Buying a home is one of the most important financial decisions you will ever make so it is crucial that you are getting the best deal. It can be overwhelming to approach the subject of mortgages due to their many varieties and the huge amount of variation between rates and fees. As you start comparing mortgages, here are our top tips for finding the best mortgage rate.
1. Don’t take advertised rates at face value
One thing to note before starting your mortgage search is that the advertised rates are not always the most accurate. Although banks and mortgage providers will display their advertised rates online, they reflect an example borrower; in other words, these rates do not reflect your personal financial situation.
Mortgage rates are assessed on a case-by-case basis so using these advertised rates is an inaccurate way of choosing a lender. You should also note that the displayed rates are usually representative of a perfect borrower profile – low debt, excellent credit score and 20% or more down payment.
The best way to get accurate mortgage rate quotes is to apply for quotes with multiple mortgage providers (experts recommend 3-5 lenders). You can do this by filling out pre-approval applications and providing personal information such as your contact information, employment information, and property details.
2. Make sure your credit score is as good as it can be
Getting the best rate on a mortgage will largely depend on your personal credit. Generally speaking, a better credit score will lead to better mortgage rates and higher chances of approval. In fact, even before the pre-approval applications, you should first make sure that your credit score is in a good state.
Mortgage providers use credit scores to assess how likely it is that you can afford to make loan repayments on time. Before applying for a mortgage, you should also check if the specific mortgage provider has a certain minimum credit score in order to qualify. For the majority of traditional mortgages, you will need a minimum credit score of at least 620 or higher. The best mortgage rates are usually reserved for those with higher credit scores.
If you are worried about your credit score, there are certain ways to improve it before applying for a mortgage. Firstly, you should request a copy of your credit report from the UK government for just ?2. From this, you can assess where you are overspending, whether there are any outgoing payments you can stop and, crucially, if there are any errors that you can fix.
You should also use this time period to decrease the amount of credit you are spending and pay off any outstanding debts. All of this will help to improve your credit score and, subsequently, help you access better mortgage rates.
3. Save for a down payment
It can be frustrating waiting to apply for a mortgage but sometimes it is better to wait. Taking time to save for a bigger down payment can save you a lot of money in the long run. There are certain mortgages that require down payments as small as 5% from the borrower; however, these are not too common and also incur worse rates. If you can turn a 95% mortgage into a 90% mortgage, it can make a huge difference so it may be worth the wait.
The higher down payment you are able to make, the less risky your profile is for a mortgage provider and the less money they have to put up. This means that they are likely to offer you better mortgage terms such as lower interest rates and a more flexible loan period.
4. Reduce your debt-to-income ratio
A debt-to-income ratio is how much monthly debt you have versus how much income you have. Mortgage providers use this as a key metric for assessing applications as it shows whether you are able to afford further monthly debt.
If you have a high debt-to-income ratio, it shows that you are struggling to cover your monthly expenses and are probably, at this stage, unable to handle further financial obligations. In general, experts recommend that a ratio of 43% or higher is considered risky.
You can improve your debt-to-income ratio by paying off any existing debt. Before applying for a mortgage, try to put effort into reducing the balance on your credit cards and paying off any outstanding loans. Minimising your debt will make it easier for you to be approved for a mortgage and with better rates.
5. Use a mortgage calculator to compare rates
Using a mortgage calculator can help you adjust the interest rate and mortgage terms in order to see how it will affect the monthly payment and the overall cost of the mortgage. You can enter your personal details to get an idea of how much you can afford to pay off per month. Importantly, mortgage calculators provide an accurate picture of how much a mortgage will cost based on your personal financial situation. This allows you to make more realistic comparisons between the different mortgage options available.
