Mortgage interest rates explained

What is a mortgage interest rate? 

Wondering how mortgage interest rates work? This guide breaks it down for you. From initial rates to APRC, let's help you understand exactly what you're paying, and why.

A mortgage interest rate is what you're charged by a lender to borrow money to buy your home. It's shown as a percentage and helps determine how much you'll pay each month (and in total) over the lifetime of your mortgage.

Over time you need to repay your lender both the amount you borrowed from them, plus interest.

The total amount you repay to your lender depends on the interest rate of your mortgage. The higher the interest, the more you repay over time.

And remember interest rates can go up or down; so it's important to consider whether you could afford higher monthly payments in the future.

Why do interest rates differ? 

You'll notice different mortgage deals offer different interest rates. This is because of things like:

• Term length: how long you agree to make repayments for.
• Loan to value (LTV) ratio: how much of the property's value you're borrowing. 
• Broader economic factors: like the Bank of England base rate.

What is an initial rate? 

The initial rate is the interest rate you pay at the start of your mortgage deal. If you choose a fixed rate mortgage, this initial rate will stay the same for the term of your deal. (For example, 2, 3, or 5 years - how ever long your fixed deal is for).

After this period you'll usually move to a different rate, unless you switch to a new deal. 

Here's an example:
You take out a £200,000 mortgage, fixed at 4.93% for two years. 

• Your monthly repayments would be £1,065.
• After two years, you'll move to the standard variable rate (SVR) unless you switch to a new deal. 
• In this examplae, let's imagine the SVR is 5.95%. Your monthly payments would increase to £1,192. 

What is a standard variable rate? 

Standard variable rate (SVR) is the interest rate you automatically move onto when your initial deal ends; unless you switch to a new mortgage deal.

Each lender sets their own SVR and it can go up or down, usually influenced by changes to the Bank of England base rate.  

If you're on an SVR mortgage, your monthly payments can fluctuate. So it's important to keep an eye on the SVR rate and review your mortgage regularly. 

What is the 'overall cost for comparison' (APRC)? 

The Annual Percentage Rate of Charge (APRC) shows the total cost of the mortgage over its full term, expressed as a percentage. It includes:

• The initial interest rate
• The lender's standard variable rate (SVR)
• Any fees, like arrangement or booking fees

The APRC is designed to help you compare mortgage deals from different lenders more fairly. Especially as some mortgage deals can come with tempting low introductory rates.

It's a good idea to look at the APRC; not just the headline rate. The APRC aims to give you a better idea of the total cost of what you borrow. 

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