Mortgage Matrix & Why Lenders Have Different Interest Rates

Following on from our previous post on your end of mortgage term options, we are sharing the ‘mortgage matrix'. 

If you are thinking or even making an application for a mortgage or remortgage, you may be shopping around for the best deal. However, there are still some mortgage factors that can affect the rate offered. In this article, we will explore the ways that might help you through the elusive ‘mortgage matrix’...

Risk

In basic terms, a loan interest rate is assessed on risk. The lower the risk of default you are assumed to be, the lower the interest rate you will be offered. These risks are divided into your (and your partner’s) income, credit ratings, the amount you want to borrow against the value of the property known as loan-to-value and the amount of credit you have outstanding. To find a good deal, the first place you can start is to reduce your perceived risk to a creditor. 

Your credit rating 

The credit reference agencies supply the vast majority of information about you which can include: 

• The Electoral Roll: This shows addresses and the dates you were registered to vote at. 

• Linked addresses: Past addresses you have lived at

• Public records: This can include county court judgments (CCJ), bankruptcies, IVAs, debt relief orders and Administration Orders. In Scotland, it can also include: Debt Payment Programmes, decrees, sequestration orders, DAS and Trust Deeds;

• Account information: Information on how you have managed your existing bank account and other borrowing and whether you have kept up the repayments on time;

• Financial associations: Information about people you are financially connected to i.e. who you have a joint account with or have jointly applied for credit with;

• Home repossessions: Supplied by members of the Council of Mortgage Lenders about homes that have been repossessed;

• Previous searches: Details of companies or organisations that have accessed information on your credit file in the last 12 months.

Most applications for credit will leave a credit trail in your ‘Credit Reference File’. Subsequently, making a large number of applications can prove negative for your report, as they think you have borrowed huge amounts and been refused the credit. 

If you have been refused credit, we suggest getting a copy of your credit file. You can ask the creditor which credit reference agency they used to make their decision (known as your statutory credit report). A credit reference agency must provide it to you if you ask for it, although you will have to pay £2 to receive the document. 

The 3 main credit reference agencies are: 

• Experian - www.experian.co.uk

• Equifax - www.equifax.co.uk   

• CallCredit - www.callcredit.co.uk

You may be able to get credit on better terms, especially if you have a low credit score, by asking another person to act as your guarantor.

Borrow less: Loan-to-Value (LTV) ratio

Essentially, this refers to the percentage of loan to the amount you want to borrow.

In general, risk assessment mortgage rates are set according to Loan-to-Value (LTV bands). Mortgage lenders have different prices for loan-to-value bands at 60%, 70%, 75%, 80%, 85%, 90% and 95%. The higher the deposit, the lower the interest rate will be applied (see table below for an example of some of the best rates (November 2018) where the amount borrowed is £100,000).

Based on 2-year fixed rate repaying over 25 years and ignoring fees* *Fees added to the mortgage amount could mean you end up paying interest on these fees for 25 years.

APRC (Annual Percentage Rate of Charge) 

A loan often includes fees; these can be added to the amount borrowed. However, the lender is always required to quote the APRC when advertising a loan or borrowing rate designed to reflect the total amount of interest that will be paid over the entire period of the loan.

To get the best rates, try to negotiate the purchase price down. Alternatively, perhaps find some way of increasing the deposit, ; whether that is from your family or other means. 

Below 60% LTV, you are unlikely to get a better rate as someone borrowing 45% of the value of their property will, typically, pay the same rates as someone borrowing 60%. 

Another benefit of slightly increasing your deposit might be the difference of getting acceptance or reducing the amount of paperwork the lender wants to see. 

How to get into a lower Loan-to-Value band

Get your property valued higher.

The value of your home is assessed by a valuer, representing the lender. They should be able to value the home to within 5% of its true ‘market value’. A valuation is not a mathematical exercise but a considered opinion based on comparable sales evidence. This evidence has been adjusted to reflect the difference between the comparable and the house to be valued.

When you are asked or have to put a figure into a mortgage application box ‘what is the estimated value’, do not guess or go for a figure. It’s also important to note that a valuer is likely to downvalue your house. Should your figure be in the ‘top end’, state a value high within 5% as they are more likely to accept that number.

Valuers may often rely on computer-based comparable evidence. You could help them by pointing out that the house sold around the corner did not have an extension, garage, layout or kitchen that you have built. Doing so should increase the value compared to the other properties that have sold. You may know of a recent, similar, high-sale price that has been completed (not just for sale), which you could also point this out to the valuer.

Remortgaging 

If your LTV falls, you may be able to get a cheaper deal.

“Finding a few hundred pounds to get into a lower loan-to-value band may significantly reduce your mortgage payments, and you could repay this sum in just one year of reduced interest payments.”

Finding the best mortgage deal

Mortgage rules changed in April 2014. Lenders must follow strict guidelines to make checks into a borrower’s affordability of mortgage repayments; not just at current interest rates, but also if interest rates rose to 6 or 7%.

Lenders not only ask about income and big bills such as debt and household costs but other factors. These factors can include lifestyle spending, such as car costs/insurance, weekly shopping, eating out/entertainment and childcare/school fees. Most lenders focus on the last three months before you apply for a mortgage. Therefore, if you know you're about to apply, try to limit spending well before you apply. 

Our mortgage brokers now offer easy online applications that do the preliminary assessment for you and don’t leave a credit trail. Thus, you may be able to get an agreement in principle (AIP) to see if they would be willing to lend to you, subject to further checks.

We also recommend using a budget planner to work out what you can afford to repay

Finding the right property at the right price can get you under a critical LTV, saving you thousands in additional interest payments, allowing you to spend the savings on you  and your family.

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