When you’re applying for a mortgage in the UK, one of the most important factors to understand is the type of interest rate attached to your loan. It affects not just how much you pay each month, but also how your repayments might change over time, and how much you’ll end up paying overall.
Interest rates can vary depending on the lender, the mortgage product, your financial situation, and the broader economic environment. Knowing the different types of interest rates can help you make a more informed choice and choose the mortgage that best suits your needs, whether you’re a first-time buyer, moving home, or remortgaging.
Let’s explore the most common types of mortgage interest rates in the UK, how they work, and the pros and cons of each.
Fixed Interest Rates
A fixed-rate mortgage offers an interest rate that remains the same for a specified period: commonly two, five, or even ten years. This means that your monthly mortgage repayments will stay consistent, regardless of changes to the Bank of England base rate or the wider economy.
The appeal of a fixed rate is predictability. You know exactly how much you’ll be paying each month, which makes it easier to budget and offers peace of mind. This is especially helpful for first-time buyers or anyone concerned about rising interest rates.
However, fixed-rate mortgages tend to have slightly higher initial interest rates compared to variable deals. They also often come with early repayment charges (ERCs) if you want to switch or pay off your mortgage during the fixed period.
When the fixed term ends, your mortgage usually reverts to the lender’s Standard Variable Rate (SVR), which can be significantly higher, so many borrowers choose to remortgage at that point.
Variable Interest Rates
With a variable-rate mortgage, the interest rate can change over time. This means your monthly repayments can go up or down, depending on various factors, most often changes in the Bank of England base rate or decisions made by your mortgage lender.
Variable-rate mortgages come in several forms, including tracker, discount, and standard variable rates.
Tracker Rates
A tracker mortgage is a type of variable mortgage that “tracks” the Bank of England base rate, plus a set percentage. For example, if your tracker mortgage is base rate + 1%, and the base rate is currently 5.25%, your interest rate would be 6.25%. If the base rate goes up or down, your mortgage rate will follow.
Tracker mortgages are transparent and easy to understand, as they’re directly tied to an external benchmark. They can offer lower rates than fixed mortgages in a low-interest environment, but they come with the risk of increased payments if the base rate rises. Most tracker deals last for an initial period, such as two or five years, before switching to the lender’s SVR.
Discount Rates
A discount-rate mortgage gives you a discount off the lender’s Standard Variable Rate (SVR) for a set period, such as two or three years. If your lender’s SVR is 6.5% and your discount is 1.5%, your interest rate would be 5%; but it can still change if the SVR changes.
Discount mortgages can be cheaper than fixed-rate products at the outset, but they’re less predictable. Because they’re linked to the lender’s SVR (which isn’t directly tied to the Bank of England base rate), your payments can go up even if the base rate doesn’t. These deals often include early repayment charges and may not offer the same transparency as tracker mortgages.
Standard Variable Rates (SVRs)
The Standard Variable Rate is the default rate your lender moves you onto once your introductory fixed, tracker, or discount period ends, unless you arrange a new deal. Each lender sets its own SVR, and it can change at any time.
SVRs are usually the highest type of interest rate a borrower can be on. They offer flexibility, there are rarely early repayment charges, but they lack the security of fixed rates and the clarity of tracker rates. Because they can be adjusted at the lender’s discretion, it’s usually best to remortgage before falling onto the SVR.
Interest-Only vs. Repayment Mortgages and Interest Rates
It’s worth noting that interest rates also interact differently depending on whether you have a repayment mortgage or an interest-only mortgage. With a repayment mortgage, your monthly payments cover both the interest and some of the loan capital, so you gradually pay off the debt. With an interest-only mortgage, you only pay the interest each month, and you’ll need a separate plan to repay the original loan amount at the end of the term.
Interest-only deals may offer slightly lower monthly costs initially, but they carry greater risk and are subject to stricter eligibility criteria. The type of interest rate (fixed, tracker, etc.) still applies, but how you repay the loan can affect your lender’s willingness to offer specific deals.
Which Interest Rate Type Is Right for You?
Choosing the right interest rate type depends on your personal circumstances, financial goals, and appetite for risk. If you prefer certainty and want to lock in a specific payment amount, a fixed-rate mortgage may be best. If you’re comfortable with some uncertainty and want to take advantage of falling rates, a tracker or discount mortgage could offer savings.
Before making a decision, consider the following:
- How much can your budget stretch if interest rates rise?
- Do you plan to stay in the property long term, or might you move?
- Are you likely to overpay your mortgage or pay it off early?
- Would you benefit from the flexibility to remortgage or switch lenders without fees?
Understanding the different types of mortgage interest rates is key to making a smart financial decision when buying a home. Whether you choose a fixed-rate for stability, a tracker to follow the base rate, or a discount deal to save in the short term, it’s important to weigh the pros and cons carefully.
If you’re unsure which option is best for you, speaking with an experienced mortgage broker can make the process easier. They’ll help you assess the available deals (particularly if you’ve experienced bad credit), explain how rate types affect your repayments, and guide you towards a mortgage that suits your long-term goals.
