How do mortgage interest rates work?
When choosing your mortgage, whether it’s your first or you’re a seasoned home mover, a buy-to-let investor or a remortgager, the interest rate you’ll pay and the length of your mortgage term are important factors to consider. Here we explain how mortgage interest rates work with answers to some frequently asked questions.
What does my mortgage interest rate mean?
Mortgage interest rates determine how much you'll be charged to borrow against a property and what your monthly repayments will be over the term. Your interest is essentially the price that you pay to borrow a large sum of money. The interest rate therefore is what it actually costs you as a percentage of the sum, which will be added on top. Mortgage lenders will all charge different rates for different circumstances with different products. The higher the interest rate and the longer the term, the more the borrowing will cost you.
Any amount of interest to pay on a loan means that you will pay back more than the amount you have borrowed.
How are mortgage interest rates set?
There are a number of factors that contribute to how mortgage rates are set which include:
- The cost to the lender of funding its mortgages. If they have easier access to funds for their mortgages or it’s cheaper for them to raise funds, the rates may be lower;
- The Bank of England Base Rate which often drives rate change and will usually have an impact on pricing of mortgage products;
- The competition in the market for mortgage products, for example if lenders want more business they will decrease their rates.
What determines the mortgage interest rates that I can access?
There are a few factors that determine which interest rates may be available to you.
The larger the deposit you have, more products on the market should be able to choose from which means the chance of getting a lower interest rate is higher. The risk is lower to the lender if you have a larger deposit as this is calculated by the loan-to-value (LTV) ratio. If you have a larger deposit then your LTV is lower and you’ll have more equity (the part you actually own) in the property. Therefore, if you default and cannot pay back the loan, the lender is likely to make less of a loss, which means they may consider you to be lower risk than someone with a smaller deposit.
Your credit history
This is the record of how you have behaved as a borrower in the past and could have an effect on your chances of getting a mortgage. If you have anything that flags up to lenders as negative on your credit report then you may not be able to borrow from them or they may charge you a higher rate. View our guide on how to improve your credit score.
How do I get the right mortgage interest rate?
The right mortgage interest rate and product for you will vary greatly from person to person and you will have to meet certain criteria that each lender will measure you up against. The goal may be to be approved for the lowest mortgage interest rate you can and this means working on your credit score and building up a good deposit as well as shopping around the market to make sure you're getting the pick of all the deals. Remember, there are lots of lenders out there and even more mortgage products so it may be tricky to find the right one all by yourself.
Everyone is unique and whatever your circumstances, Nottingham Mortgage Services will try to find you the most suitable deal with their impartial mortgage advice. Nottingham Mortgage Services search over 60 lenders and hundreds of different mortgages to find the right one for you. Get in touch online or call the team of advisers on 0344 481 0013 for expert mortgage advice. Remember, the wider the search, the better the deal.
Check out our Types of Mortgage Explained essential guide to read about the differences between repayment and interest only mortgages, as well as the features of SVR, discount, tracker and fixed rate mortgages.
Last updated on:
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE