With the new year upon us, many clients find themselves assessing the prospect of home buying or remortgaging over the next 12 months.
In this article, Diamond Property Finance will offer helpful tips on how to review your mortgage and make informed choices about your next property investment. We want to give you the knowledge to save money by learning about key impacting factors. This way, you can make smart decisions about your property finance.
The Importance of Understanding Your Interest Rate
Your mortgage interest rate is very important for the total cost of your loan. It affects how much interest you pay in addition to your loan repayments. A lower interest rate means you will have lower monthly payments and pay less interest during the life of your mortgage. Whereas a higher interest rate may cause you to pay more.
2024 saw interest rates go up and down due to economic impact, so 2025 may see some of this residual fluctuation affect new borrowers and those who are remortgaging. However, there are some actions you can take to help keep interest rates down.
A loan-to-value (LTV) ratio is closely related to your interest rate. LTV shows lenders the percentage of your property’s value you wish to borrow after you’ve put equity (or your deposit) in. Typically, a lower LTV may get you a better interest rate because it carries less risk for lenders.
By tracking your interest rate and seeing how it relates to your LTV, you can make informed choices about your mortgage. This is particularly useful when thinking about refinancing.
Assessing the Loan Term and Penalties for Early Repayment
Your loan term indicates how long you have to pay back your mortgage. Shorter terms often have higher monthly payments, but they usually cost less in interest overall. On the other hand, longer terms have lower monthly payments but often have higher interest rates.
You should also make sure you know about any early repayment penalties for your mortgage. It’s not uncommon for lenders to charge you a fee if you want to refinance or pay off your mortgage in full before the agreed term has come to an end.
These penalties help the lender reduce money lost from early repayment. Before you refinance, think about any penalties you could face and compare these costs to the savings you might get from a lower interest rate.
The Impact of Market Changes on Mortgages
Changes in the mortgage market may provide you with new opportunities to save money, or require you to change your plans. If you keep up with the market and economic trends, you can make smart choices about refinancing at the right time.
The Bank of England is important in shaping mortgage rates because they make decisions about monetary policy, including the base rate. When the base rate changes, it affects the whole economy and directly impacts the interest rates lenders charge on their mortgage products.
Other economic factors that also affect mortgage rates include inflation, jobs, and GDP growth. For example, high inflation typically means higher interest rates as lenders do this to keep their loans valuable.
The Financial Conduct Authority (FCA) oversees the mortgage market in the UK and works to make sure borrowers are treated fairly. The FCA does not set interest rates, but it helps create rules for responsible lending.
Do The Mortgage Terms Fit With Your Lifestyle?
Whilst interest rates play a significant role when it comes to choosing your next mortgage, the term length – or time you have to repay the mortgage – will directly impact your next mortgage interest rate.
Consider whether your lifestyle is due to change, and whether or not that will affect your eligibility and affordability. Typical repayment terms range between 15 to 40 years. If you choose a longer-term, this will most likely reduce monthly payments but can increase total interest costs. In contrast, shorter mortgage terms save on interest but require higher monthly payments.
Flexibility is important, so be sure to check if you can adjust the term in the future if your circumstances change. For example, are you planning to make overpayments this year? Some lenders may charge a fee for additional or overpayments, so it’s important to check that the term is flexible enough for your needs.
One other sought-after option is portability whereby clients port their existing mortgage to a new property following home moving. If you are considering purchasing a new property this year after obtaining your new mortgage, make sure you check the T&Cs carefully to ensure the mortgage can be transferred if you decide to move.
How Loan-to-Value (LTV) Ratio Can Affect Your Next Mortgage
For borrowers looking to secure a new mortgage, how much you can borrow will be impacted by the LTV ratio; the proportion of the property’s value you’re borrowing. By way of example, a 90% LTV means you’re borrowing 90% of the property price and paying a 10% deposit.
Unsurprisingly, lenders prefer lower LTVs because lending less money minimises the risk they incur. As such, lower LTV ratios with larger deposits typically attract more preferable interest rates thereby reducing monthly payments.
When choosing your next mortgage, it’s important to evaluate whether monthly payments fit your budget now and, in the future, particularly if rates rise. Consider stress testing your income and outgoings in case of potential changes in your financial situation, such as job changes or redundancy, additional expenses, or economic downturns.
Choosing The Right Type of Mortgage
Ahead of applying, you’ll need to decide what type of mortgage you’re looking to secure. There are many types available, with different methods of servicing the loan. Common mortgage products are:
- Repayment Mortgages: The borrower will repay the loan amount and added interest via monthly payments. These mortgages can be fixed rate, variable or tracker mortgages, depending on what’s best suited to the individual borrower.
- Interest-Only Mortgages: Interest-only mortgages require you to service the interest payments monthly, but the borrower will need to repay the full loan amount back at the end of the term.
- Specialised Mortgages: For borrowers in unique situations, there are bespoke mortgage products available.
Predictions for Mortgage Rates in 2025
Whilst we wish we could look into a crystal ball and predict what might happen over the next few months, forecasting mortgage rates with certainty is an impossible task! As economic and market conditions are constantly shifting, we’ve assessed expert analysis and trends to provide some insights into potential scenarios for UK mortgage rates in 2025.
- Factor: Potential Impact in 2025
- Inflation: Continued inflationary pressures could lead to higher mortgage rates
- Bank of England Base Rate: Adjustments to the base rate will directly influence mortgage rates
- Economic Growth: Stronger economic growth might contribute to higher mortgage rates, while weaker growth could put downward pressure on rates
Keeping a close watch on these factors and seeking professional advice from a qualified mortgage advisor will help to guide you on your mortgage decision in the evolving landscape.
Key Takeaways:
- Market conditions in 2025 will influence the eligibility and affordability of mortgages.
- A good credit score is paramount to securing a favourable mortgage rate.Evaluating potential savings, and budgeting effectively, is essential ahead of applying for your new mortgage.
- Consulting with an expert mortgage adviser, such as the team at Diamond Property Finance, can help to provide clarity and assist you in making informed decisions.
Frequently Asked Questions
What is the Best Time of Year to Review Your Mortgage Rate?
When it comes to finalising a mortgage application, there is no “best” time of the year as each individual application requires bespoke attention. For remortgages, we would urge clients to review options up to six months in advance but for first-time homebuyers, applying for a mortgage will depend on your own situation and affordability in the current market conditions.
