Interest rates are an indicator of how much you’ll repay on a borrowed financial product, such as a mortgage. While the UK has one of the world’s largest mortgage markets, how do interest rates affect the 25% of UK residents that own one?
Over the past year, dramatic shifts in interest rates have driven Brits online in search of clarity and cheaper deals. According to Google, searches for “what happens when interest rates are cut” surged by 5,000%, while questions about whether rates are rising or falling increased by 70% in the past 12 months.
To help navigate the uncertainty, Barratt Homes has teamed up with mortgage expert Terry Higgins, Managing Director of TNHG, to explain everything Brits need to know about interest rates and how they impact mortgages.
Brits’ knowledge of interest rates and mortgages
To assess the state of the nation’s knowledge, Barratt Homes surveyed 500 UK homeowners to uncover that over a third (37%) are not familiar with how interest rates are determined.
It also highlighted that half of those aged between 21 and 30 had no knowledge at all – making this the age group with the greatest knowledge gap.
When asked about different mortgage types, 16% also could not explain the difference between a fixed-rate and adjustable-rate mortgage.
How interest rates affect different mortgage types
Interest rates play a crucial role in determining the overall cost of a mortgage, and understanding how they impact available options is essential when choosing the best mortgage.
A small change in interest rates can significantly affect monthly payments and the total amount an individual will repay over the life of a loan.
Mortgage expert Terry Higgins explains:
“When interest rates are low, borrowing is cheaper, which can make larger loans or longer terms more appealing. But when rates rise, borrowing becomes more expensive, so you may need to adjust your loan size or consider a different mortgage to keep payments affordable.”
Variable rate mortgages: With a variable rate mortgage, the interest rate can change based on market conditions, often tied to the Bank of England’s base rate. If the base rate increases, your mortgage payments will rise, and if it decreases, your payments will fall.
Tracker mortgages: A type of variable rate mortgage, a tracker mortgage tracks the Bank of England’s base rate, so any changes in the base rate are immediately reflected in your mortgage rate.
Fixed rate mortgages: A fixed-rate mortgage locks in your interest rate for a set period. Even if the Bank of England base rate fluctuates during that time, your payments will remain the same.
What’s considered a good interest rate for a mortgage?
A ‘good’ interest rate for a mortgage depends on several factors, including current market conditions, an individuals credit score, the type of mortgage they are considering, and the length of the loan term. Generally, the lower the interest rate, the less you’ll pay over the life of the loan.
Mortgage expert Terry explains:
“In an ideal scenario, a good mortgage rate is one that’s lower than the current market average. However, what constitutes a ‘good’ rate is different for everyone. It largely depends on your individual circumstances, like your credit score, the size of your deposit, and how long you’re planning to stay in the property.”
How can you secure a good interest rate on a mortgage?
Securing a favourable interest rate on a mortgage often comes down to preparation and understanding the factors that influence lending decisions. While market conditions play a role, there are several steps homebuyers can take to position themselves for the best possible rate.
1. Improve your credit score
Your credit score is one of the most critical factors lenders consider when determining your mortgage rate. The higher your score, the better your chances of securing a lower rate.
Mortgage expert Terry Higgins advises, “Start by checking your credit report for any errors or outdated information that could be pulling your score down. Pay off outstanding debts where possible and ensure you’re paying your bills on time. Even small changes in your credit score can make a big difference to the rate you’re offered.”
2. Save for a larger deposit
A bigger deposit can help you access better interest rates by reducing the loan-to-value (LTV) ratio of your mortgage. A lower LTV is less risky for lenders, so they’re more likely to offer you a competitive rate.
Terry explains, “Aim to save at least 20% of the property’s value if you can. While many lenders will accept smaller deposits, the best rates are often reserved for those with a higher deposit.”
However, if saving a large deposit feels out of reach, schemes like the Own New – Rate Reducer can help make securing a mortgage more accessible. The scheme contributes up to 5% of a new build property’s purchase price, reducing your mortgage rate and monthly payments for the first few years.
3. Shop around and compare offers
Different lenders offer different rates, so it’s crucial to shop around. Use comparison tools or work with a mortgage advisor who can help identify the best options for your circumstances.
“Don’t settle for the first offer you receive,” Terry advises. “Take the time to compare rates from multiple lenders. An advisor can also help you access exclusive deals that aren’t always available directly to borrowers.”
4. Consider the type of mortgage
The type of mortgage you choose—fixed or variable—can affect the rate you’re offered. Fixed rates provide stability, while variable rates may start lower but come with the risk of rising payments.
Terry suggests, “Think about your financial priorities. If you’re looking for predictability, a fixed rate might be worth the slightly higher initial cost. If you’re comfortable with some fluctuation, a variable rate could save you money in the short term.”
5. Time your application wisely
Interest rates are influenced by overall economic conditions, so keeping an eye on market trends can help you apply at the right time.
“While you can’t control the market, being informed about rate trends and Bank of England announcements can help you make smarter decisions about when to lock in a rate,” says Terry.
6. Get pre-approved
Securing pre-approval through a Mortgage in Principle can help you secure a rate and show sellers you’re a serious buyer. This also gives you a clear idea of what you can afford.
By following these steps and staying informed, you can improve your chances of securing a good interest rate that aligns with your financial goals. As Terry says, “Preparation is key, and taking the time to get your finances in order and understanding your options will pay off when it comes to finding the best rate for your mortgage.”
For more information, please see the Mortgage Support Hub on the Barratt Homes website: https://www.barratthomes.co.uk/mortgage-support-hub/
