The guide to a lower interest rate
Buying a home is no simple task. It requires a lot of organization, careful thought, and money. However, it becomes much easier when you carefully review the financing options and choose the right mortgage lender and the best interest rate that suits your needs.
In this blog, we cover some of the important factors that affect mortgage calculations for home buyers.
Bank of England
Lenders are quite free to charge any interest rate they want, provided it is within a reasonable range. Most lenders determine the interest rate based on Bank of England base rate and LIBOR.
Mortgage lenders take the base rate and add a risk factor, plus a required rate of return to the calculation and come up with a final interest rate to charge their customers.
Your Deposit is very important as it determines the interest rate the bank will set when purchasing your property, the bigger your deposit, the lower the interest rate. This is because lenders see a lower level of risk when you have a bigger stake in the property.
If you offer to pay 20% of the loan, you will usually get a lower interest rate from the lender. If you offer to pay less, like only 10% , then the lender will charge a higher interest rate due to the risk element to the lender, the bigger the deposit, the better the rate, the better the deal.
The Credit Score
Your credit score plays a major role in mortgage calculations. Generally speaking, borrowers with a higher credit score are charged a lower interest rate than borrowers with a lower credit score.
This is because your credit score is used by the lender to predict how reliable you will be in making regular payments on your loan. People with a low score are seen as credit risky and charged more to cover the risk.
Your credit score is calculated based on the information that comes up in your credit report. The information shows your credit history, outstanding loans, credit cards, direct debits and payment history.
Your first step before looking for a property, you should check your credit report. You should get the report checked for errors that lower your score, and then have a copy ready for your broker, this will increase your chance of buying your first home..
If you do find such errors, raise a dispute with the credit reporting company. If the agency determines that they made an error, they will correct it and your score will get better. It can take 1 – 2 months to resolve errors on your credit reports, so check your credit early.
Type of Property
The type of property and purpose of purchase also affects the interest rate slightly.
If you are buying a home for a personal residence, you are charged a regular rate. If you already own a home and purchase a secondary property on mortgage such as a buy to let, you may be charged a slightly higher rate.
You will need to show calculations for the rental income on your property to the lender. An income generating property is less likely to default and lowers risk for the lender. Your broker will be able to assist with this.
Mortgage rates are dependent on the basic market factors of supply and demand. The Bank of England, inflation, economic growth, borrowers’ credit worthiness, and deposit all play a role in determining a final interest rate for the borrower.
There are dozens of lenders in the market who offer different types of loans with varying terms. In order to get the best deal, you should work with an experience mortgage broker who can find you the most suitable lender for your requirements.
To find out more get in touch…