How do mortgage rate changes affect me as a first-time buyer?
The Bank of England recently announced it’s cutting the base interest rate by 0.25%, down to 5%, which is likely to have a knock-on effect on mortgage rates. As a prospective first-time buyer, what could this mean for you?
You might remember recent headlines about mortgage rates reaching record highs because the cost of borrowing (interest rates) was so inflated.
That was bad news for those wanting to get the housing ladder and many people chose to wait for interest rates to come back down so that they wouldn’t be saddled with large monthly repayments.
Well the good news is, mortgage rates have been on a mostly downward trend since the start of this year, with many suspecting this will continue.
And on 1 August, the news finally broke that the cost of borrowing is coming down! This is big news because it’s the first time in almost three years that the interest rate has dropped at all.
So, how could changes to mortgage rates affect your total loan and monthly payments?
First, you need to understand what influences mortgage rates.
How do mortgage rate changes happen?
Your mortgage rate is the amount of interest you need to pay on your mortgage each year. So if you have a 4% mortgage rate then each year 4% of the amount you owe is added to your mortgage.
With most mortgages, this is calculated monthly and you’ll pay the interest off each month as well as paying off some of the actual loan.
So, lower interest rates mean there’s less interest to pay each month. You can either put more money towards paying off the loan or simply pay less each month.
You can find out more about how mortgages work in our guide.
Mortgage rates are set by your mortgage lender, and they’ll have their own set of rules that they go by. But they’ll also, to some degree, be influenced by the base interest rate, which is set by the Bank of England, as lenders tend to borrow from the Bank of England themselves.
The Bank of England sometimes changes its base interest rate depending on how the country’s economy is doing. This is so it can keep the cost of living, or inflation, from getting out of control.
As the Bank of England has announced it’s lowering the base interest rate, it’s likely mortgage lenders will also lower their interest rates, so there may be better deals coming available. In fact, mortgage rates under 4% have been reported this week, which is the lowest on offer since April.
If the Bank of England had instead decided to raise the base interest rate, the mortgage rates on offer would have likely gone up.
Are mortgage rates going up or down?
Mortgage rates have been on a mostly downward trend since 2023, with a few small ups and downs and are now expected to go down after the news of the 0.25% change in the base interest rate.
According to Rightmove, the current average mortgage rate for a 2-year fixed-term mortgage is 5.96%. While this was slightly lower in January, it’s still a big decrease from when the same average mortgage rates peaked at 6.8% in July 2023.
Experts believe mortgage rates are likely to continue going down, to possibly below 5% by the end of the year, and even 3% sometime in 2025.
How do mortgage rate changes affect you?
Simply put, your mortgage rate is how much interest you pay on the amount you borrow from your mortgage provider to buy your house. If you take out a mortgage with a lower interest rate, then you’ll have less to pay back than you would with a higher one.
When you take out a fixed-rate mortgage, you agree to an interest rate that won’t change until the end of the fixed term. After that, you have the opportunity to look for a different rate. So, you want interest rates to be nice and low when your fixed-term finishes!
If you take out a tracker, or variable rate, mortgage, the amount of interest you pay will change month-to-month.
How do mortgage rate changes affect my monthly mortgage payments?
Let’s look at the numbers.
A quarter of a percent (0.25%) might not seem like much when you’re choosing between mortgages, but this is actually quite a lot of money when you consider how much you’re going to be borrowing to buy your house.
Let’s imagine you want to buy a house for £350,000 with a 10% deposit. Your bank has offered you a 25-year mortgage with a 5% interest rate fixed for two years.*
| House value £350,000 with a 5% interest rate | |
|---|---|
| Deposit amount £35,000 |
Loan amount £315,000 |
| Interest rate 5% |
Loan amount with interest (the total amount you'll pay) £552,637 |
| Monthly payment (repayment mortgage) £1,842 |
Amount of monthly payment that's interest £1,313 |
| Deposit amount | Loan amount | Interest rate | Loan amount with interest (the total amount you'll pay) | Monthly payment (repayment mortgage) | Amount of monthly payment that's interest |
|---|---|---|---|---|---|
| £35,000 | £315,000 | 5% | £552,637 | £1,842 | £1,313 |
Suddenly, that 5% makes a really big difference. But what if you were to take out a mortgage with a mortgage rate that’s just 0.25% less?
| Deposit amount | Loan amount | Interest rate | Loan amount with interest (the total amount you'll pay) | Monthly payment (repayment mortgage) | Amount of monthly payment that's interest |
|---|---|---|---|---|---|
| £35,000 | £315,000 | 4.75% | £538,511 | £1,795 | £1,246 |
| House value £350,000 with a 4.75% interest rate | |
|---|---|
| Deposit amount £35,000 |
Loan amount £315,000 |
| Interest rate 4.75% |
Loan amount with interest (the total amount you'll pay) £538,511 |
| Monthly payment (repayment mortgage) £1,795 |
Amount of monthly payment that's interest £1,246 |
This means that not only do your monthly payments go down by almost £50, but you'll also have to pay a whole £14,000 less!
How can I avoid a high mortgage rate on my first home?
If you’re getting ready to buy your first home, you’re likely keeping a close watch on mortgage rates.
The best way to make sure you’re getting the best deal that’s available at the moment is to use a mortgage adviser. They will be able to shop around on your behalf and find products that you’re likely to be accepted for.
As a first-time buyer, you may find that some providers offer mortgages with fairly low interest rates that are only available to people who have never owned a home before.
You may also be able to get a lower rate if you agree to a longer fixed term. Banks will often offer lower interest rates for longer fixed terms.
Similarly, if you agree to pay your mortgage back over a shorter amount of time (e.g. 20 years rather than 30 years), you’ll be paying less interest as you’ll pay the debt off quicker. But this will mean higher monthly payments as you’ll be paying more off the mortgage each month.
One of the best ways to avoid paying a high mortgage interest rate is by saving up as much as possible for a mortgage deposit. This will mean banks are more willing to offer you lower rates and you’ll also have less money to pay back in the first place.
If you’re looking to build up a deposit for a first home, a lifetime ISA could be a good option. You can save or invest up to £4,000 each tax year, and you’ll get a 25% government bonus on everything you put in. This means you can get up to £1,000 from the government each tax year to help you get on the property ladder!
There’s a catch, however. If you take the money out for any other reason than buying your first home you’ll have to pay a 25% government withdrawal charge (this charge stops applying after you turn 60). As this 25% is on everything you take out, including the government bonus, it will not only cost you the bonus amount but also some of the money you put in, too.
Ready to start saving for your first home?
Our Lifetime ISA could help! You'll gain a 25% boost from the government on top of your savings, as well as any potential stocks and shares returns.
The OneFamily Lifetime ISA invests in stocks and shares. While this means your money has good potential to grow, the value of your investments could go down as well as up and you could get back less than you've put in.
*Figures from MoneySavingExpert’s mortgage repayment calculator.
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