Mortgage interest – key information

Interest rates and mortgage interest are crucial factors when buying a property. In today’s article, I’ll explain what determines them and what you can do to keep them as low as possible.

The interest rate on the mortgage affects the interest and the monthly repayments we will make.

I think this information will be useful to our readers. It is particularly relevant given that we are currently experiencing high inflation in the UK and many other countries. One of the ways to combat inflation is to raise interest rates, which results in higher borrowing costs.

By knowing how to find a mortgage with a lower interest rate, we can offset these increases to some extent.

Why are mortgage interest rates important?

The mortgage interest rate determines how much the outstanding balance of the mortgage will increase each month. The higher the interest rate, the higher the monthly mortgage payments. Interest rates are always calculated as a percentage of the outstanding mortgage balance.

If you have a mortgage with capital repayments – which most people do – you will pay a set amount of the balance each month plus interest. People with an interest-only mortgage pay interest but do not repay the capital.

Even a small change in the mortgage interest rate has a real impact on the interest charged and the total cost of the mortgage. For example, if we borrow £150,000 over 25 years at an interest rate of 4%, we will pay £792 each month and the total cost of the mortgage will ultimately be £237,527.

However, if we manage to find a mortgage with a lower interest rate, say 3.5%, the monthly repayment will be £751 and the total cost of the mortgage £225,281. The difference will be as much as £12,246, so it is worth making every effort to find the right mortgage.

What interest rate will I pay on my mortgage?

There are two main types of mortgage interest rates:

• With a fixed-rate mortgage, the interest you pay remains the same for a number of years, usually between two and five years.

• With a variable interest rate, the interest rate you pay may change.

(source: What are the different types of mortgage interest rates?)

Fixed-rate mortgages

With fixed-rate mortgages, the bank guarantees that the interest rate and monthly repayments will not change for a set period. As I mentioned, this is usually two or five years, but there are fixed-rate mortgages available for 10 or even 15 years.

Variable-rate mortgages

With variable-rate mortgages, the interest rate can rise or fall from month to month, which means that the amount you pay can change.

Most variable-rate mortgages track the Bank of England’s base rate, which currently stands at 3.75% (March 2026).

The interest rate may be described as ‘base rate + 2%’, meaning that the actual mortgage rate will be 7.25%, but if the base rate changes, your interest rate will also change.

Tracker mortgages can be as short as two years or last for the entire term of the mortgage.

Discount mortgages are subject to the lender’s standard variable rate (SVR), which the lender sets and may change at any time, with a specific percentage discount applied. So, if the lender’s SVR is 6.2% and your discount is 4%, you will pay 2.2%.

For most mortgage deals, once the initial period ends, the interest rate will revert to the lender’s SVR. SVRs are usually relatively high, so it is often worth remortgaging before switching to the SVR (read our article: Mortgage: How does it work?).

Which mortgages have the lowest interest rates?

Generally speaking, interest rates on fixed-rate mortgages are higher than those on variable-rate mortgages.

This is because you pay a little more for the guarantee that your monthly payments will remain unchanged for a longer period.

The same logic applies to longer-term fixed-rate mortgages, lasting five years or more. The lender takes on greater risk by offering these mortgages, as interest rates in the wider market may rise during that time, so a long-term fixed rate will often be higher than a short-term one.

How do you get the best mortgage rate?

The right deal for you will depend on your circumstances and what you expect from a mortgage. In most cases, you will need to meet certain conditions to qualify for the most competitive rate on offer.

4 steps to reduce your mortgage interest:

Make sure you have a good credit rating

Lenders scrutinise your credit history very closely when assessing your application – they want to ensure that you will be able to repay the mortgage and weed out any potentially unreliable borrowers. The better your credit rating, the greater your chances of being granted a mortgage.

Our company recommends Checkmyfile.com, where you can check your credit score for free for 7 days (after that, the monthly cost of using the service is £14.99). Extend Finance will receive a small commission from Checkmyfile for sign-ups. You can find a useful guide on improving your credit rating in the UK on our blog, entitled ‘How to improve your credit score? 9 important tips for borrowers’

Build up a larger deposit

The best interest rates are reserved for borrowers with a lower LTV (loan-to-value ratio) – that is, those borrowing a relatively small percentage of the property’s value. You can achieve this by saving up a larger deposit or, if you already own a property, by overpaying your existing mortgage (in this scenario, you’ll pay lower interest rates on the remortgage).

Compare multiple offers

We live in the internet age, and comparing different offers – including mortgage deals – takes literally just a few seconds. There are dozens of mortgage lenders on the market, ranging from the big, well-known names to lesser-known brands, all vying for your business. Most lenders publish at least some of their offers online. You can access these offers individually or use websites that compare them. Simply type phrases such as ‘compare mortgages’ or ‘best mortgage in the UK’ into Google to quickly find price comparison sites.

As mentioned, the sums involved are quite substantial, so it’s worth spending a few hours of your free time comparing numerous offers and taking notes to find the most competitive deals.

Use the services of an independent mortgage broker

Mortgage advisers not only know the various products on offer but are also able to advise which lenders are most likely to approve your application. Whole-of-market mortgage brokers often have access to mortgage offers that cannot be obtained directly.

Our company, Extend Finance, is a whole-of-market mortgage broker in the UK and, over the last few years, has helped many clients find and secure the right mortgage. Please do get in touch if you need a mortgage adviser who can review the mortgage options available on the market and advise you on which one to choose.