A mortgage is often the largest loan you’ll ever take out, and looking at how much interest you’ll pay over the full term can often feel daunting. The good news is that the interest rate will often fall over time. Read on to discover three reasons why you might benefit from a lower rate this year.
When you first take out a mortgage, your lender will often provide you with an illustration showing how much you’ll pay in interest.
If you borrow £200,000 through a repayment mortgage over 25 years with an interest rate of 4.5%, the total interest you pay will be around £133,000. However, this assumes that you’ll pay the same interest rate throughout the entire term, which often isn’t the case.
Read on to find out why your interest might fall, leading to lower repayments and saving you money in the long term.
1. The Bank of England cuts its base interest rate
The Bank of England’s (BoE) base interest rate affects the cost of borrowing, including through a mortgage. When inflation was high, the Bank decided to increase the interest rate, but as the rising cost of goods and services stabilises, it’s expected to make cuts.
As of January 2025, the BoE base rate is 4.75%. According to This is Money, experts are predicting that the BoE will make several cuts to the interest rate throughout the year. By the end of 2025, some forecast that it could be as low as 3.75%.
While a change of 1% might seem small, it can have a significant difference when you’re borrowing large sums.
For instance, if you have £150,000 remaining on a mortgage that you’ll be repaying over 15 years and an interest rate of:
- 75% would mean a monthly repayment of £741 and paying around £92,200 in interest over the remaining mortgage term
- 75% would mean a monthly repayment of £669 and paying around £70,600 in interest over the remaining mortgage term.
If interest rates do fall, you’d benefit straight away if you have a tracker-rate mortgage as it follows the BoE’s base interest rate.
You’re also likely to benefit if you have a variable-rate mortgage. Your repayments could rise and fall during the mortgage term depending on your lender’s interest rate, which will often change in line with the BoE.
If you have a fixed-rate mortgage, the interest rate will remain the same for a defined period. So, you wouldn’t benefit from a BoE interest rate cut immediately but could find a more competitive deal once your current one ends.
You can take out a new mortgage deal before your current one ends. However, you’ll normally have to pay an early repayment charge, which is typically a percentage of the amount you still owe on your mortgage agreement.
As a result, it might not make financial sense to end a mortgage deal even if you could secure a lower interest rate elsewhere.
2. Your loan-to-value ratio has fallen
When reviewing your application, lenders will assess how much of a risk you pose. Typically, the greater the risk, the higher the interest rate you’ll be offered if they accept your application.
Those with small deposits are often viewed as riskier because they haven’t built up as much equity in the property, which could make it more difficult for a lender to recover the money if you defaulted on the repayments.
However, as you make repayments, you slowly build up equity. So, the outstanding mortgage debt compared to the value of your home, known as the “loan-to-value” (LTV), falls.
Usually, lenders will offer homeowners who fall into a lower LTV bracket a more competitive interest rate.
You won’t benefit from your LTV falling straightaway, but when your mortgage ends and you’re searching for a new deal, you’ll often find the interest rate you’re offered is lower.
3. Your property value has increased
It’s not just making mortgage repayments that affect your LTV. In many cases, the value of property is rising. As a result, the outstanding amount on your mortgage compared to the value of your home is falling.
According to Rightmove in December 2024, the average asking price will increase by 4% by the end of the year.
So, getting your home revalued if you’ll be taking out a new mortgage could lead to a more competitive interest rate and lower repayments.
Contact us if you’re searching for a new mortgage
If you’re searching for a new mortgage, we could help you find one that suits your needs. We could offer guidance about which lenders are most likely to accept your application and potentially save you money by securing a mortgage with a lower interest rate. Please get in touch to speak to us.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
