Introduction

Mortgage interest rates are effected by a range of factors including the Bank of England’s assessment of the economic climate and the cost of borrowing between mortgage lenders, known as the LIBOR rate. Whilst there is little a borrower can do about external factors there are a number of factors within your control that are likely to reduce mortgage interest rates for your own personal situation. We explore a number of practical ways in which you can start saving money on your mortgage by reducing mortgage interest rates.

1. Loan To Value Ratio

If you are keen to reduce mortgage interest rates on your own borrowing then a key feature is the loan to value ratio (LTV). The loan to value ratio is a measure of the amount of mortgage you have outstanding on a property compared with value of the property itself and is normally expressed as a percentage. For example a house valued at £100,000 which has an outstanding mortgage of £90,000 would have an LTV of 90%.

The reason that the loan to value ratio is important if you are looking to reduce mortgage interest rates on any borrowing, is because the lower the LTV percentage the lower the risk you are to a lender and the more likely you are to attract the lowest mortgage interest rates.

Our top tip is to opt for a cheaper property and then trade upwards once you have made money on it, that way you are likely to have a lower loan to value ratio on your next property.

2. Check Your Credit History

A second way to get the lowest mortgage interest rates from lenders is to check your credit history. This can be done easily by checking the current credit record that a credit reference agency holds on you. The main credit reference agencies in the United Kingdom are Experian, Equifax and Call Credit. You can do this either in writing or by signing up for a credit report online. You will then get access to your credit report which is a history of all your credit related transactions and applications.

A credit report with lots and lots of credit applications may make a mortgage lender nervous as it gives the impression that you are desperate for credit and is often associated with those who have bad credit ratings. However no credit history is just as bad as mortgage lenders need to know that you have the ability to manage credit properly. Ensure that you have some form of positive credit history as this will enable you access to the lowest mortgage rates available. If your credit history is poor then wait until it improves before applying for a mortgage, so that you avoid higher interest rate charges.

Experian offer a free 30 day credit report and after that you can either cancel your subscription or pay a fee to continue to monitor your credit record. Some credit card companies like Capital One actually offer a free credit report through Equifax if you sign up to a Capital One credit card.

Top Tip: Monitor your credit record regularly to enable you to develop a good credit history and gain access to the lowest mortgage interest rates and to also protect you from identity fraud.

3. Put Down A Large Deposit

This is one of the most effective methods to get the lowest mortgage interest rates available and has been tried and tested over many decades. The reason that mortgage lenders will provide their lowest interest rates to borrowers who can adopt this strategy is that they perceive them as less of a risk. If for example you put down a £20,000 on a £100,000 property, then the mortgage lender doesn’t need to lend as much money and it also demonstrates your commitment to the mortgage process and as such you as the borrower has more to lose should you default on mortgage payments. However someone who needs to borrow the full amount on a property i.e. 100% mortgage, has little to lose if things go wrong. In essence this is how sub prime mortgages became problematic because borrowers were being loaned too much, with little chance of them meeting the monthly repayments. Remember that getting the money together for a large deposit may seem difficult but it will enable you to get the lowest mortgage interest rates and save you money on your mortgage in the long term.

Top Tip: Start making regular monthly contributions to a mortgage deposit as soon as you are able to. Consider placing this into a Cash ISA which means that any interest you receive will not be subject to tax and which means that this money will further boost your mortgage deposit pot of cash.

4. Consider A 3-5 Year Fixed Rate Mortgage

Fixed rate mortgages can be extremely useful in the right context, but you will need to get your timing right. A fixed rate mortgage can be beneficial in an economic climate where inflation is growing. Inflation is a measure of the costs of goods and services and Government’s frequently increase interest rates in order to slow down the rate at which inflation increases. In boom times opting for a 3-5 year fixed rate mortgage can give you access to the lowest mortgage interest rates over that period of time and having used this method myself I can agree that it is very beneficial. However in times of recession when inflation is low anyway then it may not be beneficial. Consider fixing your mortgage to access the lowest mortgage interest rates at the right time in the economy. It is worth consulting a financial advisor or mortgage broker to advise you on this process.

Top Tip: Monitor mortgage best buy tables which are frequently published in newspapers and which allow you to monitor whether mortgage interest rates are changing.

5. Compare Mortgage Interest Rates

There are a huge variety of ways in which you can compare mortgage interest rates across lenders. Firstly you could consider using an independent financial advisor. As there name suggests these are not tied into specific mortgage products and as such can advise you on the whole market enabling you to obtain the lowest mortgage interest rates possible. However you are likely to have to pay an upfront consultancy fee of between £300 - £500. Mortgage brokers and mortgage advisors are another option although many of them are often affiliated to specific lenders and are therefore only qualified to advise on specific products, however they may have very good working relationships with lenders which provides you with access to the lowest mortgage interest rates for that specific lender. The best free ways to find the lowest mortgage interest rates are by using online comparison sites and best buy tables. Online comparison sites like Moneysupermarket charge you nothing for their services and instead receive a commission payment of a few hundred pounds should you take out a mortgage with a lender that they referred you to. Clearly these sites are not independent but they do compare a good range of mortgage products and lenders. Best buy tables are also effective and these can be accessed either online through sites like Mortgage Sorter & The Guardian,or through newspapers like the Financial Times, The Times, The Telegraph & The Guardian.

6. Combine Joint Incomes

The sixth way to get the lowest mortgage interest rates is to use the joint income from a spouse or partner to apply for a mortgage. Even consider buying a property with a good friend. Avoid going it alone or your ability to get the lowest mortgage interest rates may be severely reduced, as you will be dependent upon one income. Mortgage lenders offer their lowest mortgage interest rates to those with the largest incomes or who can provide the largest initial deposit because a large combined income will reduce the level of risk the mortgage lender is exposed because you are more likely to meet monthly repayments. Combining joint incomes in this way will save you money on your mortgage in the long term by reducing the level of interest that you will need to pay back through lower mortgage interest rates charges.

Top Tip: If buying a property with a friend then it is important to make a legal contract prior to undertaking the mortgage. This contract needs to specify the level of investment each person has made and it is best to get it approved by a solicitor to ensure that it is legally enforceable. This way if there is any disagreement in the future, you will both have a clear understanding of the ownership levels.

7. Pay An Arrangement Fee

In order to get the lowest mortgage interest rates it is sometimes beneficial to pay an upfront arrangement fee with a lender. Arrangement fees were introduced by mortgage lenders as a means of gaining access to the lowest mortgage interest rates. Whilst the thought of paying £500 - £1000 upfront to access the lowest mortgage interest rates can seem daunting it may save you thousands of pounds in the long term on interest payments therefore making your mortgage cheaper.

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