An Overview of Mortgage Interest Rates

What is a Mortgage Interest Rate?

Usually expressed as an annual percentage of the loan, your mortgage interest rate refers to the cost of borrowing money to pay for your property. It is an extra amount you are required to pay to your lender in addition to paying off the amount you’ve borrowed.

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Types of Mortgage Interest Rate

Your mortgage’s interest rate will depend on the type of mortgage you have.

Fixed Rate Mortgage

If you have a fixed rate mortgage, the interest rate you pay will remain the same (fixed) for a specified period (which can be anything from 2 years to 10 years). This means that your monthly repayments will stay exactly the same, enabling you to know how much you’ll pay each month and therefore budget accordingly.

It’s worth noting, however, that if interest rates fall elsewhere, you will be locked into your fixed rate deal. On the other hand, though, if interest rates rise, you’ll pay less in relation.

Variable Rate Mortgage

If you have a variable rate mortgage, your interest rate could either increase or decrease each month, meaning that the amount you repay each month could change.

You will be charged at your lender’s standard variable rate (SVR) which is subject to change frequently and at the lender’s discretion.

There are a number of different types of variable rate mortgages, including tracker, discount and capped rate.

  • Tracker mortgage – This type of mortgage follows the Bank of England’s base rate and rises or falls along with it. So, if the base rate increases or decreases, so does your interest rate. Tracker mortgages typically charge the base rate plus a few percent.
  • Discount mortgage – This type of mortgage means you get a discount on your lender’s SVR for a set period. For instance, if your lender’s SVR is 3% but your mortgage came with a 1% discount, you’d pay 2% for the set period. However, the actual amount you pay each month can change if the lender changes their SVR.
  • Capped rate mortgage – This type of mortgage implements a cap on how high the interest rate can increase, meaning it won’t rise above a certain level.

You can find out more about the different types of mortgages available in our previous blog: What are the Different Types of Mortgages?

How are Mortgage Interest Rates Calculated?

Here we explain some of the factors that are likely to have an impact on the interest rate offered to you by your mortgage lender.

Credit Score & History

As discussed in a previous blog from The Mortgage Heroes, your credit score represents your creditworthiness and how much of a financial risk you might be to lenders. Your score is largely based upon your credit report and can help inform lenders how reliable you’ll be in paying your loan.

Generally, those with higher credit scores receive lower interest rates.

Loan-to-Value (LTV)

The larger the deposit you have, the lower the interest rate you’ll be offered. This is because you’re seen as a lower level of risk by lenders – not only does it mean you have more equity in the property, but by putting a larger deposit down, you’re borrowing a smaller amount and shows that you’re capable of saving.

Loan Term

The duration of your loan is another factor that impacts the interest rate you’ll be offered. Shorter team mortgages with higher monthly repayments tend to receive better interest rates because the lender will recoup their loan faster.

Interest Rate Type

Whether you’re on a fixed or variable rate will impact your interest rate.

The interest rates on fixed rate mortgages are usually higher because you’re paying for the security of ensuring your monthly repayments stay the same every month.

How to Get the Best Mortgage Interest Rate

Here are some tips you can use to help increase your chances of being offered the most competitive rates.

Improve your Credit Score

If you have a low credit score, lenders will think you’re more likely to default on your mortgage payments and will therefore charge you a higher rate of interest to cover this risk. However, if you can improve your credit score by demonstrating that you are good and reliable at repaying debt, lenders are more likely to be comfortable offering you a better rate.

Increase the Size of your Deposit

Increasing the size of your deposit will give you more chance of being offered a lower interest rate. Those who are able to put down a deposit of more than 15% usually qualify for the better deals.

Speak to a Mortgage Broker

Rates vary from lender to lender so it’s important to browse the different options and ensure you understand which lender is offering the best terms. By speaking to a professional mortgage broker, like The Mortgage Heroes, you’ll be able to get trusted advice on which lenders are most likely to accept you for the most competitive rates.

Consider Other Fees

Mortgages come with many fees so the interest rate shouldn’t be the only thing you consider – the overall cost can sometimes outweigh the benefits of agreeing to a mortgage with a low interest rate. Things to look out for include arrangement, overpayment and early repayment fees.

Get Started with The Mortgage Heroes.

We hope this guide has provided you with some useful information regarding mortgage interest rates.

If you are looking to find a mortgage, please don’t hesitate to get in touch with The Mortgage Heroes today. We’re a leading mortgage broker helping to support people in all situations across the UK find the right mortgage.

As whole of market mortgage brokers, we are able to help you find the mortgage deal and lender that is suitable for you.

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