Although a hefty mortgage can be a burden, it does give you access to better deals. We track down some of the best.
One consolation of having a larger-than-average mortgage is that it does give you access to some of the best deals around, because many mortgage lenders prefer to deal with bigger home loans.
According to the latest data from the Bank of England, UK homeowners owe a massive £1,016 billion to mortgage lenders. Given that there are 11.6 million mortgages in the UK, this means that the average mortgage is close to £88,000. Indeed, if total mortgage debt continues to rise at the rate it has over the last five years, it won't be long before the average home loan reaches six figures (it already has for new and recent buyers).
Although a large home loan also means equally hefty monthly mortgage repayments, borrowers with large loans can take advantage of some of the lowest rates around. By and large, mortgage lenders prefer the economies of scale of dealing with larger loans, because there is less work involved in arranging a single loan of, say, £300,000, rather than three loans of £100,000 apiece.
What's more, as many loans have fixed, rather than percentage-based, arrangement fees, the larger the loan, the smaller the impact a fixed fee has. Hence, borrowers looking for bigger home loans can enjoy lower interest rates and smaller fees (in relation to the size of their mortgage).
To prove my point, I checked the best rates for three different 25-year repayment mortgages for home-movers (not first-time buyers): small (£83,333), medium (£166,667) and large (£250,000). The first is slightly smaller than the average home loan, the second is twice as large and the third is three times the size of the first (and a nice round number, too).
Also, I assumed that each of these borrowers has a 30% deposit, which means that they all have a loan-to-value ratio of 70%. This gets around the problem of lenders charging extra fees for loans which exceed three-quarters (75%) of the value of a property. In addition, I assumed that these borrowers have an income equal to a third of their loan (making their loan-to-income ratio three in each case).
Finally, I ignored loans with extended early repayment charges, which means that any early settlement penalties expire when any special-rate deal does. Using our mortgage search engine, which is powered by independent financial researcher Moneyfacts and can be found in our Mortgage centre, here's what I discovered:
|
Loan size (£) |
Lowest true |
Five-year |
|---|---|---|
|
Small (83,333) |
27,668 | 33.2 |
|
Medium (166,667) |
54,586 | 32.8 |
|
Large (250,000) |
81,505 | 32.6 |
So, as you can see, the largest loan has the lowest percentage cost over five years: 32.6% compared to 33.2% for the smallest loan. A different of 0.6% may not sound like much, but it amounts to a £1,500 saving over five years, or £25 a month.
So, we have our proof: borrowers with large loans do enjoy better deals. Thus, it is vital for homebuyers and remortgagers with big mortgages to shop around for the very best deals. My advice would be to ask a no-fee mortgage broker to search the entire market for you, such as the award-winning London & Country Mortgages, which you'll find in our Mortgage centre.
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