How mortgage interest rates work

What are mortgage interest rates?

Interest is money you pay to lender in return for borrowing from them. You’ll pay a percentage of the amount you borrowed – this is called the interest rate. You’ll typically want a low mortgage interest rate, as this means you’ll pay less to the lender in borrowing costs.

Interest rates are usually set by the lender, but they may follow or be influenced by the base interest rate set by the Bank of England.

How do mortgage interest rates work?

There are three different interest rate options when it comes to choosing a mortgage – fixed, variable and tracker.

A fixed rate mortgage comes with a set interest rate that stays the same for an agreed number of years.

This means that no matter what happens to the base interest rate as set by the Bank of England, your mortgage repayments will stay the same during the fixed rate period – so it’s easy to plan a budget around.

More about fixed rate mortgages

A variable rate mortgage (sometimes known as a ‘standard variable rate mortgage’) comes with an interest rate that can change, meaning your mortgage repayments can go up or down.

Different to a tracker mortgage, the lender sets the variable interest rate you pay and has several choices when there’s a change to the base rate.

More about variable rate mortgages

As with a variable rate mortgage, a tracker mortgage interest rate can change over time meaning your repayments can go up or down. The difference with a tracker mortgage is that the interest rate is set at a fixed amount above or below another rate, which it tracks – usually the Bank of England base rate.

For example, if base rate is set at 0.5% you might have a tracker rate that’s set at 1% above base rate – so you pay 1.5% interest on your mortgage.

More about tracker rate mortgages

What’s a good interest rate for a mortgage?

There’s no exact number that makes a good interest rate. That’s because the interest rate you’ll pay depends on a lot of factors, like how much you’re borrowing and the size of your deposit.

The important thing is to make sure you’ll be able to afford the repayments – as you risk losing your home if not – and that the rate is competitive with what else is out there.

To see a selection of mortgages from across the UK market and get an idea of what interest rates are available, you can compare mortgages with Experian.

What can you do if your mortgage interest rate goes up?

Firstly, a rise in the Bank of England rate will only affect you if you have a variable or tracker mortgage.

The best way to deal with an interest rate rise is to be prepared in the first place, by understanding how an interest rate rise will affect you before you choose your mortgage. To give you an idea: with a rate rise from 0.25% to 0.5%, a person on a tracker mortgage who’s paying 2% interest on a 25-year, £250,000 mortgage would see their monthly £1,060 repayment rise by around £30.

If you already have a mortgage, there are other options. You could consider overpaying while the lower interest rate lasts, so you have less to pay off after the rate goes up. Most lenders allow you to overpay by a certain amount (typically 10% of your balance) each year without charge. If you exceed the limit you may get stung with an early repayment charge. Alternatively, you could try and lock in a good deal by remortgaging to a fixed rate – although if a rate rise is imminent, lenders will take this into account when making an offer. Just remember, you may be charged an early repayment fee if you remortgage during your fixed term.

How can you get a good interest rate on a mortgage?

Before you apply for a mortgage, you should make sure your finances are in the best shape possible, and check if you meet the criteria a mortgage lender may look for. Here are our suggested steps:

Check your credit score

To get an idea of how a lender may view you when you apply for a mortgage, check your Experian Credit Score for free. This is a number between 0-999 – the higher it is, the better your chances may be of getting a mortgage at the best rates.

Check your credit report

Taking steps to improve your credit score may improve your likelihood of being accepted for a mortgage. For an in-depth look at your credit data – including factors affecting your score – check your Experian Credit Report.

Have stable employment and income

Being employed full-time, with a steady income for the previous two years, can help you get a better mortgage interest rate. Mortgage lenders can be particularly strict on the self-employed and may ask for several years of income tax returns to ensure you can meet regular repayments.

Put down a healthy deposit

Generally speaking, the bigger the deposit you put down, the better your interest rate will be. This is usually because the more money you commit, the less you appear as a risk to the mortgage lender. Typically, a 15% deposit should get you some decent deals, while those looking for the best rates may need to put down 25% or more.

Compare mortgages with Experian