product out there? Who is the best lender? And where can I find the cheapest option, especially now that rates are falling?
The answer is… as unique as you are.
This is because there is no BEST rate, product or lender for everyone.
There are a number of factors that will influence the answer to this question, so allow me to explain how we – as real estate agents – come to offer our advice and recommendations.
‘Cheapest most suitable option’
We use the phrase ‘cheapest most suitable option’ when looking for the best product and rate for a customer, because of how individual the answer is.
Your needs and circumstances should be taken into account and compared with the cheapest rate available to you. This way you arrive at the cheapest, most suitable product.
Here you’ll find insight into how different factors, depending on your needs and circumstances, can influence the best rates available to you.
Rode
The available purchase products are priced differently than products for refinancing a mortgage or product exchange. So we look at what you need the mortgage loan for.
Loan-to-value
The loan-to-value (LTV) also affects the product choices available to you. This is the amount you need to borrow and is expressed as a percentage of the value of your property.
The higher the LTV, the higher the rates. Mortgage lenders generally offer their lowest rates for products under 60% LTV.
Affordability
Lender affordability calculations vary in the background. One lender may offer a cheap rate, but you may not meet their affordability criteria. However, another lender may have an offer that suits your affordability needs, but the rate may be slightly higher.
Product costs
Some rates are low but include a high product fee. Other higher rates may not apply product fees. Based on these elements, the advisor will calculate the cheapest option for you.
Fixed interest period
Currently, a five-year fix is cheaper than a two-year fix when it comes to monthly repayments. This is largely because available market rates are expected to be lower in two to five years.
You will need to consider the length of time you plan to repair a product based on your future plans. Fixed rate products often charge early repayment fees (ERCs) if they are paid off within the fixed period. You can read more about this feature discussing fixed rate options of two or five years.
Other factors
Other elements, such as credit history, age and how you work, also play a role in recommending a mortgage product. Because lenders use different criteria on how they view and calculate these elements.
Can I take out a mortgage below 4%?
When you see headlines announcing that a particular lender has cut its mortgage rates below 4% – which we’ve seen recently with some major lenders such as Nationwide, Barclays and NatWest – be aware that these specific products have their own specific criteria to have.
Let’s take the Nationwide mortgage as an example, which was launched in July with an interest rate of 3.99%. There are the details:
- Reason: NEW customers moving – purchasing product
- LTV: At 60% LTV or less
- Product cost: £1,499
- Period: five-year fixed interest rate basis.
This is clearly a great product and option, but only if you qualify for all of the above and it meets your needs now and for the foreseeable future.
What really happens to mortgage interest?
However, we can take some solace in the overall trajectory of the market. The BoE base rate is finally coming down and lenders like Nationwide offering products below 4% will lead the way for other lenders to start repricing. Hopefully, more reduced rates will become available over the next six to twelve months and beyond.
It is misleading to say that interest rates are ‘falling’; In my opinion, the word conjures up images of sudden and large declines.
However, it is fair to say that there are gradual reductions and it is expected that these will continue, cautiously, in the coming years. This is as long as we do not face sudden political unrest or unprecedented times.
The best way to find the BEST product for you is to seek advice from a broker who has access to the market. Let them check all your needs and circumstances to find the cheapest and most suitable rate for you.