Mortgage interest rates explained
Quick answer: Mortgage interest is the fee you pay to borrow money to buy your home. A higher rate means higher repayments. Fixed-rate deals lock the rate you pay, while variable-rate deals can change — often with the Bank of England base rate. It’s important to compare the rate, fees and total cost, not just the headline rate alone.
What are mortgage interest rates?
Interest is the money you pay a 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.
For more detail on how buying a home works, see our guide on what is a mortgage.
How are mortgage rates set?
Mortgage rates are set by the lender, based on two key factors.
First, market conditions. Lenders look at things such as how high inflation is, and how aggressively other lenders are pricing their deals. The Bank of England base rate also plays a huge role. This is how much the Bank of England charges banks when they borrow money. Mortgage rates tend to rise and fall in line with the base rate.
The second key thing lenders look at is how risky you are to lend to. To work this out, they’ll look at your credit history, your income and expenses, and how much you want to borrow.
The rate you get offered will also depend on whether you choose a fixed, variable or tracker product.
What is the current rate of interest on mortgages?
There’s no single current mortgage interest rate. Different lenders will have different rates, though all rates will be influenced by the Bank of England’s base rate. The rate you get offered will also depend on your personal circumstances, such as your type of mortgage, the size of your deposit, and your credit history.
How do mortgage interest rates work?
There are three interest rate options when it comes to choosing a mortgage — fixed, variable and tracker.
| Fixed rate | Variable rate | Tracker rate |
|---|---|---|
| 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 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. More about tracker-rate mortgages. |
For example, if the 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.
What is a good or high 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. Just remember, we’re a credit broker, not a lender.
Credit and Mortgage Expert
Our expert says
Remember, a mortgage is about more than just the headline interest rate. There may be additional fees, charges or early repayment penalties, so it’s important to consider the overall cost and make sure the mortgage deal is right for you.Jacqui Hamilton, Experian UK
What can you do if mortgage rates go up?
Firstly, a rise in the Bank of England rate will only affect you if you have a variable or tracker mortgage.
If you know interest rates are heading higher and you already have a mortgage, you could consider overpaying while your lower rate lasts. This means 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 mortgage, each year without charge. If you exceed the limit, you may get an early repayment charge. Calculate how much you could save with our overpayment calculator.
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 to get a lower 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. We’ve also got more detail on what credit score you need for a mortgage.
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
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.
FAQs
What is considered a high interest rate on a mortgage?
What is considered a high mortgage rate will change with market conditions. What is seen as high also depends on your own circumstances. For example, if you have a small deposit or a lower credit score, you are likely to be charged a higher mortgage rate. A good way to make sure you don’t pay more than you need to is to compare current mortgage deals.
What percentage of a mortgage payment is interest?
The exact percentage will constantly change. Because your mortgage reduces with every payment, the amount of interest you pay drops slightly each month. Early in a repayment mortgage, interest typically makes up 60% to 80% of your monthly payment. But by the end of your mortgage, this shrinks to nearly 0%.
Why do mortgage fees vary by lender?
Lenders price mortgages using the Bank of England base rate and other economic conditions, what their competition is doing, and how much business they want. Your own deposit, credit history and affordability can also change the rate you’re offered.