A large proportion of the cost of taking out a homeowner loan is the interest that is charged by the lender. Understanding homeowner loan interest rates is an important step for those embarking on the homeowner loan process.
In this guide, we break down the latest homeowner loan rates, how interest rates and decided and the additional fees that you can expect to pay.
What are the latest homeowner loan rates?
Homeowner loan rates can be broken down depending on whether the loan will be taken out against your home, or a buy to let property.
Homeowner loans which are secured against your home start at rates of 5.24% per year. Fixed rate products are usually a little higher than this, as are applications at a higher loan to value (LTV).
For buy to let (BTL) properties, the lowest current interest rates are 6.05% for applications up to a maximum of 65% LTV.
How are homeowner loan interest rates decided?
The interest rates charged by lenders depend on a number of factors. They are:
- The lender chosen
- Your loan to value (LTV)
- Your credit history
- The property type
- Whether the security property is your home or a buy to let
- Your income
To find out more, read our guide on how to get a homeowner loan.
Fixed and variable interest types explained
The interest on your loan can be either fixed or variable rate. This simply means that the rate charged doesn’t move when the Bank of England Base Rate changes (in the case of fixed rates), or it does (in the case of variable rates).
Fixed rates don’t tend to be locked in for the full loan term, instead, they tend to be offered for an introductory period, often 2-5 years.
Should I fix my homeowner loan rate?
The decision to fix your homeowner loan rate is an important one and depends on your personal circumstances.
As we stand, interest rates look set to increase, with few believing that they will remain the same or drop. As such, if you want the security of knowing that your payments won’t increase as interest rates do, you should consider a fixed rate product.
That said, fixed rate products tend to come with early repayment charges, so if you’re planning to repay your loan early, a fixed rate may not be the best option.
The best homeowner loan deals are reserved for lower loan to value (LTV) applications
Homeowner loan lenders price their products based on the level of risk presented to them. As such, they offer lower interest rates on lower loan to value applications, with loans at 60% LTV usually being the cheapest.
While it’s important to get the best possible interest rate, you can also keep your total interest costs to a minimum by reducing your loan term. This will increase your monthly repayments but reduce the overall loan costs. This can be worked out using our homeowner loan calculator.
How can I get a lower homeowner loan rate?
To get a lower rate on your homeowner loan, you should look to keep your loan to value to a minimum.
In addition to this, tidying up your credit file, including getting any missed payments up to date and settling any defaults or CCJs may result in a better deal.
Why are homeowner loan rates lower than unsecured loan rates?
Homeowner loan rates are lower than unsecured loan rates because the lender has the added security of a charge over your property. This reduces the lender’s risk of losing money should you fail to keep up your repayments.
While a lower interest rate is a benefit, it’s important to consider the increased risk that comes with the lender taking a charge over your property. In the event of default on the loan, a homeowner loan comes with an increased risk of losing your property than would be the case with an unsecured personal loan.
Can homeowner loan interest be offset against tax?
No, homeowner loan interest can’t be offset against tax in the UK.
The exception to this is when the homeowner loan is taken out against a buy to let property which is owned by a limited company. In this case, interest can be offset, although you should seek the advice of an accountant to confirm your potential tax position.
Homeowner loan fees
In addition to the interest paid when taking out a homeowner loan, there are also several fees to consider. They are broken down below.
Lender arrangement fee
Lender arrangement fees, also known as product fees are charged by the lender on completion of the loan (when the funds are released to you). This fee is usually either a fixed amount, or a percentage of the loan.
Most lenders allow you to add their arrangement fee to the loan, meaning you don’t have to pay it as a lump sum. While this is appealing, adding a fee to the loan will result in you paying interest on it over the course of the loan, increasing its true cost.
Broker fees are usually charged on completion of the loan and can add up to a significant sum. While we charge a fixed £1,495 broker fee, many other homeowner loan brokers charge fees up to 12.5% of the loan amount. For example, on a £50,000 loan, a 12.5% broker fee would be £6,250. This equals £5,255 more than our fee!
Homeowner loan lenders rely on your property as their security and as such, they want to ensure that its value is what you say it is. They do this by instructing one of their panel valuers to inspect the property and produce a valuation report.
The cost of this inspection and report is paid for by you and can’t usually be added to the loan.
In some cases, a desktop valuation, or AVM can be used instead of a physical inspection, which is often free.