Four considerations for the UK mortgage market in 2021

In May 2021, the Bank of England’s Monetary Policy Committee (MPC) voted to maintain the base rate of interest at a record low 0.1% to support the country’s post-pandemic economic recovery. This has proven to be a positive force which has allowed lenders to demonstrate their confidence in the UK economy by lending.

Bank of England figures, as reported by Trading Economics, show that the number of approved mortgages reached 87,500 in May 2021 – an increase over the previous month and higher than market expectations. Crucially, this level was also higher than the number of approved mortgages in the February 2020 pre-covid market.

So, with the UK mortgage market in good health, here are four things you need to know about getting a mortgage in the UK in 2021.

How much can I borrow with a mortgage in the UK?

How much you can borrow for a mortgage depends on several factors, the most important of which are how much you currently earn, and how large your deposit is.

Once you have those bits of information in hand, you can talk to your bank and they will be able to provide your Loan to Value (LTV) ratio and give you a maximum borrowing figure. This will then allow you to look at what kind of property you can afford to buy.

How do I get a mortgage in the UK?

As mentioned previously, this will involve talking to a bank or an independent mortgage advisor to find out what your maximum borrowing limit is as a first step. You will normally need to have saved a deposit of between 5% and 15% depending on the type of mortgage you get.

There are a whole range of different mortgage products available once you reach this stage which offer a variety of interest repayment rates, length of repayment times and more. There are also different products available if you are a first time buyer or are purchasing a property for the purposes of a buy to let investment.

For example, HSBC and TSB have this month launched the UK’s lowest fixed-rate mortgages for those with a large deposit, according to reports in the Financial Times. In the case of HSBC, this is the cheapest home loan it has ever offered in the UK.

How is mortgage interest calculated in the UK?

Mortgage interest rates determine how much it will cost you to borrow the money needed to purchase your home and what your monthly repayments will be. The higher the interest rate, the higher your monthly mortgage payments will be.

Interest rates are calculated by the lender depending on four criteria:

• Cost of funds – how much it costs the lender to secure the initial funds that it lends to you. For example, some lenders raise deposits from savers and some use wholesale markets. These have different costs attached which will affect the interest percentage you will be charged.
• Your deposit – As a general rule, the larger the deposit you can put in, the better deal you will be offered on interest rate. This is because a small deposit means there will be less equity in the property, creating a larger risk to profits for the lender. To minimise this, they will charge you a higher rate of interest and you will be paying more overall.
• Market competition – This can include anything from the lenders current position in the market to its profitability targets. If a lender wants to increase its market share it may lower interest rates, if it wants to increase income it may raise them. This is not something you can affect, but it is one to be aware of.
• Your credit history – If you have a poor record of repaying loans or credit cards on time previously then it is possible that you will not be able to get a mortgage in the first place, and if you do then a lender is likely to increase the interest rate in order to cover their risk.

What is the current average UK mortgage interest rate?

According to Statista, the average 10-year mortgage interest rate in the UK was 2.58% in April 2021, the last month statistics are currently available for as of July. This is a slight increase over the pre-pandemic rate of 2.36% in March 2020, but still represents a reasonable rate, and can be seen as particularly encouraging news for first time buyers.

If you would like more information on the details of purchasing property in the UK, get in touch with our team of experts today >>