What is a bad mortgage rate?

What is a bad mortgage rate?

A bad mortgage rate is typically considered to be a rate that is significantly higher than the current average rate offered by lenders in the market. 

However, what constitutes a “bad” mortgage rate can vary depending on individual circumstances and financial goals.

We’re going to take a look at what is considered a bad mortgage rate in the current climate and what contributes to those rates.

What is meant by a mortgage rate?

It’s important to define what a mortgage rate is, especially if you’re a first-time buyer. A mortgage rate is the interest rate charged on a mortgage loan. 

Mortgage rates can vary widely depending on the lender, the type of mortgage, and the current economic conditions.

It’s also important to note that mortgage rates change often depending on the base rate the Bank of England sets. 

Factors that contribute to a bad mortgage rate

Determining what constitutes a bad mortgage rate in the UK is a complex issue that depends on a variety of factors. 

One of the most significant factors that can affect mortgage rates is the Bank of England’s base rate. This is the interest rate that the Bank of England charges banks for borrowing money, and it can have a significant impact on the mortgage rates that lenders offer to borrowers. 

Naturally, when the base rate is low, lenders can offer lower mortgage rates to attract borrowers, whereas when the base rate is high, lenders may need to charge higher mortgage rates to cover their costs.

Another factor that can affect mortgage rates is the type of mortgage that the borrower chooses. There are several different types of mortgages available in the UK, including fixed-rate mortgages, variable-rate mortgages, and tracker mortgages. 

Fixed-rate mortgages offer a set interest rate for a fixed period of time, whereas variable-rate mortgages can change depending on market conditions. 

Tracker mortgages on the other hand are linked to the Bank of England’s base rate, meaning that the interest rate can go up or down in line with changes to the base rate.

In general, a bad mortgage rate in the UK is one that is significantly higher than the average rate being offered by other lenders. This could be for several reasons:

  1. because you have a poor credit history, 
  2. or because the lender is charging higher fees or interest rates to cover their costs. 

It can also be one that is unsuitable for the borrower’s financial situation, such as a variable-rate mortgage that the borrower cannot afford if interest rates rise.

How do we determine what a bad mortgage rate is?

To determine whether a mortgage rate is good or not, it is helpful to look at the current average mortgage rates being offered by lenders. 

As of March 2023, the base rate sits at 4.25%. To get an idea of the impact of that on lenders’ mortgage rates, according to Uswitch (at the time of writing) mortgage rates on average stand at:

  • The average two-year fixed-rate mortgage rate in the UK is 5.45% (based on 75% LTV)
  • The average five-year fixed-rate mortgage rate in the UK is 4.84% (based on 75% LTV)
  • The average two-year variable-rate mortgage rate in the UK is 4.75% (based on 75% LTV) 
  • The average standard variable rate (SVR) in the UK is 7.74% 

However, it is important to note that these average rates are just that – averages. Individual lenders may offer higher or lower rates depending on their own financial situation and your financial situation. For example, borrowers with a poor credit history may be offered higher mortgage rates than those with a good credit history, as the lender will perceive them to be a higher risk.

The rate you can get will also depend on how much deposit you can put down. The bigger the deposit, the lower the loan-to-value (LTV) which generally allows you access to better deals as lenders will see you as less risky. 

A mortgage rate that is significantly higher than the average rate being offered by other lenders is considered a bad mortgage rate. For example, if the average rate for a two-year fixed-rate mortgage is 2.15%, a borrower who is offered a rate of 3% would be paying significantly more than they need to. 

What else should you consider when it comes to mortgage rates?

In addition to the interest rate itself, it is important to consider the overall cost of the mortgage when determining whether it is a good deal or not. This includes factors such as arrangement fees, valuation fees, and legal fees. A mortgage with a low-interest rate but high fees may not be a good deal overall, you may end up paying more in fees than you save on the interest rate.

It is also important to consider your financial situation when determining whether a mortgage rate is bad for you. For example, if you’re on a tight budget you may prefer a fixed-rate mortgage that offers predictable payments each month, rather than a variable-rate mortgage that could change unpredictably. Similarly, if you’re planning to stay in your home for a long time you may prefer a longer fixed-rate mortgage, whereas if you’re planning to move in a few years you may prefer a shorter fixed-rate mortgage or a variable-rate mortgage.

Ultimately, it will depend on your individual financial situation and preferences. However, as a general rule, a mortgage rate that is significantly higher than the average rate being offered by other lenders is likely to be a bad deal. 

By carefully comparing different mortgage options and choosing a mortgage that suits your needs, you can ensure that you get the best possible deal on your mortgage.

In the current climate with rates changing regularly, it’s worth speaking to a whole-of-market mortgage broker who can compare deals to find the best mortgage rates for you. There are plenty of deals available. So, if you need a mortgage, whether you’re a first-time buyer, home mover or need to remortgage, get in touch with us at the Online Mortgage Guru to discuss the options available to you.

Contact us today at Online Mortgage Guru on 0345 3669799 or email us via info@theonlinemortgageguru.co.uk and we will put you in touch with a suitable specialist to handle your enquiry with no obligation.

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