What is a good interest rate for a mortgage?

Mortgage rates have decreased hugely over the past 10 years. Even sub-2% interest rate mortgages were barely conceivable some 10 years ago, when the average overall average mortgage rate sat around 3.8%, according to Statista.

The interest rates of 5 and 10-year fixed-rate mortgages have fallen the most, dropping from around 3.5% to 4% in 2014 to under 2%. It’s even possible to find 2-year fixed mortgage rates for under 1% in 2021.

Martin Lewis from Money Saving Expert remarks that these historic low interest rates are due to a ‘perfect storm’ of factors:

Ultra-low UK interest rates that look set to continue
Housing boom triggered by Stamp Duty cuts
Banks have lots of money to lend because people spent so little throughout the pandemic

Mortgage rates in 2020 and 2021 have really ‘bottomed out’, as This is Money described it, prompting analysts to wonder whether the only way is up. How long can these ultra-low interest rates be sustained? Is now the best time ever to remortgage onto a cheaper deal?

As of August 2021, the Bank of England base rate remains at a historic low of 0.1%. While this holds, interest rates are not likely to rise by much, if anything, for the near future. Thus, it seems likely that the ultra-low interest lending environment will remain.

Mortgage rates explained

Fundamentally speaking, mortgage rates are interest rates that dictate how much your balance will grow.

There are three main types of mortgage rates:

Variable/tracker rates, where the rate tracks economic variables, primarily the Bank of England Base Rate. This lasts for the duration of the deal.
Fixed-rate, where the rate is fixed for the duration of the deal.
Discount rate, where a discounted rate is offered against the lender’s standard variable rate (SVR).

The confusing aspect of mortgages is that they offer a promotional period with a lower rate before reverting to the lender’s SVR, which is considerably higher.

For example, a 5-year fixed-rate mortgage may charge 2% interest for the first 5 years, fixed for that period. A 5-year variable rate mortgage is similar, but the rate will vary with the Bank of England base rate.

After this 5-year promotional period is up, your 2% mortgage will revert to the lender’s SVR, which might be 3.5% or even higher. At this stage, it’s often a good idea to remortgage at a cheaper rate. This is standard practice in the UK, and essentially, you ‘jump’ between more reasonable promotional mortgage rates. It’s often possible to negotiate a better deal with your current lender than their SVR.

The only downside to remortgaging is paying various fees like early exit fees and setup fees. If your mortgage debt is small, then it might be best to negotiate with your current lender to see if there’s any wiggle room on their SVR. This helps you avoid remortgaging fees.

What is a good rate for a mortgage?

It’s tough to say what a good mortgage rate is as individual circumstances vary considerably.

When considering a mortgage, you’ll need to consider how you’ll handle your home and what your plans are for the future.

For example, buy-to-let is much different to buying a family ‘forever home’. Likewise, if you’re expecting to move again in the next few years, this is also a significant consideration.

While we cannot predict the future, planning how you’ll handle your home is crucial to selecting the right type of mortgage for you.

For example, fixed-rate mortgages over long periods of 5, 10 or even 15 years offer peace of mind and repayment stability. The rate will remain fixed for the term duration. There’s little else to worry about other than paying it until the deal ends. At that point, you can consider remortgaging at a better rate. This is a good option for those planning on raising a family in a home, for example.

Variable-rate mortgages aren’t that tangibly different to fixed-rate mortgages in terms of the amount you’ll have to pay back over time – they’re very closely matched. Right now, the Bank of England base rate is just 0.1%. This means that variable rate mortgage rates are also low. If the base rate falls even more, variable-rate mortgages will follow. However, some rates won’t fall below a specific minimum value. So the only situation in which variable rate mortgage borrowers will benefit in the near future is if the base rate falls below zero, which is possible but unlikely.

The lowest mortgage rates right now

Mortgage rates are exceptionally low right now. For example, it’s possible to obtain a 5-year fixed-rate mortgage with an interest rate of around 1.5%. Some 5-year fixed-rate mortgages have fallen as low as 1.17%, according to Money Saving Expert.

There’s rarely been a better time to remortgage or take out a new mortgage to buy a home.

The lowest mortgage rates available right now are between 1% and 1.5% for 2 to 5-years. These sorts of rates are offered by many banks and building societies, including:

Nationwide
Santander
Lloyds
Barclays
Halifax
Natwest
HSBC
Bank of Scotland

It’s possible to obtain 75% LTV mortgages on 5-year fixed rates of 1.5% or below. This is unprecedented.

How to get lower mortgage rates

The lowest rates will be given when the debt itself is easily manageable and payable by the borrower. For example, a lower value, low loan-to-value (LTV) mortgage that is easily serviceable should incur low fees if the borrower has a good credit record. Loan to value refers to how much loan is granted against the value of the property.

For example, a 90% LTV loan on a £200,000 property will be £180,000 – you’ll need at least a £20,000 deposit. This presents a higher risk than, say, a 60% LTV loan on the same property at £120,000 where an £80,000 deposit is provided. This is a lower risk proposition for lenders, and thus, better interest rates will be offered.

At the very least, the lender will want to see:

Continuous employment history that covers the monthly repayments with interest
Credit history
A sufficient deposit

The deposit is often crucial, as higher loan-to-value (LTV) mortgages are much riskier for the lender. A surefire way to negotiate a better mortgage is to save a bigger deposit. The less borrowing you need, the lower your payments will be and the easier they’ll be to cover.

Mortgage rates are negotiated on several factors, including:

Your personal information. Your employment status and income play a huge part in helping lenders decide what they can or can’t lend you and what rates they can offer.
Your credit history and score. A good history of punctual debt repayment and responsible handling of debt will boost the credibility of your mortgage application and rates.
The property type and value. Some properties, such as listed buildings, may incur higher interest rates as they are riskier to the lender due to unforeseen repairs or maintenance charges.
Affordability. Checks on the affordability of the mortgage, also involving your savings and other financial records.

To secure the lowest interest rates, you can:

Shop around. Competition between lenders is fierce right now, so deals will remain widely available as competition remains high.
Save a bigger deposit. A bigger deposit means lower rates at lower LTVs. Paying more for your property upfront will also reduce your total repayments.
Build your credit score. Building your credit score is probably not as complicated as you think. Which? has a great guide on how to improve your credit score here.