Calculating the cost of a mortgage is not a quick, straightforward task, as there are lots of different types of costs and variables that must be considered. As well as varying costs such as the interest rate on loans, there are different loan term lengths and there are often fees applicable to mortgages. When calculating the average cost of a mortgage, the following areas should be reviewed:
Average mortgage interest rates
Mortgage rates vary greatly from one lender to another, as well as there being different deals available with the same lender for different circumstances e.g. Loan to Value amount, applicant’s credit history, etc.
According to Statista, the average mortgage interest rate in the UK in September 2019 was 1.56% for 2-year fixed-rate mortgages. The average for 3-year fixed-rate mortgages was slightly higher at 1.66%, whilst the 10-year fixed-rate mortgages averaged at 2.65%. The average for two-year variable mortgages was 1.61%.
The Bank of England rate impacts mortgage interest rates and currently, the base rate is 0.75%, which is quite low when compared to historical rates. For example, in 2007 the base rate was 5.5% and at this time, the average variable mortgage interest rate was 7.5%.
Therefore, the mortgage interest rates are very attractive for mortgage applicants right now, although there are other factors that are not as attractive, such as the requirement to provide a deposit in order to get a mortgage loan and higher house values.
The current market shows that Halifax are offering an initial rate as low as 1.23% (2 year fixed with 75% maximum LTV). At the other end of the rates scale are the bad credit mortgages, with Kensington providing an initial rate of 5.59% (5 year fixed and 85% maximum LTV). So there really is a huge gulf in the interest rates that are available, depending on the applicant’s circumstances and the details of the loan.
The average length of a mortgage
The length of the mortgage is another contributing factor in the cost of the mortgage. In the UK, mortgage terms start from as short as six months and can be as long as 40 years. The most common length of the mortgage is 25 years but 30, 35 and 40 years are now available with some lenders.
People choose to take out longer terms to allow them to lower their monthly payments, as they are spreading their loan repayments out over a longer period. However, this means that they will end up paying more interest throughout the lifetime of the mortgage (we show the typical calculations for this further on in the article).
With house prices have risen dramatically since 2009, mortgages over longer terms have increased in popularity, as applicants look for solutions to affording the house that they want. The average UK house price in March 2009 was £154,452, as published by the Office of National Statistics, compared to the much-increased average price of £234,853 in 2019. This has made it much more difficult for people to buy property, particularly with bigger deposits required now too. The government’s Help to Buy scheme has been introduced to help improve house affordability.
House prices also vary massively depending on the area of the UK, with people in London facing the most expensive house prices and therefore the biggest mortgage loans.
Average monthly payments on a mortgage
The average monthly payments on a mortgage depend on a large number of variables, such as:
- Type of mortgage i.e. interest only, repayment or a combination of the two
- The interest rates that the applicant is eligible for
- Length of the mortgage term
- Amount of deposit paid
- House price
- Interest rate type (fixed or variable)
In order to get the lowest monthly payments, the applicant would need to be approved for a mortgage with the lowest interest rates. Applicants with a bad credit history will often have to work with a specialist lender that will apply higher interest rates and therefore higher monthly payments. The amount of the loan and the length of time it is taken out over will also have a significant bearing on how much the monthly payments are.
Recent reports showing details for 2017, showed that the average monthly take-home pay was £2,309, whilst the average monthly mortgage payment was £669, which was based on someone with a 30% deposit.
Another study conducted by mortgage provider Santander in 2018 found that the average monthly mortgage repayment was £723, which was based on the average mortgage rate of 2.48%. This was based on first-time buyers and the study also broke average monthly payments down into regions:
- London £1,280
- NI £451
- North West £537
- Scotland £510
- Yorkshire £521
- West Midlands £596
- South West £723
- South East £935
- Wales £535
- North East £450
- East Midlands £577
- East of England £862
Monthly payments generally include the mortgage interest payments, the capital repayment of the mortgage and any mortgage protection premiums. The huge range in different monthly payments by region is largely down to the house prices in each of the areas. If a mortgage arrangement fee has been charged (typically around £1,000), this could also be added into the loan repayments, although you can usually choose to pay this separately instead.
How to lower monthly mortgage payments
Choosing an interest-only mortgage would be much cheaper each month than taking a repayment mortgage out, as you are only paying off the interest on the loan and not any of the loan.
This is another way that people can afford homes but it means that after the mortgage term finishes, the loan is still outstanding, therefore you wouldn’t own your home. Interest-only mortgages have become more difficult to get approved, with other solutions such as Help to Buy mortgages becoming more popular.
Putting down a larger deposit will considerably lower the monthly payments, or extending the term length can always bring the payment down.
It is also possible with some mortgages to make overpayments so that you can pay the mortgage off quicker, reducing the amount of overall interest that is paid.
Average total cost including interest of a mortgage
The total cost of a mortgage includes a number of factors, including the amount of loan, the mortgage term, interest rate and any fees for arranging the mortgage (if applicable). When you are provided with a mortgage illustration, the provider will show you exactly how much you will be paying off over the full term of the mortgage.
To see the difference in how the term length and interest rates affect the overall cost, using the average house price indicated by HM Land Registry of £227,000 these are the overall costs:
25 years with interest rate of 1.70% = £284,247 (which includes £54,247 in interest)
30 years with interest rate of 1.70% = £295,522 (which includes £65,522 in interest)
25 years with interest rate of 4.33% = £381,018 (which includes £151,018 in interest)
As you can see from these calculations, the high-interest rate of 4.33% that is typical for someone with bad credit, would result in paying nearly £100,000 more over a 25-year period. Based on the1.70% interest rate, by choosing a 30-year term rather than a 25-year term, there would be over £10,000 more interest to be paid.
Many homebuyers do not fully consider how much interest they will be paying off on a mortgage, as the interest rate seems quite small. However, a mortgage is a huge sum of money and 25 or 30 years is a long time to pay interest on a loan, which is why the interest accumulates to such a significant amount.
So, that gives you an insight into how critical it is to find the lowest mortgage rate possible and that it is often a better option to spend some time improving your credit score in order to ensure you are not paying much higher amounts of interest over the term.
Before applying for a mortgage, you should check your credit score to look for any issues that may impact the interest rates that you are eligible for. Saving up a bigger deposit and choosing a smaller loan term will also help to ensure that you are not paying as high a total amount of interest.
There are some ways you can help to boost your credit score before you apply for a mortgage, such as updating your records on the electoral roll and ensuring you make your payments on time. Your debt-to-credit ratio will be taken into account, so paying off any credit cards can significantly improve your credit score. If you have any missed payments or have CCJs then it may be better to wait until these are cleared from your credit history, so that you can get approved for a mortgage with a lower interest rate.
The cost of mortgages varies greatly depending on the variables outlined above but the good news is that there are plenty of options available to suit people’s different circumstances. There are solutions for homebuyers who want to be able to afford a home, or for those who are looking to ensure that their overall interest amount is as low as possible.
For people who would otherwise struggle to afford a home, the option to choose a longer-term can be their best solution. However, for those looking to keep interest payments to a complete minimum, a shorter-term and finding the lowest possible interest rate is the best solution for that situation.
If you would like any advice on the available mortgage solutions for your requirements, call Boon Brokers today.