How Home Buyers Get A Better Mortgage Deal

The largest loan most people have in their lifetime is their home mortgage.

Data from the U.S. Census Bureau’s American Community Survey in 2020 says approximately 62% of homeowners in the United States had a mortgage. In the U.K., the percentage of mortgagees is around 43% of all homeowners.  Millions of people with mortgages can save money when they know how to get a better deal on their home loan.

In this blog post, we look at ways homeowners and first-home buyers can ensure they get the best mortgage for their needs over time. Plus, we look at the most common types of mortgage products in the USA and the U.K.  Before we get to these hot topics, we must understand the relationship between the economy and mortgages.

Mortgage Rates And The Economy

How are mortgage rates tied to the economy?

Mortgage rates are closely tied to the economy in several ways. The economy’s overall health and the supply and demand for credit can significantly influence mortgage rates, including the following key factors.

Inflation

Inflation occurs when there is excess demand for goods and services compared to their supply, leading to a price rise. This can be caused by increased consumer spending, growth in the money supply, or a decrease in the supply of goods and services.

High Inflation

High inflation can lead to higher fees as lenders will charge more to offset the loss of purchasing power caused by inflation.

Deflation

Deflation refers to a sustained decrease in the general level of prices for goods and services. When there is ample supply for demand, deflation is the result.

It’s important to note that both inflation and deflation can significantly impact the economy, which is tied to interest rates.

Economic growth

When the economy is strong and growing, there is typically higher demand for credit, which can push mortgage rates up. Conversely, when the economy is weak, and demand for credit is low, mortgage rates may decrease.

However, the opposite can occur too – i.e., a strong economy and low-interest rates. When this occurs, it’s easy for homebuyers to get caught out paying too much for a property with a much higher mortgage. Borrowing more becomes problematic when the interest rates rise, as do the repayments, which become more challenging.

When repayments become unmanageable, the homeowner is often forced to sell, which may occur when house prices drop, and if they drop by too much, the homeowner may repay their loan but lose their initial deposit (down payment).

Federal Reserve or Bank of England Policy

The Federal Reserve is responsible for setting monetary policy in the United States. The Bank of England (BoE) has the same role in the UK. When the Fed or BoE raises interest rates, mortgage rates tend to follow suit. Conversely, mortgage rates may also decrease when the Fed lowers interest rates. Both actions are triggered by the rate of inflation.

Housing market conditions

When there is a high demand for housing and low supply, mortgage rates tend to be higher as lenders can charge more to meet the demand. When there is an oversupply of homes, mortgage rates may be lower. When homeowners are attuned to market conditions, they can determine if their current mortgage product is the best they get or if they should look around for a better deal.

Overall, mortgage rates are closely tied to the economy and are influenced by various factors, including inflation, economic growth, Federal Reserve policy, and housing market conditions.

USA vs. U.K. Mortgages

How do mortgages differ in the USA and the U.K.?

There are several differences between mortgages in the USA and the U.K., including

• Type of mortgage products offered
• Deposit aka down payment requirements
• Interest rates
• Fees
• Regulations governing the industry

Let’s take a look at each difference in more detail.

Mortgage types

The most common type of mortgage in the USA is the fixed-rate mortgage, where the interest rate remains the same throughout the loan term. Over 90% of mortgagees have a 30-year fixed-rate mortgage. This mortgage offers certainty that the repayments and interest rate remain within expectations. Homeowners can be confident they can afford the repayments until they’ve paid off the loan.

In the U.K., there was a time when variable-rate mortgages were more common, where the interest rate could fluctuate over time. However, the fixed rate is now the most common, with 86% preferring them.

The maximum term for a fixed-rate mortgage in the U.K. is 10 years. However, two to five-year fixed-rate mortgages are the most popular.

Down payments, aka deposits

In the USA, it is common for borrowers to make a down payment of at least 20% of the property’s purchase price.

In the U.K., purchaser deposit requirements are lower, with 5% being a common minimum. However, the recommended amount is 20%, and for buy-to-let mortgages, it is 25%, but it can be as much as 40%.

Interest rates

In the USA and the U.K., mortgage interest rates vary all the time, as we mentioned earlier, as they are tied to the economy. Plus, it’s uncommon for both countries to have the same interest rate simultaneously. For example, for a 10-year mortgage, there can be as much as a one percent difference.

The two countries typically have different interest rates and terms for all their mortgage products, so it is hard to compare them. If you were to get a 10-year fixed rate mortgage today in the USA, you might get 5.49% vs. in the UK 6.37% – (percentages were accurate when writing this article).

Fees

In the U.K., it is common for lenders to charge fees for arranging mortgages, such as application fees, valuation fees, and legal fees. In the USA, these fees are less common, and lenders instead charge points, a percentage of the loan amount paid upfront. Additionally, in the U.K., expect a break fee should you wish to end your fixed-term loan before maturity.

In the USA, you can terminate your fixed-rate mortgage and secure one with another lender without break fees applying.

Regulations

The mortgage industry is heavily regulated in the USA and the U.K., but the regulations differ. In the USA, mortgages are regulated by federal and state agencies, while in the U.K., mortgages are regulated by the Financial Conduct Authority (FCA).

These are just some key differences between mortgages in the USA and the U.K. It is important to research each country’s specific requirements and options before applying for a mortgage.

First Home Buyers Mortgages USA and U.K.

Do first-home buyers get a better deal with mortgages in the U.K. or USA?

The mortgage market in the U.K. and USA is different, so it’s difficult to compare directly. However, generally speaking, first-home buyers can find good mortgage deals in both countries.

The U.K.

In the U.K., first-time buyers can take advantage of government schemes such as the Help to Buy scheme, which can help with a deposit, and the Shared Ownership scheme, which allows buyers to purchase a share of the property and pay rent on the remaining share.

Furthermore, some lenders offer special deals, such as lower interest rates or no arrangement fees, for first-time buyers.

USA

In the USA, first-time buyers can benefit from various government-backed loan programs, such as the Federal Housing Administration (FHA) loans, which require a lower down payment, and the Veterans Affairs (V.A.) loans, which are available to eligible veterans and their spouses with no down payment required. Some lenders offer special programs for first-time buyers, such as low or no closing costs or down payment assistance.

Ultimately, the best deal for a first-time buyer will depend on their circumstances, such as their credit score, income, and the size of the deposit they have saved. It’s essential to compare offers from different lenders and thoroughly research them before deciding on a mortgage.