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How does mortgage interest work?
Every mortgage comes with its own interest. Mortgage interest can vary depending on your deal and the type of mortgage you have. However, it can help to know how mortgage interest works.
So, if you’re thinking of applying for a mortgage or looking to remortgage, this page is for you.
What is a mortgage interest rate?
A mortgage interest rate is the interest you’ll pay on the money you borrow to buy a property. The rate on your mortgage is shown as a percentage. For example, you may have an interest rate of 4% per month. This will either be added to your repayments each month or be charged alone as part of an interest-only mortgage.
Mortgage rates are often linked to the Bank of England Base Rate, also known as the Bank of England Bank Rate, but they are not the same thing. Here’s what each rate means:
- Interest rate
The percentage of interest you pay for any borrowing or earn on savings. - Mortgage rates
The interest rate for a mortgage deal. - Bank of England Base Rate
The rate the Bank of England charges banks and lenders when they borrow money.
How do interest rates affect your mortgage?
Mortgage interest rates can affect your mortgage in different ways depending on the type of deal you get. For example, a 4% interest rate on a fixed rate mortgage will stay the same for an agreed term. However, an initial 4% variable rate may change several times during your mortgage term.
Here’s how mortgage interest works for five common mortgage types.
What are the interest rates on Lloyds Bank mortgages?
Looking to apply for a Lloyds Bank mortgage? Take a look at the mortgage interest rates available to you before you apply.
How is mortgage interest calculated?
Lots of things can affect how your mortgage interest is calculated and the rates you are offered. While the type of mortgage can have an impact, your lender will look at other things too. Common factors may include:
Why do mortgage rates change?
Mortgage rates can be impacted by anything from inflation to the mortgage market. If you choose to get a variable rate mortgage, these interest rate changes can even impact your monthly repayments. So, it’s good to understand why they may change.
- Bank of England base rate
This is set by the Bank of England. Tracker mortgages that are linked to the base rate can see repayments change if the Bank of England’s interest rate goes up or down. While the base rate directly impacts tracker mortgages, it can also affect the rates lenders offer on a fixed rate deal too. - Lender decisions
Lenders tend to change their mortgage rates based on the Bank of England base rate and competitors in the market. But many lenders will take lots of factors into account when offering an interest rate for a mortgage.
How often are mortgage rates calculated?
The Bank of England monetary policy committee usually meets every six weeks to discuss the base rate and whether it needs to change. Tracker rates follow the movement of the Bank of England base rate, so will be calculated in line with this.
Fixed rate mortgages will stay the same for a set period depending on your current deal. Though the rate offered when you start a new deal may change based on the latest base rate.
Use our mortgage rate change calculator to learn how much your monthly payments may be if your interest rate changes.
Frequently asked questions
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You can usually look to secure a new mortgage deal if you have less than 6 months left on your current mortgage. If you want to switch before then, you may still be able to, but it may result in an early repayment charge (ERC).
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How often mortgage interest is calculated varies between lenders and mortgage products. Most mortgage interest is calculated and charged monthly. However, some lenders calculate interest daily and charge it monthly.
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Many factors can contribute to you getting the best mortgage interest rate available. Factors that might contribute include:
- Deposit
A larger deposit can lower your mortgage amount and decrease the interest you need to pay. - Type of mortgage
Consider your options – from fixed to tracker mortgages – and see how your rate may change with a 2 year fixed rate mortgage compared to a 5 year fixed rate.
You can use our mortgage calculator to compare different deals and rates.
- Deposit
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Yes, remortgaging can potentially affect your interest rate. If your deal is ending and you want to avoid moving to a standard variable rate, you may be able to remortgage to get a better rate than the SVR. Be mindful of early repayment charges and exit fees.
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It will depend on the situation. You may be able to switch to a new rate if a better deal comes up during the application process. Renegotiation options will vary between lenders if you’re already within the deal period.
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