First-time buyers: How to reduce the interest you pay on your mortgage

The average first-time buyer is now paying almost £209,000 for their first step on the property ladder, according to Halifax. With many first-time homeowners taking out substantial mortgages, reducing the interest paid is an important step. It’s a move that can have a positive effect on finances in the short and long term.

Despite average property prices soaring, the number of first-time buyers has reached the highest point in a decade. The Halifax research found:

  • The average first-time buyer is spending £208,741 on their property; for London it’s £419,608
  • In the last decade, first-time buyers have seen property prices increase by 21%; London saw the greatest increase at 48%
  • Nationally the average deposit put down on a first home is £33,127; rising to £114,952 in the capital

With property prices on the rise, even a small change in interest can have an impact on mortgage repayments and, ultimately, your monthly income. When you look at how much interest you’ll pay over the full length of your mortgage, the impact of small rises becomes even more obvious.

The Bank of England (BoE) has increased its base interest rate recently. The rate now stands at 0.75%, following a 0.25% increase earlier this year. Further rises are expected. As a result, securing a low, competitive interest rate now can be useful for budgeting. While reducing the amount of interest due over the full length of your mortgage means you pay significantly less.

As a result, taking these steps can help, whether you’re a first-time buyer, remortgaging or taking a step up the property ladder.

1. Improve your credit score

The most important step to take when you’re trying to improve your chances of securing a low-interest rate is to check your credit score.

Your credit score is one of the most important factors when lenders are processing your application. It’s what lenders will use to assess how likely you are to default on payments. As a result, the better your credit score, the more likely you are to be approved.

If your credit score is considered ‘poor’ it’s important to make sure you start taking steps to improve it before you apply. Ideally, you should look at your credit report six months before you plan to apply for a mortgage. This gives you plenty of time to address any negative factors.

2. Increase the deposit you put down

The more money you have to use as a deposit, the better your chances of being offered an interest rate that’s lower.

This is because your loan-to-value ratio is more, so you’ll own more equity. It gives lenders confidence. Firstly, in your ability to budget and save. And secondly, that should you default they will be able to get back what you still owe.

Typically, you’ll need a minimum of 5-10% of the property’s value to use as a deposit. But saving for an extra few months could mean you pay less in interest. Depending on your circumstances, waiting to purchase a house can be beneficial in terms of money.

3. Look beyond the high street for lenders

When you’re looking for a mortgage, it’s the high street banks and building societies that are easiest to find. While some of these may offer the best interest rate for you, there are hundreds of other products that you should compare too.

Looking beyond the usual lenders means you could find a lower rate. But sorting through all the different options can be time-consuming and complex. This is where we, as mortgage specialists, can help you. We already work with those lenders that are harder to find and understand the type of buyers that match their criteria. As a result, we can connect you with lenders we know are most likely to offer you a competitive rate.

4. Shorten your mortgage length

If you want to reduce the amount of interest you’re paying over the long term, one option is to reduce the length of your mortgage.

The standard length is 25 years. But, as budgets have been placed under pressure, more people are opting for longer terms, such as 30 or 35 years. However, if you can afford to, shortening your mortgage length can save you tens of thousands of pounds in the long run.

5. Overpay where possible

If you want to reduce the interest you pay over the life off your mortgage but need flexibility, overpaying is another option. Overpaying gives you more freedom, as you can stop it if necessary. If you’re unsure how your finances will fare in the future, it can give you more confidence.

The amount overpaid will come directly off your loan; so, you can rapidly cut down the interest paid if you make consistent overpayments. You will need to check the terms of your mortgage here. Often, you’ll have a set amount that you can overpay without incurring any additional charges.

6. Consider fixing while rates are low

If you want to benefit from low interest rates in the short term, a fixed rate mortgage may be the option for you. While they have risen recently, interest rates are still low. As a result, fixing you rate for a set period of time can mean paying less in the short term. There are mortgage products to fix your interest rate for two, three, five and 10 years.

With interest rates expected to rise, it can shield you from increasing monthly costs for the length of your mortgage product. Of course, there’s no guarantee that you will be better off. Should interest rates fall, you won’t benefit from this; your payments will stay the same.

7. Don’t stay on the Standard Variable Rate (SVR)

Once your mortgage product has come to an end, you’ll usually be moved on to your lender’s SVR automatically, unless you take out another product.

The SVR is usually higher than alternatives and is unlikely to be the best option for you. Staying on the SVR could mean unnecessarily paying out more each month.

If you’re researching new mortgage products and are struggling to compare rates we can help. With access to lenders that aren’t available on the high street and an understanding of what they’re looking for, we can help you secure a competitive mortgage. Contact us today to find out more.