TL;DR
In short
- Mortgage interest is the charge for borrowing, normally quoted as an annual rate on the relevant mortgage balance.
- On a repayment mortgage, each payment includes interest and capital; on an interest-only mortgage, the capital still needs repaying at the end of the term.
- A fixed rate can give payment certainty for its deal period, while tracker, standard variable rate (SVR) and discounted-rate mortgages can change under their product terms.
- Compare the initial and follow-on rates, fees, incentives, early repayment charges and costs over the period you expect to keep the deal.
- Your credit history matters, but lenders also assess income, commitments, affordability, the property and their own criteria.
Mortgage interest affects both your monthly payment and the overall cost of borrowing. This guide explains how it works in the UK and how to compare mortgage deals without relying on the headline rate alone.
Mortgage rates can change over time, and lender pricing depends on more than the Bank Rate. For a separate explanation of how rate changes can affect borrowers, see how changes in interest rates affect a mortgage.
Why are mortgage interest rates important?
Mortgage interest is the charge for borrowing money. It is usually quoted as an annual percentage rate and is applied to the balance under the lender’s terms. A higher rate will generally increase the interest charged and, on a repayment mortgage, can increase the monthly payment.
With a repayment mortgage, each instalment includes interest and capital. The split usually changes over the term: earlier payments generally contain more interest, while more of later payments goes towards capital. With an interest-only mortgage, the instalments cover interest, so you need an acceptable plan to repay the capital at the end of the term.
A repayment illustration
The following is a hypothetical capital-repayment illustration, not a mortgage offer, APRC or guaranteed saving. It assumes a £150,000 loan over 25 years (300 monthly payments), an unchanged annual rate for the full term, no fees and no overpayments.
- At 4%, the monthly payment is £791.76. The total repaid is £237,526.58, including £87,526.58 in interest.
- At 3.5%, the monthly payment is £750.94. The total repaid is £225,280.61, including £75,280.61 in interest.
The difference in this illustration is £12,245.97 over 25 years. Actual payments and interest can differ because rates, product terms, fees, payment dates and lender calculations vary.
What interest rate will I pay on my mortgage?
Common mortgage rate types include fixed rates and variable rates. The MoneyHelper guide to mortgage interest-rate options explains these options in more detail.
Fixed-rate mortgages
With a fixed-rate mortgage, the rate and scheduled payments are fixed for the agreed deal period. That can help you budget, but the rate, fees and early repayment charges still need comparing with other products. Fixed periods are often two or five years, and longer fixed periods are also available.
Tracker mortgages
Tracker mortgages follow a stated reference rate plus or minus a stated margin. For example, a hypothetical tracker at “reference rate + 2 percentage points” would be 5.75% if the reference rate were 3.75%. The product terms set which reference rate is used, when changes take effect and whether a floor or collar applies. A tracker may run for an introductory period or for the mortgage term.
Standard variable rate and discounted-rate mortgages
An SVR is set by the lender and may change under the mortgage terms; it is not the same thing as a tracker. A discounted-rate mortgage is usually a stated discount in percentage points from that lender’s SVR. For example, an SVR of 6.2% with a 2 percentage-point discount would produce a rate of 4.2% while that SVR and discount apply.
When an initial deal ends, the mortgage moves to the follow-on rate in its contract, which is commonly the lender’s SVR. This is not universal: a lifetime tracker and some other products can have different arrangements.
How should you compare mortgage costs?
The lowest initial rate is only one part of the comparison. Consider the initial rate and the contractual follow-on rate, the loan-to-value (LTV) band, deal length, product or booking fees, advice fees where applicable, valuation or legal costs where applicable, and any incentives.
Also check early repayment charges (ERCs), which can apply if you repay, remortgage or move the loan during a deal period, and the product’s overpayment allowance. These terms vary: do not assume a particular fee, ERC or overpayment limit applies to every mortgage. If a fee is added to the loan, interest can be charged on it.
APRC is a standardised annual measure of the whole-term cost of borrowing, including relevant charges, under stated assumptions. It is useful for comparing illustrations, but it is not a forecast of future variable rates or a measure of every property-purchase cost. Compare the pound cost over the period you intend to keep the deal as well as the APRC.
Before the deal ends, compare an existing-lender product transfer with a remortgage. Whether either is available or worthwhile depends on eligibility, the property’s valuation, the costs and the product terms.
What can affect the rate you are offered?
There is no single mortgage type that always has the lowest rate or overall cost. The appropriate comparison depends on the specific product, your LTV, fees, deal duration, affordability and requirements. A fixed rate may offer payment certainty for a period; a variable rate may change. Neither point alone tells you which deal will cost less for your circumstances.
Lenders assess an application using their own criteria, including income, commitments, affordability, credit history and the property. A consumer credit score can help you understand your credit file, but it is not the lender’s lending decision.
A larger deposit or lower LTV can widen access to more competitive deals, but it does not guarantee approval or a lower rate in future. The lender’s valuation and market conditions can also affect the LTV and available products.
Four steps to compare mortgage interest
Check your credit file and affordability
Check that the information in your credit file is accurate and consider your income, regular commitments and realistic monthly budget. This can help you prepare, but the lender applies its own affordability and eligibility assessment.
You do not need a paid credit-report subscription to apply for a mortgage. Checkmyfile advertises a seven-day free trial followed by £14.99 per month; review its subscription-management and cancellation information if you choose to sign up. Extend Finance may receive a small commission for sign-ups made through this Checkmyfile link. You can also read our guide on improving your credit score.
Review your deposit and LTV
A lower LTV (loan-to-value ratio) means borrowing a smaller share of the property’s value. Saving a larger deposit or reducing an existing balance may widen your options, but check the valuation, available products and any charge before overpaying an existing mortgage.
Compare the full cost over your intended deal period
Put comparable illustrations side by side. Include payments, the initial and follow-on rates, fees, incentives, ERCs and overpayment conditions, then compare the pounds you expect to pay during the deal period. APRC adds useful whole-term context but should not replace this comparison.
Speak to a mortgage adviser if useful
An adviser can help you compare options that may be suitable for your circumstances. Ask what service and product range is covered, how recommendations are made and what fees may apply. Extend Finance offers a free initial discussion with no obligation to proceed; we explain the scope of our service and any fees for further work before you decide whether to go ahead.
Your home may be repossessed if you do not keep up mortgage repayments.
For help comparing mortgage options, arrange a free initial consultation with Extend Finance.
FAQ
Frequently asked questions
Why are mortgage interest rates important?
Mortgage interest is the charge for borrowing. On a repayment mortgage, a higher rate can increase the interest in each payment and the overall cost; the amount also depends on the balance and product terms.
What interest rate will I pay on my mortgage?
It depends on the product. A fixed rate stays unchanged for its deal period, while tracker, SVR and discounted-rate mortgages can change under their terms. Check the initial and follow-on rates and how any change is calculated.
How do tracker and discounted-rate mortgages work?
A tracker follows a stated reference rate plus or minus a margin. A discounted-rate mortgage applies a stated percentage-point discount to the lender’s own SVR. The contract sets timing, floors or collars and what happens when the deal ends.
What should I compare besides the initial mortgage rate?
Compare the LTV band, deal period, follow-on rate, fees, incentives, ERCs and overpayment conditions. Look at the pounds you expect to pay over the intended deal period as well as the APRC.
Does a good credit score guarantee a mortgage?
A consumer credit score is not a guarantee. Lenders use their own assessment of your credit history, income, commitments, affordability, the property and their criteria before deciding whether to lend.
