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24 Mar 2022

Everything to Know About Mortgage Interest Rates

Many shops offer ‘buy now pay later’ and monthly repayment schemes on products, sometimes you’ll be lucky enough to find a 0% interest on the condition that it’s paid off in the time outlined, which could be anywhere from 3 months to a year or more. But with other contracts, you’ll be subject to a standard interest rate.

If you can save up and buy it outright, it’s much cheaper than paying the extra interest. However, for the average person, some things aren’t possible to buy outright. And with something as expensive as property, interest is usually unavoidable. Unless you receive a big inheritance, inherit a property, win the lottery or so on, interest is inevitable.

Just like when you take out any other loan, there will be interest rates on a mortgage loan as well. However, there are many varying factors when it comes to interest rates with mortgages. Different interest rates will come with different types of mortgages. In this guide, we’ll look at everything there is to know about these mortgages and their interest rates.


Types of Interest Rate

There are two main types of interest rates you’ll come across when dealing with mortgages:


  • A standard variable rate (SVR) – each mortgage lender has their own rate that they set as a default. This rate is what you’ll move on to when a tracker, fixed or discount mortgage interest deal comes to an end.


  • The Bank of England base rate – this base rate is set by the Bank of England and its purpose is to regulate inflation. It is the most influential interest rate in the United Kingdom and impacts all other interest rates. When the rate is low, it will cost less to borrow money on a loan or mortgage.


Tracker mortgages, for example, will normally follow this Bank of England base rate, plus an extra set percentage. So if you take the Bank of England’s current early 2022 rate of 0.5% plus the lender’s extra rate of 2%, you’ll be paying a 2.5% interest rate on your monthly repayments.

If the Bank of England’s base rate changes this will also affect the amount you pay on your tracker mortgage. So if the base rate increases to 0.75%, you’ll now pay an interest rate of 2.75% a month.

The Bank of England’s Monetary Policy Committee meets eight times a year to vote and decide what the rate should be. Though it’s unusual that they would change it eight times (and would instead vote to keep it at the same rate in at least some of these meetings), if you’re looking into getting a tracker mortgage you’ll need to be prepared for the possibility that your rate could go up multiple times throughout the year.

This is especially important to factor in when you are calculating what you can afford to repay monthly.


Different Types of Mortgages and How Their Interest Rates Differ

As we’ve already explained, a tracker mortgage follows the base rate plus a small percentage of their own. But there are many different types of mortgages that each handle interest a little differently.


Fixed Rate Mortgages and Standard Variable Rate Mortgages

Fixed rate mortgages are one of the most popular types of mortgage taken out in the UK, with 60% of people opting for one.

With a fixed rate mortgage, the interest rate on your monthly payments is frozen for a period of time specified on the deal. This is most commonly somewhere between two and five years. Fixed rate mortgages are great for if you like to know the exact amount you’ll be paying each month (for the first few years) and could potentially save you money if interest rates go up.

However, the downside is that interest rates could decrease, leaving you stuck paying more than you potentially need to. Once the time period of the deal is over, you’ll be automatically moved on to the mortgage lender’s standard variable rate, unless you decide to remortgage and start looking around for a new deal before your current fixed rate deal ends.

Looking for a new deal could be a good option, as standard variable rates can be significantly higher than the interest rate you were paying during the deal. Even going up by 3% on your monthly repayments could result in paying £100’s more a month, and £1000’s more a year. The lender of a standard variable rate mortgage can also raise or lower their interest rates at any time, leaving you with no say in the matter.

If you are on a fixed rate, tracker or discount mortgage and your deal period is almost coming to an end, you can contact us to look into remortgaging.


Interest Only Mortgages

For something completely different, there are mortgages that only require you to pay the interest percentage every month and not the actual monthly repayment. The idea of this type of mortgage is that you save up money, or expect to gain a large sum like inheritance eventually, and pay the full amount of the property off at the end.

However, the downside to this type of mortgage is that you are especially susceptible to falling into negative equity with this method. As you are only paying the interest, you aren’t actually building up any equity, so your property value might change and leave you paying more that it’s worth at the end.


How to Get the Best Mortgage Interest Rates

To qualify for the most competitive rates you’ll need to meet certain conditions:


Good Credit Score

One of the most important conditions is to have a good credit score. Lenders will check your credit history very thoroughly when looking through your application. Showing them that you are good at repaying your debts on time will increase your chances of being approved for the best deals and rates.

It can be difficult to have good credit, especially when you are young and new to it all, but thankfully there’re lots of opportunities to build up your credit score. Things like buying a new phone or laptop and paying monthly (and on time) can help build up your credit. For more information on increasing your credit score, check out this article.


Big Deposit and LTV Ratio

Another option is to save as much money as you possibly can in order to build up a big deposit to put down. This will give you a lower loan to value ratio (LTV) and the best mortgage interest rates are normally reserved for those with this.


Increase Equity and LTV Ratio

If you already own a property but are thinking about moving, the further you are in paying off your current mortgage, the more equity you’ll have and the lower your LTV ratio will be. This will also help get a better deal when you move.


Decreasing Interest Rates

If you aren’t moving house, as you pay off your mortgage with monthly repayments and get closer to paying it off fully, the interest amount on the monthly payments will start to drop. This is because there’s less money left to pay off. So there is light at the end of the tunnel!


Use a Mortgage Advisor

Whilst having a good credit score and decent sized deposit are big helpers, using a mortgage advisor can get you access to mortgage deals you can’t get by applying directly. They will find the best deal and interest rates to suit your circumstances.

It’s easy to use a mortgage advisor, especially an online advisor, and at Mortgages Online that’s exactly what we do. Contact us today for professional mortgage advice or start your journey here.



Jessica Bellingham

As Marketing Manager, Jess works to spread the word of Mortgages Online from the website and social platforms to all digital communication ensuring that all customers, from the moment they search for Mortgages Online in Google to when they purchase a home, have a great experience.

Jess loves to pursue personal development in her own time and is a qualified NLP practitioner. She is also an adrenaline junky and has bungee jumped, skydived, zorbed, water caved, zip lined, been pinged off a cliff, and anything else you can think of (that isn’t to do with sharks!)

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