Working out what a `good' mortgage rate is

We all have an idea of what constitutes a `good' mortgage rate. But are we being realistic? Tim Wilson, mortgage broker at lovemoney.com, takes a look.

What is a ‘good’ mortgage rate?

I think it’s a very good question. After all, everybody seems to have a different opinion on the subject.

If you are having your friends and family round for dinner one night and are just tucking into your dessert, why not ask around and see what the response is. A number of different factors will play a part in their answer, mainly their own circumstances and age!

Varying experiences

It’s easy to cover the circumstances area. If you have been looking at mortgages recently you will know there is a simple equation to consider - the more equity/deposit you have, then the better the interest rate will be.

Things are a little different for older homeowners. Now, this isn’t me being ageist, but people who had mortgages back when the bank base rate went up to 15% in the early 90s will know and feel what a high rate is all about. By contrast, the people who bought their first house less than five years ago will have seen some really low rates, and perhaps view that as the norm.

With age comes wisdom?

So does that mean that if you are older you have a better idea, and really know what a good rate is all about?

I can hear my father saying now, “You don’t know how good you've got it!”

To answer that, I guess I will have to tell you where I sit (hopefully without giving my age away).

I bought a house with a 5% deposit and got a two-year fixed rate mortgage at 5.20%. I was bouncing around with joy at the time – the mortgage had only just come on to the market, and what’s more it had been reduced by 0.05%. Bargain!

Two years passed (with the addition of a few grey hairs) and I was coming to the end of the deal. The lender then offered me another fixed rate, this time at a rate of 7.5%. I declined this of course – the Standard Variable Rate at the time stood at just 5.5%, so fixing would have seen my rate jump by a whopping 2%!

My interest rate now is down to 2.5%, still on the Standard Variable Rate. But as I am always looking at mortgage rates, I sometimes find my mind getting somewhat clouded with what is in the market and what exactly is a ‘good’ deal.

Times are changing

Now if you are lucky and have loads of equity in the property, you could get another two-year fixed rate at around 3%. But for the people who don’t have that luxury the market has been very hard. Rates have been up and around 7% over the past year or so for people who only had the 10% deposit or equity.

However, things have started to change of late. Within the market, plenty of people are talking about the signs of ‘green shoots’ appearing. There are indeed signs that the market is recovering, though I have been very sceptical about the chatter.

Or at least I was. Recently I have again been looking around at the options for borrowers with only a relatively small deposit or equity. And borrowers with 10% can now get a fixed rate at 5.49%. That’s not that much higher than what I originally booked when I bought the house! It’s close to the rate that made me bounce around with joy as I was getting a good deal.

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Is it still a good deal? Have we been a little spoilt with such low rates in this market, that when the market settles and mortgage rates start to increase slightly that we convince ourselves we are being charged too much?

Personally, I think so. So is it time to lock myself into another deal?

Rising rates

The consensus among the economic experts is that interest rates are going to be heading up by the end of the year, a theory that has only gained further momentum following the most recent inflation figures with the Consumer Prices Index unexpectedly hitting 4.5%.

As a result, it stands to reason that the banks and building societies are going to increase their rates beforehand to compensate and cash in.

With that in mind, is a rate of 5.49% for a two-year fixed mortgage still a good deal? I think so.

But what do you think. What would you class as a ‘good’ rate? And why? Let us know by leaving a comment in the box below.

More: Get a market-leading savings account | The debt-busting card you’ve never heard of | The best mortgages for low deposits

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This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

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