What is a bad mortgage rate? By mortgage rates we mean the interest rate you’ll pay on your mortgage loan.
Interest mortgage rates vary from lender to lender and what you’ll be offered will always be impacted by several factors, the top one being your credit rating.
In this article, we’re going to look at what can be considered a bad mortgage rate and what to look out for when you’re looking at mortgages. We’ll also cover what a good mortgage rate would look like, how rates can fluctuate and the factors behind what could affect any mortgage offer (and interest rate) from a lender.
For starters, it’s important to note that there are generally two types of mortgage you can apply for as a potential borrower, interest only and repayment.
Both are very different in the way they work:
Repayment – A repayment mortgage is probably the most conventional and widely available method of repaying a mortgage. It means you can pay back the capital (loan) and the interest together and the loan amount will gradually reduce over the term. Your monthly payments to your lender will therefore be made up of both capital repayment and the interest on your loan.
The capital to interest ratio will vary throughout the term of your agreement (but your monthly payment amount will stay the same). In the early part of the term, your payments will mainly be interest.
Interest Only – An interest-only mortgage is pretty much what it says on the tin. When you take out an interest-only mortgage the payments you make every month cover the interest on the loan as set by your lender. You won’t pay any of the capital back on the loan itself until the end of the mortgage term. This means that you won’t own your property outright until you have paid back the capital.
On top of this mortgage lenders will offer interest rate options which will usually be:
- Fixed-rate – The interest rate on your mortgage payments will be fixed at a certain rate for a fixed amount of time so you’ll always know how much you’re paying each month. These are usually available for 2-5 years but be aware that if rates fall you cannot take advantage of them as you are locked into your current rate.
- Tracker – Following the Bank of England base rate your mortgage rates will track and change with it whether it goes up or down.
- Capped rate – Not fixed rates but variable with the proviso that if rates reach a certain limit they can be capped, meaning you will never pay over a certain amount. They do, however, usually have higher rates than fixed-rate mortgages.
- Offset – offsetting your savings against what you owe, in turn reducing the overall amount of interest you pay. They do however tend to come with higher rates.
There are several products and rates to choose from so it’s always worth talking to a specialist advisor who can help you understand what may work best for you based on your individual circumstances.
How are mortgage interest rates decided?
Mortgage rates reflect the Bank of England’s interest rates.
The bank of England in August raised interest rates from 1.25% to 1.75% in a bid to ease inflation.
Because interest rates are the only tool they have to influence inflation rates.
For the property market in the UK this means if you’re on a mortgage that charges you a variable interest rate, you might find that the cost of your repayments goes up. If you’re on a fixed rate you won’t see any change until the end of your fixed period.
It’s worth noting that the Bank of England review’s the economy to make informed decisions on interest rates. They are allowed to review and make changes up to 8 times a year (every 6 weeks).
So, if you’re wondering when the next Bank of England interest rate review will be, at the time of writing we expect to hear the next review announcement on the 22nd September.
Will interest rates go up in 2022? All predictions we’ve seen point to yes and it’s possible the rate could more than double by May 2023.
The amount of mortgage rate rise will cost you will depend on the type of mortgage you have – as described above.
At the end of the day, your lender decides how much, if any, of the increase they would pass on.
What is a good mortgage rate?
As the base rate increases so do mortgage rates. So it’s becoming the trend to see higher mortgage rates than we’ve seen over a number of years.
So what does a good mortgage rate currently look like:
(Note: If you’re in a fixed rate mortgage then these increases won’t affect you and your repayments until you come to the end of your fixed term deal.)
2 year fixed rate mortgage
The lowest rate on a 2-year fix this month is from Barclays at 3.04%. You’ll need a 45% deposit and £749 for the arrangement fee.
3-year fixed rate mortgage
The best available rate on a 3-year fix this month is from Skipton Building Society at 3.62%. You’ll need a deposit of 40% and it has an arrangement fee of £995.
5-year fixed rate mortgage
You’ll see the best available rates on 5-year fixes are lower than the best available rates for a 3-year fix.
The lowest rate on a 5-year fix this month is from Barclays at 3.14%. You’ll need a deposit of 45% and it has an arrangement fee of £749
The lowest rate on a variable mortgage this month is from Furness Building Society at a 4.03% discount for 2 years which has an initial rate of 2.06%. You’ll need a 20% deposit and it has an arrangement fee of £999.
If we look at this compared with what the lowest mortgage rate ever was, was in 2021 when 30-year mortgage rates dropped to 2.65%.
What is a bad mortgage rate?
It’s important to note that a good mortgage rate can look different from person to person. So while a 4% mortgage rate might seem like a good rate for you, it would look like a bad mortgage rate to someone else.
If you’re asking “is 4.25% a high mortgage rate?”, then yes, when we consider what the best rates are currently at it would seem like a bad mortgage rate.
But, and this is a big but.
Are you eligible for those ‘good’ mortgage rates? Lenders tend to base their advertised rates around an ‘ideal’ borrower.
If for instance you have a bad credit rating or have any credit issues such as an IVA, defaults or a CCJ then you might not be eligible for those deals.
In short, the better your finances look, the lower your mortgage interest rate will be.
So, if we’re talking about the current mortgage rates compared to mortgage rates last year, then yes, something like a 4.25% mortgage rate would be considered a bad mortgage rate.
However, we’re talking about the current climate and the increase in the Bank of England base rate and the impacts that have had on the mortgage market, that sort of rate doesn’t look quite so bad especially if you’re not an ‘ideal’ borrower.
As for how bad mortgage rates could get, that will depend on the Bank of England’s review and how they set the interest rates.
According data held by Freddie Mac the worst mortgage rate we’ve ever seen was in 1981 when the annual average rate was 16.63%!
To find the best rates speaking to a mortgage broker is a good idea. Not only do they have access to the wider mortgage market (not just the high street banks) but they will base their search on your individual circumstances to give you the best possible result on any potential mortgage applications.
Looking to the wider market could open a few more doors for you. Furthermore, an advisor can help you prepare an application as they’ll know what the lender requires from you to assess and process your application.
Contact us at Online Mortgage Guru on 0345 3669799 or email us via firstname.lastname@example.org and we will put you in touch with a suitable specialist to handle your enquiry who has experience handling cases such as yours.