Yes, your mortgage interest rate can impact how much you pay. Your rate will vary, depending on the type of mortgage you choose, and decisions on the ‘base’ rate by the Bank of England. You can lower your rate by putting down a bigger deposit, which will lower your LTV (loan to value – basically, how much you borrow compared with the value of the property).
"Mortgage interest rates can sound a bit confusing, but they really don't need to be. In simple terms, your rate is just the price of borrowing the money you need to buy a home.
Even a small difference in your rate can save you thousands over the life of your mortgage, so it's well worth taking a little time to compare your options.
You don't need to be a maths genius to do the sums, but you also don’t need to do it by yourself. We love helping first time buyers get to grips with the basics, and there's no such thing as a silly question. Pop us a message and we'll talk you through it, step by step."
Rachel Geddes
Strategic Lender Relationship Director
What is a mortgage interest rate?
Your mortgage interest rate is the price you pay for borrowing money to buy a home. Think of it as the ‘cost’ of your mortgage. It’s a percentage of the amount you’ve borrowed and then added to what you pay every month.
A 4% rate doesn’t mean you pay 4% of your mortgage each month. Most lenders work out interest daily, based on how much you still owe. So as you pay off your mortgage, the amount of interest you’re charged usually goes down. Your rate is also likely to change during your mortgage, for example when a fixed-rate deal ends.
Here’s a simple example. If you owed £200,000 at 4%, you’d be charged around £667 in interest in your first month. So as you pay off your mortgage, the amount of interest you pay usually goes down, even if your rate doesn’t change.
Most people have a repayment mortgage. How this works is that each monthly payment covers that month's interest plus a slice of the loan. Early on, more goes on interest. Later, more goes on the loan itself. Your rate decides how big that monthly payment is.
This is only an illustration, and what you pay will depend on your mortgage. A mortgage adviser can show you what it would cost you.
How does your interest rate affect what you pay?
Here's an example. We've used a £200,000 repayment mortgage over 25 years.
At 3% interest, your monthly payment is roughly £949.
At 4% interest, your monthly payment jumps to around £1,056.
At 5% interest, you’re looking at about £1,170.
That’s a difference of £221 a month between 3% and 5%.
This is why even small changes in interest rates matter. A 0.25% shift might sound tiny, but it can add £20–£40 a month to your payments depending on your loan size. You can choose to pay the mortgage off over a longer period too, which would lower monthly payments, but increase the amount of interest paid overtime.
These figures assume the rate stays the same for the whole 25 years. In real life, rates change when your deal ends. So treat these figures as a guide and speak to a mortgage adviser .
Estimate your costs with the mortgage repayment calculator.
How do lenders decide your rate?
Your lender doesn’t just pluck a number out of thin air. They look at several things to work out how risky it is to lend to you – and the lower the risk, the better the rate you’re likely to get.
There are three things that matter the most.
Your loan-to-value
Your loan-to-value (LTV) is the percentage of the property price you’re borrowing.
A 90% LTV means you’re putting down a 10% deposit and borrowing the rest.
A 75% LTV means you’ve got a 25% deposit and borrowing the rest.
Generally speaking, a lower LTV is lower risk for the lender, and you can therefore (usually) get lower rates.
Rates often step down at set points, such as 95%, 90%, 85%, 75% and 60%. So saving a little more to increase your deposit means you can reach the next LTV band and therefore pay less a month.
Your credit history
Lenders look at how you've handled credit in the past. Paying bills on time, staying within your limits and being on the electoral roll all help. A strong record can open the door to better rates.
Don't worry if your credit score isn't perfect. There are several things you can do to boost it.
Read about how to improve your credit score.
Your income and outgoings
This is about what lenders call ‘affordability’. Lenders check your salary, spending, debts and commitments to make sure you won’t be overstretching yourself to pay the mortgage back. Strong affordability can help you get better deals.
What affects mortgage interest rates?
Factors that affect the mortgage interest rates you’re offered might be:
Personal to you (e.g. your deposit, LTV, credit rating)
Related to the wider economy (e.g. the Bank of England base rate, swap rates, inflation, competition between lenders).
The Bank of England base rate
The Bank of England base rate (sometimes just called ‘base rate’) is the interest rate set by the Bank of England. It's the starting point for lots of borrowing costs. A group of economists at the bank meet to decide the base rate eight times a year (sometimes more often).
So how does the base rate affect mortgages? When it rises, lenders tend to raise their rates. When it falls, rates tend to follow.
Inflation
The Bank of England aims to keep inflation close to 2%. Don’t worry, you don’t need to be an expert economist to get your head around inflation. Basically, when prices on things like your shopping or fuel rise quickly (rising inflation), the Bank of England might up the base rate a bit to cool things down. When inflation is steadier, the base rate might go down.
That's why inflation news can hint at where mortgage rates may head next.
Swap rates and lender competition
Swap rates reflect what the financial markets expect interest rates to do in future, and lenders use them to price their fixed-rate deals. So, when swap rates rise, fixed mortgage rates usually follow. Competition also plays a part – when lenders want to attract more customers, they often cut rates. That's good news for you as a buyer.
The different types of mortgage interest rate
Not all mortgage rates behave the same way. Here are the main types you’ll come across.
If you choose a fixed rate mortgage your rate stays the same for a set time, usually two, three or five years. What you pay every month stays the same too. That makes budgeting simple and gives you peace of mind.
If the base rate goes up, your interest rate doesn’t change. But if the base rate falls, you won't benefit until your deal ends. If you want to leave a fixed rate mortgage early, you normally have to pay early repayment charges (more on this later).
A tracker mortgage follows the Bank of England base rate, plus a set amount. Say the base rate is 4% and your tracker is base plus 1%. You'd pay 5%.
When the base rate moves, your rate moves with it. Your payments can go down or up. Some trackers have no early repayment charge, which gives you more freedom to switch.
The standard variable rate is your lender's default rate. You usually move onto it when your deal ends. Your lender sets it and can change it at any time.
It's often higher than the deals on offer, so most people try to avoid staying on it for long. If you find yourself on the SVR, you can probably find a cheaper mortgage, so it’s well worth speaking with a mortgage adviser for their view.
A discount mortgage takes a set amount off the lender's SVR for a set time. If the SVR is 7% and your discount is 1.5%, you pay 5.5%.
If the lender raises its SVR, your rate goes up too. Compare discounts with fixed deals before you choose.
What is Annual Percentage Rate of Charge (APRC)?
In simple terms, it’s a way of showing the total cost of your mortgage over its full term. This includes fees and any changes in rate.
It’s useful for comparing mortgages, but don’t panic if the number looks high – it assumes that you’ll stay with the same lender for the entire term and move onto the lender’s (usually quite pricey) SVR when your fixed rate ends. Most people don’t do this, either choosing to fix a new rate, or to go onto a tracker mortgage
Use the APRC as a guide, but no more than that. Look at the monthly payment and the fees too. An adviser can help you compare deals.
Can you change your mortgage interest rate?
Yes, you can, and most people do. Here's how it can be done:
At the end of your deal
When your fixed or tracker deal ends, you’ll move onto your lender’s SVR automatically. This is usually more expensive, so most people either remortgage or do a product transfer to get a new deal.
Before your deal ends
You can switch early, but you may pay an early repayment charge. These can be a percentage of your remaining balance, so it’s worth checking the numbers before making a move. A broker can usually help you time switching your mortgage to avoid these charges.
Product transfer or remortgage
A product transfer is when you stay with your current lender and switch to a new deal.
A remortgage is when you move to a new lender.
Both options can help you get a better rate. A mortgage adviser can help you figure out the best option.
How to get a better mortgage interest rate
Wondering how to get a better mortgage rate? You can't control the base rate or the economy. But you can do plenty to put yourself in the best spot. Here's how:
Save a bigger deposit. A lower LTV can unlock cheaper rates.
Check your credit report. Fix any errors and keep up with payments.
Pay down debts. Closing unused credit cards can help too.
Compare lots of deals. Brokers can often get deals you won't see going direct.
Look at the fees, not just the rate. A low rate with a high fee can cost more overall.
Note your mortgage’s end date. Start looking about six months before it ends, as this is usually when early repayment charges don’t apply
How can we help?
Still a bit confused? Percentages not your thing? No worries – mortgages can seem complicated, especially when you’re getting one for the first time. Give us a call if you have anything you want to ask. There is no such thing as a silly question.
A Mab adviser can look at your situation, compare deals for you and explain it all in plain English. They'll help you find a rate that suits your budget and your plans.
Ready to chat? Our advisers are ready to call you back today. The first chat costs nothing and is totally free of obligation.
Something to bear in mind...
Frequently asked questions
Lenders start with their own cost of borrowing, which they decide by the base rate and swap rates. Then they add a margin, so they can make some money. Finally, they adjust the rate for your LTV, credit history and income.
This is the big question. The answer is it depends on what matters to you. A fixed rate gives certainty. A tracker or discount can give flexibility, and sometimes lower starting payments. An adviser can help you weigh it up.
Not always. Sometimes a mortgage involves an upfront fee called a product fee. The bigger your mortgage is the more the rate matters, and the fees less so. A mortgage broker can help you do the sums and work out the best deal, taking both the interest rate and fees into account.
Nobody can say for sure. Rates move with the base rate, inflation and the markets. If you're worried about rises, a fixed rate can give you certainty.
Often, yes. You can switch at the end of your deal, or earlier if you're happy to pay any early repayment charge. Speak to an adviser to see what makes sense for you.
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