Mortgage interest rates explained
, by Matt Stevens
Almost all loans have an interest rate, and mortgages are no exception. The interest rate of a mortgage is the percentage that’s charged on top of the amount you owe, which acts as a payment for using your chosen lender’s services.
When choosing your mortgage product and provider, it’s incredibly important that you look into all of the different interest rates available to you. This is because even the smallest difference can end up saving you thousands of pounds over the term of your loan.
To help you get the best deal, we’ve put together this guide to mortgage interest rates, which will cover:
- What is the interest rate on a mortgage?
- Why are mortgage interest rates important?
- How do mortgage interest rates work?
- What are the current interest rates for a mortgage in the UK?
- Are interest rates going down?
- What can I do if my mortgage interest rate goes up?
- What is a good mortgage rate?
- What is the mortgage base rate?
- What are the different types of mortgage rates?
- Which mortgages come with the lowest interest rates?
- What is APRC?
- How to get the best mortgage rate
Read on to find out more.
What is the interest rate on a mortgage?
When you take out a mortgage, your lender will charge you interest for using their services. This is typically a percentage of the total amount you borrow, which you’ll pay on top of your agreed loan repayments.
You’ll find that different mortgage products have different interest rates, and it’s vital you take this into account as it can have a huge impact on how much you actually end up paying for your property. The amount you’ll owe throughout your loan term will equal the amount you initially borrow, also known as the capital or principal, and the interest that is added on top.
Why are mortgage interest rates important?
Your mortgage interest rate is important because it determines the trajectory of your loan balance each month. In essence, it serves as the compass guiding the growth of your loan. When the interest rate is higher, it amplifies the impact on your monthly repayments, translating to an increased financial commitment on your part. Therefore, understanding and carefully considering the implications of your chosen interest rate is vital in managing your overall mortgage expenditure wisely.
How do mortgage interest rates work?
Your mortgage interest rate will be calculated as a percentage of the amount you borrow. How it works and how you pay it back will depend on the type of mortgage you take out.
For instance, if you take out a repayment mortgage, you’ll pay back the value of your loan plus the interest over the term in the form of monthly payments. So, a portion of each monthly payment goes towards the principal, reducing your loan and building your share of equity (the portion of your home that you own), and the rest goes towards interest fees.
Mortgage interest is then calculated on your remaining balance each month, which will decrease over time because of your capital payments. As a result, the amount of interest you pay will also decrease over time, and a larger portion of your monthly payment will go towards the capital instead.
If you take out an interest-only mortgage, you’ll repay the capital at the end of the term, rather than contributing to it monthly. During the loan term, you’ll only pay the interest you owe each month. This is a common approach with buy-to-let mortgages.
How is a mortgage interest rate calculated?
Mortgage interest rates are expressed annually (for example, 2.4% per annum), so you need to divide this by twelve to calculate the percentage applied each month.
(mortgage rate ÷ 12) x remaining balance = monthly interest charge
For example, if you take out a £100,000 mortgage with a 2.4% interest rate, you will pay (0.024 ÷ 12) x £100,000 = £200 in interest in the first month.
If your monthly payments are £600, the remaining £400 will go towards your mortgage balance.
This will leave you with a balance of £99,600, so you will pay (0.024 ÷ 12) x £99,600 = £199.20 in interest the second month.
The remaining £400.80 of your payment will then go towards your capital, leaving you with a mortgage balance of £99,199.80 in the third month. This pattern will continue until your balance is paid.
What are the current interest rates for a mortgage in the UK?
According to data from Rightmove which is correct as of January 9 2024, the average interest rate on a 5 year fixed-rate mortgage is 4.94% and the average interest rate on a 2 year fixed-rate mortgage is 5.23%, with both being relative to 75% LTV. The tables below contain data on deals for other LTV ratios while showing the week-on-week changes they've experienced.
Current average two-year fixed mortgage rates
Loan to value (LTV) | January 3 2024 | January 9 2024 | Weekly change |
60% LTV | 4.82% | 4.61% | -0.21% |
75% LTV | 5.23% | 5.07% | -0.16% |
85% LTV | 5.55% | 5.41% | -0.14% |
90% LTV | 5.69% | 5.53% | -0.16% |
95% LTV | 5.81% | 5.75% | -0.06% |
Current average five-year fixed mortgage rates
Loan to value (LTV) | January 3 2024 | January 9 2024 | Weekly change |
60% LTV | 4.44% | 4.36% | -0.08% |
75% LTV | 4.94% | 4.87% | -0.07% |
85% LTV | 5.10% | 5.04% | -0.06% |
90% LTV | 5.16% | 5.06% | -0.10% |
95% LTV | 5.40% | 5.31% | -0.09% |
Are interest rates going down?
After raising the base rate 14 consecutive times in order to combat inflation, the Bank of England decided to keep the base rate standing at 5.25% in its September, November, and December 2023 meetings. Since inflation dropped considerably in the second half of 2023, money markets are now forecasting a base rate decrease to 4.25% by the end of 2024. Albeit, decreases will likely be gradual to ensure that inflation meets the 2% target.
What can I do if my mortgage interest rate goes up?
If you’re aware of interest rates going higher, or you’re finding it difficult to manage recent increases, then one solution could be to remortgage at a better fixed rate. Bear in mind, however, that this could open you up to having to pay an early repayment charge so it’s best to know of this beforehand.
You’ll only be subject to interest rate changes if you’re on a variable rate mortgage such as a tracker mortgage, the remaining length of which should also be a major determining factor. For instance, if you only have a couple years of your mortgage’s term left, then it may be shrewd to lock in a fix before any further interest rate increases. On the other hand, if you have around 20 years remaining on your mortgage, then it’s almost certain that interest rates will return to a more favourable standard eventually.
What is a good mortgage rate?
What makes a good mortgage rate depends on the type of mortgage. The product with the lowest rate isn’t necessarily the cheapest or most suitable product for you, because there are so many other factors involved. The best way to determine whether a lender is offering a good rate is to compare it to similar products.
It’s also important to remember that mortgage rates change depending on the base rate and economic climate at the time you take out your mortgage. Your financial circumstances can also dictate what is a ‘good’ mortgage rate: for example, it’s easier to access lower rates if you have a good credit rating, or if you can afford to put down a large deposit.
What is the mortgage base rate?
When you take out a mortgage, your lender will borrow money from the Bank of England to cover the cost. The base rate is the interest charged by the Bank of England when lending money to banks, including mortgage lenders. The lenders then pass this cost onto the borrower, meaning that the base rate has a direct influence on how much interest you can expect to pay.
An increase in the base rate makes borrowing money more expensive and saving more rewarding. So, when the base rate is high, people tend to borrow less and save more, and vice versa when it is low. Our collective spending and saving habits can lower or increase the overall inflation rate, so the Bank of England adjusts the base rate on a regular basis to control inflation.
The current base rate is set at 5.25%, a level not seen in around 15 years. But, as this figure is reviewed by the board of governors every month, it’s liable to change at short notice.
What are the different types of mortgage rates?
When you start your search for the right mortgage, you’ll discover that there are different types of products that have different types of interest rates. So, here, we’ll look at the options you’ll typically have so you can choose the one that’s right for your situation.
What is a fixed-rate mortgage?
If you take out a fixed-rate mortgage, the interest rate you pay will stay the same for the length of the deal you get. This won’t be affected by whatever happens to interest rates in the market during that time.
When your fixed-rate period ends, you’ll be moved onto a standard variable rate (SVR) unless you remortgage. The standard variable rate is likely to be significantly higher than the fixed rate you were initially offered, which can lead to higher monthly payments. So, it’s generally a good idea to remortgage when you come to the end of your original deal.
How does a fixed-rate mortgage work?
With a fixed-rate mortgage, your interest rate is guaranteed to stay the same for a specific period of time — usually two or five years. This can provide you with peace of mind because, unlike with a variable-rate mortgage, you’ll know exactly how much you’re going to pay each month. For this reason, fixed-rate mortgages tend to be the most popular.
Should I fix my mortgage rate?
Many borrowers decide to fix what they perceive to be a ‘good’ rate, in order to give themselves some long-term security and to protect them from rate rises in the future. However, there’s always an element of risk involved in fixing your mortgage. If you fix and rates do rise, then you could save a lot of money, but if rates remain competitive (or fall even lower) then you might actually end up paying more.
You’ll also be locked into a minimum term with a fixed rate, so this isn’t going to work for you if you have plans to sell your home anytime soon.
If you’d like to have more security over your monthly outgoings, fixing your mortgage can help you with budgeting. You should only opt for a variable-rate mortgage if you can afford to pay more should interest rates rise, and want to be able to take advantage should they fall.
Is now the right time to fix my mortgage?
After over 10 years of consistently low interest rates, the Bank of England’s base rate has increased 14 times. For reference, in December 2021 the base rate was 0.1%, and now as of January 2024 it currently stands at 5.25%, the highest rate since 2008. As such, mortgage interest rates are rather volatile at the moment, which has caused a lot of uncertainty in the market, especially for first-time buyers. However, the market is predicting interest rate decreases this year.
So, given that a drop is now expected by many, most mortgage advisors would recommend that homeowners wait before locking into a new fix. Although, if you’re in the last six months of your existing mortgage deal's term, then you may not benefit greatly from decreases as they will likely be very gradual.
If inflation eventually decreases to its target of 2%, then the base rate will start to decline dramatically, meaning that you’d be losing out if you fixed your mortgage prior. Albeit, it’s uncertain how long such a drop will take. We understand that this is tricky to navigate, what’s best for you depends entirely on your specific position. This is precisely why it’s so integral for you to speak to an expert mortgage broker if you’re making these considerations.
How long should I fix my mortgage for?
Generally, fixed-rate terms last for two, three, five, or 10 years. As a rule of thumb, a shorter term means a lower rate, because this is less risky for the lender. However, if interest rates rise by the time you come to remortgage, you might have been better off locking in a higher rate for a longer time. It’s impossible to predict what will happen, so it’s all about balancing the potential risk and reward in line with your own financial circumstances.
One thing to bear in mind is that you’re likely to face exit fees if you wish to remortgage before your term ends. So, if there’s a good chance you’re going to move home in the next ten years, it’s unwise to lock yourself into a ten-year mortgage.
What happens when my fixed-rate mortgage ends?
Unfortunately, all fixed-rate mortgage deals must come to an end, so it’s worth planning ahead and thinking about what you’re going to do when yours does.
If you’re approaching the end of your deal, it’s wise to speak to a mortgage broker who can help you to decide what your next step should be. If you do nothing, your lender will move you on to an SVR mortgage. Every company sets its own SVR and this can rise or fall at any time. It will generally be more expensive than the rate you’re used to paying.
As a result, remortgaging will usually be in your best interests. This will allow you to secure another fixed-rate deal either with your current lender or another provider. You can arrange to remortgage your home up to six months before your current fixed-rate period ends.
Can I get out of a fixed-rate mortgage?
The short answer is yes, you can usually leave a fixed-rate mortgage early, but most lenders will require you to pay an early repayment charge. The way this applies can vary, but it will often be applied as a percentage of around 1–5%.
If you’re thinking about trying to get out of your fixed-rate mortgage, make sure you read the small print on your agreement and get in touch with your lender to find out whether there are any other fees you will need to pay. If you would like to learn more about the possible expenses you’ll face, make sure you read our guide to mortgage fees and charges for more information.
Can I sell my house during a fixed-rate mortgage?
Yes, you can sell your house while in a fixed-rate mortgage, but it could end up costing you more than you expect. The main concern is that you could be subjected to an early repayment charge. To avoid this, you could delay your move and wait until your fixed-rate period ends.
What is a variable-rate mortgage?
If you take out a variable-rate mortgage, this means your interest rate — and therefore your monthly payments — can rise or fall.
There are three main types of variable-rate mortgages: standard variable rate (SVRs), tracker rate, and discounted rate mortgages.
How does a variable rate mortgage work?
With a variable-rate mortgage, your monthly payments can change, as your interest rate can go up or down over time.
The variable rate you pay will be decided by your lender. This won’t necessarily fluctuate in line with the Bank of England base rate unless you’ve chosen a tracker mortgage. If you find yourself on your lender’s SVR, you’ll usually have the freedom to remortgage to a different deal without having to pay an early repayment charge.
What is a tracker rate mortgage?
A tracker mortgage is a type of variable rate mortgage. Their interest rates are directly impacted by any changes made to the Bank of England’s base rate. However, tracker rates don’t match the base rate — instead, they’re set at a margin above it. For example, you may pay the base rate plus 1%. In this case, if the Bank of England base rate was 5.25%, your mortgage interest rate would be 6.25%.
You can take out a tracker mortgage for an introductory period, which is usually between one and five years long, and you’ll then be moved onto an SVR or another tracker rate that has a higher margin. Alternatively, you can get a lifetime tracker, which will last the entire term of your mortgage.
What is a discounted rate mortgage?
Mortgage lenders have a standard variable interest rate, which is determined by the Bank of England’s base rate and their own costs. If you take out a discounted variable rate mortgage, this means your interest rate will be set at a fixed percentage below your chosen lender’s standard variable rate.
So, for example, if your mortgage provider’s standard variable rate was 4.8% and your discounted variable rate was set at 1%, your interest rate would actually be 3.8%. The standard variable rate can change over time, which means the amount of interest you pay could fluctuate, but you’ll always be charged at the agreed fixed percentage below the standard rate.
This means that, if the lender’s standard variable rate rose to 5.3% and your agreed discount was still 1%, you would then be charged 4.3%.
Discounted variable rate mortgage deals typically last two to five years, but this can be affected by factors such as mortgage providers’ current deals, your financial situation, and your credit score.
Which mortgages come with the lowest interest rates?
In the realm of mortgages, fixed-rate options generally come with higher interest rates compared to their variable counterparts. Why? Well, it's a bit like paying a premium for peace of mind – with a fixed-rate mortgage, you know exactly what your monthly repayments will be.
This principle extends to longer fixed-rate deals, especially those spanning five years or more. Lenders face a greater risk with these extended periods because market rates might fluctuate during that time. Consequently, a longer-term fixed rate often carries a higher interest rate than a shorter-term one, reflecting the lender's need to hedge against potential market changes.
What is APRC?
The Annual Percentage Rate of Charge (APRC) is a comprehensive measure that evaluates the complete cost of interest and fees incurred throughout the entire duration of a mortgage loan. This calculation encompasses not only any fixed interest rate periods but also factors in the lender's standard variable rate for the remaining term of the loan.
Other mortgage costs
Mortgage products may come with additional costs, including application fees or product fees. Typically, these fees can be paid upfront or added to the mortgage principal. It's important to note that when fees are added to the mortgage, they can end up costing more in the long run due to accruing interest.
When evaluating different mortgage offers, it's wise to consider options both with and without these additional fees. This allows you to compare not only the APRC, but also your potential monthly repayments, enabling you to make an informed decision about the most suitable option for your financial situation.
How to get the best mortgage rate
To get the best mortgage rate and ensure your money goes as far as possible, we would always recommend improving your credit score, having a stable income, saving for a sizable deposit, and speaking to a mortgage broker who understands the market inside and out.
Mortgage brokers will also have a professional network of people who can help to provide you with the best deal and may even have access to exclusive products that are much more affordable than those you can find yourself.
Here at The Mortgage Genie, our mortgage brokers are experts in helping our clients to find the best possible mortgage deals to suit their needs. So, if you want to ensure you pay as little interest as possible over the term of your mortgage, get in touch to discuss your needs with us today.
We also have mortgage calculators that can help you to estimate how much you’ll be able to borrow to buy a property. If you’re in the early stages of your home buying journey, use our tool to set your expectations and ensure you’re looking at properties that are within your budget!
