Understanding Mortgage Rates

Learn more about mortgage rates and most importantly, how you can get a better deal. Use our handy guide below to get started.

What are Mortgage Rates?

A mortgage rate refers to the payable interest of your monthly mortgage payments and can either be fixed or variable. Mortgage rates will typically stay the same for a set period of years, the duration of which is dependent upon the type of deal arranged between the borrower and lender.

What is a Fixed-Rate Mortgage?

A fixed-rate mortgage means that you're able to set the amount of interest that you pay back to your lender for a fixed period of time (generally between two to ten years).

The Benefits of a Fixed-Rate Mortgage

Fixed mortgages can offer you a greater sense of security and peace of mind as your lender cannot change the interest rate you'll pay until this agreed period has passed. One of the benefits of a fixed-rate mortgage is that the amount you pay per month will remain unaffected by changes to the Bank of England's base rate of interest.

Most house buyers choose fixed-rate mortgages as they can be sure of the exact amount that they'll pay each month, allowing them to more accurately budget and plan ahead.

The Downsides of a Fixed-Rate Mortgage

Despite the obvious advantages of providing you with a fixed interest rate for a set period of years; the downside of choosing a fixed-rate mortgage is that it offers you much less flexibility to swap & change your lender at will to seek a better deal elsewhere.

With a fixed-rate mortgage, you will be locked into an agreement for a set period of years and unable to change to a more attractive rate should one appear within your fixed-rate period. In many mortgage deals, lenders will enforce high exit fees, known as redemption penalties, as a deterrent to stop you moving to another lender during your fixed rate period.

How is the Fixed-Rate Calculated?

The rate of chargeable interest is generally worked out by the lender from a number of considerations, including a prediction on how interest rates will change over the period of time that you've signed up for.

More often than not, a lender's educated prediction is one that normally favours the lender due to their extensive knowledge and research in market predictions. However, despite this fixed-rate mortgages can still offer you a great way to manage your budget in advance, even if you may be unable to switch to a more attractive interest rate within a set period of time.

What is a Variable Rate Mortgage?

As the name suggests, a variable rate mortgage is the complete opposite of a fixed-rate mortgage and is one that allows for the rate of interest to fluctuate.

While variable-rate mortgages could see you pay more interest per month (vs a fixed-rate mortgage), it's important to consider that interest rates can drop as well as rise, meaning that in some instances you could end up paying less interest than you otherwise would with a fixed-rate mortgage.

Variable mortgages come in three different packages, Standard Variable Rate mortgages, Tracker mortgages and Discount Rate mortgages.

What is a Standard Variable Rate Mortgage?

A standard variable rate (SVR) mortgage is based on the standard interest rate charged by your lender. Typically, SVR mortgages are set to a higher interest rate than a Tracker or Fixed-Rate mortgage but crucially, many do not come with an early repayment charge - making them a popular choice if you know that you could pay off your mortgage ahead of time.

One of the major drawbacks of an SVR, however, is that the amount you will be charged for your monthly repayments are constantly subject to change as the lender has the ability to increase or decrease rates whenever they wish to do so.

What is a Tracker Mortgage?

A tracker mortgage will generally follow and stay roughly in line with the Bank of England's official borrowing rate. As such, tracker mortgages are popular amongst market-savvy mortgage hunters as they can capitalise on national low or falling interest rates without being concerned about the commercial considerations of the lender.

However, despite their advantages to more market-conscious customers, tracker mortgages do typically track ahead of the national base interest rate, meaning any significant changes to the economy could have serious financial repercussions to your repayments.

What is a Discount Rate Mortgage?

Discounted variable-rate mortgages are a type of mortgage that, as the name suggests, offers a discounted rate compared to the lender's SVR mortgage.

With a discount rate mortgage, depending on the amount the lender has set for their SVR, you could find a cheaper than average interest rate. However, it’s important to note that as SVR’s differ between lenders, a bigger discounted rate by one lender could still end up costing you more interest than another lender with a cheaper SVR.

In addition to being wary of being swayed by an eye-catching discount price at the expense of a less than impressive SVR, it’s important to also note that unlike a fixed-rate mortgage, a discount rate mortgage is still a variable rate, and therefore could end up costing you more than a fixed plan.

Which is the Best Mortgage?

Unfortunately, there is no definitive answer as to say which type is the most appropriate. Each mortgage type has its upsides and downsides, and most importantly, each mortgage depends on your preferences and financial situation.

Should you wish to take advantage of a hypothetical current low national interest rate, a variable-rate mortgage could be the better choice. However, it is crucial to consider that interest rates can (and often do) fluctuate considerably, which could result in you paying far more interest than you initially expected.

On the other hand, if consistency and stability is the most important aspect to you, then choosing a fixed-rate mortgage is the better choice as you can effectively guarantee a set price for a specific duration.

How are Mortgage Rates Calculated?

Mortgage rates can be determined by a number of factors including the health of the national and global economy, as well as competition and offers from other lenders, the length of the mortgage and of course, your credit history and deposit amounts

You can dramatically affect the mortgage rate you'll pay by contributing a larger deposit upfront on the home that you're buying. If you're unfamiliar with the term, a deposit refers to an amount of money that you'll pay towards a property.

Typically, a deposit will be 10% of the property's total valuation (e.g., £10,000 deposit for a £100,000 home), but the rate of a deposit can be higher or lower than the average 10%. A larger deposit (e.g. 30% or above) will often result in you being eligible for far more attractive and competitive mortgage deals than you otherwise would with a small deposit of 1 - 5%.

Does Mortgage Length Affect the Rate?

As with most loan agreements, it is often a good idea to pay most debts off as soon as possible to minimise the amount of interest owed. While increasing the length of your mortgage will usually result in you paying less money per month to your lender, your interest rate will also increase, meaning that your overall expenditure will be higher.

Can I Make an Early Repayment?

Making an early repayment (either in one sum or through monthly 'overpayments') can reduce the overall amount you need to pay on your mortgage. However, it is a good idea to check with your lender before overpaying as you may incur a charge for early repayment.