How does mortgage interest work?

Every mortgage comes with its own interest rate. This determines how much interest you’ll pay to cover your borrowing costs. But mortgage interest can work in different ways depending on your deal and the type of mortgage you have.

The headlines

  • Mortgage interest is the charge for your borrowing costs, based on the mortgage rate set by your lender.
  • The longer your mortgage term, the more interest you could end up paying overall.
  • Your mortgage type can also impact how your mortgage interest works – for example, fixed and variable rate mortgages work differently.

In this guide

What is mortgage interest?

What is a mortgage interest rate?

What determines your mortgage interest rate?

How does the interest rate affect your mortgage?

What are Lloyds mortgage rates?

Why do mortgage rates change?

How often do mortgage rates change?

Frequently asked questions

What is mortgage interest?

Mortgage interest is the cost you pay to borrow money. The amount of interest you pay is determined by your mortgage interest rate and the type of mortgage you have.

  • On repayment mortgages – you pay off the loan balance, or capital, as well as interest so you reduce the amount you owe. 
  • On interest-only mortgages – you only pay off interest, so the loan balance doesn’t reduce and must be paid in full at the end of the mortgage term.

What is a mortgage interest rate?

A mortgage interest rate is the percentage of interest you pay on the money you borrow to buy a property. This determines how much interest you’ll pay on your mortgage to cover the cost of borrowing. For example, you might have an interest rate of 4% on your mortgage deal. 

Mortgage interest rates are usually influenced by the Bank of England base rate, also known as the Bank Rate. But they are not the same thing.

  • Mortgage interest rate – 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.

What determines your mortgage interest rate?

Loan-to-value (LTV) ratio

The amount of your house you own, known as loan-to-value, has an impact on what rates a lender offers you. Usually, if you have a lower LTV, the lower your rate could be. If you have a high LTV, your rate could be higher.

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The deposit size

The money you borrow when you take out a mortgage is worked out by taking away your deposit from the value of your new home.

A higher deposit gives a better loan-to-value ratio, which means you’ll probably be offered lower interest rate deals.

Type of mortgage

Different types of mortgages could have different interest rates. For example, fixed-rate and tracker mortgages will usually have different rates.

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Length of your deal

The rates offered may be different depending on how long your deal is. For example, interest rates on a 5 year deal will usually be different to rates on a 2 or 3 year deal.

Bank of England base rate

The Bank of England base rate influences how lenders set their rates. And if you have a tracker mortgage, your interest rate will change if the Bank of England base rate changes.

Bank of England base rate and your mortgage

How does the interest rate affect your mortgage?

Mortgage interest rates affect your monthly repayments. Your rate can be affected by the type of mortgage you have. For example, a fixed-rate mortgage will have the same rate for a set period, but a tracker mortgage rate could change.

Here’s how mortgage interest works for 5 different mortgage types.

Fixed-rate mortgage

As the name suggests, the mortgage rate for a fixed-rate mortgage stays the same for a set period. This is usually between 2 to 5 years, but it can go up to 10 years. 

It means you’ll pay the same percentage of interest on your monthly repayments during that time. This could make it easier to budget over the initial term.

Tracker mortgage

A tracker mortgage is a type of variable rate mortgage that is linked directly to the Bank of England base rate. As the base rate rises or lowers, so does your interest rate. 

These types of mortgages usually track the base rate for a set period.

Standard variable rate (SVR)

You’ll usually move on to a standard variable rate (SVR) at the end of your mortgage deal. This rate is set by your lender and can change during your term. This means your payments could go up or down each month. 

The SVR may be affected by the Bank of England base rate, but it’s not directly linked.

Capped mortgage

Capped mortgages have a set limit on the mortgage interest rate applied to your deal. This means your repayments won’t go over a certain amount each month but can still change during your term. 

Your mortgage rate could also drop if interest rates drop, which means you’ll pay less.

Offset mortgage

The rates for offset mortgages can be either fixed or variable. The mortgage is linked directly to your savings, which are used to reduce the interest paid on your mortgage.

What are Lloyds mortgage rates?

 
Lady looking at mobile phone

We have a range of rates for different mortgage types, from fixed to tracker rate mortgages. Simply tell us about your deposit size and mortgage term and we’ll give you a personalised rate. 

Use the mortgage rate calculator

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 do mortgage rates change?

The Bank of England meets around every 6 weeks. If the base rate changes, tracker mortgage rates will change as well. 

If you have a fixed rate, it won’t change during your deal, even if the base rate changes. But rates for new deals may have changed, so they may be higher or lower than your current rate by the time your deal ends.

Is your mortgage rate changing?

See how a rate change might impact your mortgage interest and monthly repayments.

Use the mortgage rate change calculator 

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The content on this page is for reference and does not constitute finance advice.

For impartial financial advice, we recommend government bodies like the MoneyHelper.