Mortgage Rates: What You Need To Know

Taking out a mortgage is common when buying a house, but many people do not fully understand the nuances of how mortgage rates could influence the total amount you pay over time. Especially for first time buyers, understanding mortgages is an essential step in your home-buying journey. Within this guide, we aim to provide you with enough of the information you need to know to help you make an informed decision.

What is a mortgage interest rate?

When you take out a mortgage, you will be charged interest on the amount of money you borrow to buy the property. You will pay back the loan in monthly repayments for a set amount of time. You must keep up with repayments on your mortgage otherwise your home could be repossessed, so it is important to choose the right mortgage for you.

Types of mortgage rates 

There are two main types of mortgage interest rates – fixed rate and variable rate. Fixed rate means that the interest you’re charged will stay the same for a set number of years, usually between two and five. Variable rate means that the interest rate can change over time, based on a number of factors.

Let’s look at these in a little more detail:

Fixed interest rate mortgages

Despite interest rates fluctuations in the market, a fixed interest rate will remain the same throughout a designated period of time. This means that you can have peace of mind and can budget more effectively knowing the exact amount of money you’ll pay each month. The disadvantage of choosing this type, however, is that if interest rates fall you won’t benefit and may end up spending more overall.

As you reach the end of your fixed deal, you should investigate mortgage deals elsewhere otherwise you’ll be automatically moved to your lender’s standard variable rate (SVR).

Variable interest rate mortgages

A variable rate mortgage means that the interest rates could change at any time. Standard variable rate (SVR) is an option but it is commonly a lender’s most expensive rate. It can be linked to the Bank of England’s rate but there are also other factors which could see your lender raise or lower the rate at any time. This means that your rate could rise or fall depending on changes in the Bank of England’s base rate or factors solely affecting your lender. It is recommended to shop around, as you will nearly always find better rates than the SVR.

Tracker rates are similar but move in line with the Bank of England base rate. Often you will see these advertised as ‘base rate +1%’. We would recommend taking the time to fully understand the ways in which your mortgage rate could change on a variable rate before signing on the dotted line.

Cheapest mortgage rates 

Overall, fixed-rate mortgages tend to be a lower rate than variable offers. Should interest rates rise, a fixed rate mortgage will protect you against this for the period of your fixed term. On the flip side, however, variable rates could get you access to a cheaper mortgage rate in the short to medium term if the BoE base rate starts coming back down which would also result in mortgage rates falling.

You can compare mortgages using the Annual Percentage Rate of Charge (APRC), where lenders provide you with the total cost of the credit over the entire term of a mortgage loan.

Should I fix it for 2 or 5 years?

Interestingly, according to Rightmove, 2-year deals are more expensive than 5-year deals as of September 2023. If you’re looking for the cheapest deal, you would benefit from opting for a 5-year fixed rate mortgage. One thing to note is that although a 5-year deal may be cheaper currently, you may not be able to take advantage if interest rates do drop during that period.

The challenge currently is to determine whether you are best to take out a 2-year deal and pay more in the short term but have more chance of benefiting from lower rates after this, or to have guaranteed payments for 5 years which could be cheaper. A mortgage broker could guide you through this decision and compare hundreds of lenders to save you time and money.

If you want to switch your mortgage before the end of the 2 or 5 year term, you would need to consider the costs of the lender’s “early redemption” fees. These are often very expensive and prohibitive. You can’t simply change from your current fixed term to another cheaper deal until the end of your fixed rate deal. You should take this into consideration when deciding which mortgage term is best for you.

What gets you a better mortgage rate?

Here are some simple ways to improve your chances of getting the most affordable rate on your mortgage:

1. Improve your credit score

Lenders will offer better rates to people with strong credit scores and credit histories. You could take steps to improve your credit score and demonstrate that you are a reliable customer to try and receive a better rate. You can check out your current credit score for free online from many different websites.

2. Save for a bigger deposit 

The higher your down payment is, the better interest rate you may be offered. Since lenders will be facing less risk if you have put down a large deposit, it is recommended that you save as much as you can in advance.

3. Shop around

The way to find the best deal is to explore all of the options available. You might want to shop around yourself or get the help of a mortgage broker who could offer you more specialist advice.

Choose the best mortgage for you

Ultimately, many different factors can influence the mortgage rate you’ll be offered, and you can take steps to ensure you have all of the options available before making your decision.

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