Mortgage rates and interest

Different types of mortgage rates

There are two main types of mortgage interest rates:

• Fixed-rate – the interest you’re charged stays the same for a number of years, typically between two to five years
• Variable rate – the interest rate you pay can change.

Fixed rates

The interest rate you pay will stay the same throughout the length of the deal, no matter what happens to interest rates in the market. You’ll see them advertised as ‘two-year fix’ or ‘five-year fix’, for example, along with the interest rate charged for that period. When this period ends, you’ll move onto a standard variable rate (SVR), unless you remortgage or secure a new rate with your existing lender. The SVR is likely to be significantly higher if you’re about to come off your fixed rate, which can lead to a big increase in your monthly repayments.

Pros:

• Peace of mind that your monthly payments will stay the same, helping you to budget.

Cons:

• Fixed-rate deals can be slightly higher than variable rate mortgages.
• There can be high early repayment charges (ERCs) if you want to end the fixed rate early.
• If interest rates fall, you won’t benefit.

Variable rates

With variable interest rates, the rate can change at any time. Make sure you have some savings set aside so that you can afford an increase in your payments if rates do rise. Variable rates are sometimes discounted for a period at the start.

Standard variable rate (SVR)

This is the interest rate a mortgage lender applies to their standard mortgage and often roughly follows the Bank of England’s base rate movements. If you’re on your mortgage lender’s SVR, you’ll stay on this product as long as your mortgage lasts or until you take out another mortgage deal. Because a lender’s SVR often follows the Bank of England rate, your rate might rise or fall after a change in the Bank of England base rate.

Pros:

• Freedom – you can leave at any time.

Cons:

• Your rate can be changed at any time during the loan.

Discounted rates

This is a discount off the lender’s standard variable rate (SVR) and only applies for a certain length of time, typically two or three years, but it pays to shop around. SVRs differ across lenders, so don’t assume that the bigger the discount, the lower the interest rate.

For example, two banks have discount rates:

• Bank A has a 2% discount off an SVR of 6% (so you’ll pay 4%)
• Bank B has a 1.5% discount off an SVR of 5% (so you’ll pay 3.5%).

Although the discount is larger for Bank A, Bank B will be the cheaper option.

Pros:

• Cost – the rate starts off cheaper, which will keep monthly repayments lower.
• If the lender cuts its SVR, you’ll pay less each month.

Cons:

• Budgeting – the lender is free to raise its SVR at any time.
• If the Bank of England base rates rise, you’ll probably see the discount rate increase too.

Watch out for charges if you want to leave before the end of the discount period.

Tracker rates

Tracker rates move directly in line with another interest rate – normally the Bank of England’s base rate plus a few per cent. So, if the base rate goes up by 0.5%, your rate will go up by the same amount. They usually have a short life, typically two to five years. Some lenders offer trackers which last for the life of your mortgage or until you switch to another deal.

Pros:

• If the rate it’s tracking falls so will your mortgage payments.

Cons:

• If the rate it’s tracking increases so will your mortgage payments.
• You might have to pay an early repayment charge (ERC) if you want to switch before the deal ends.

Watch out for the small print. Check your lender can’t increase rates even when the rate your mortgage is linked to hasn’t moved. It’s rare, but it’s happened in the past.

Comparing deals

When comparing these deals, don’t forget to look at the fees for taking them out, as well as the exit penalties. Make sure you seek advice from a qualified mortgage specialist to ensure you get the best deal.

Interest rates

What does a rise in interest rates mean?

Interest rates in the UK are set by the Monetary Policy Committee (MPC) of the Bank of England (BOE). This is the interest rate at which banks borrow from the BOE. When interest rates have increased, it means the MPC has decided to increase the base rate.

Banks are not obliged to follow Bank of England interest rate decisions, but they can influence the cost of borrowing or how much interest you can earn on savings.

The impact of interest rates rise on mortgages

When and if your mortgage repayments are affected by an interest rate change will depend on what type of mortgage you have and when your current deal ends.

If you have a variable rate tracker mortgage linked to the BoE base rate, you are likely to see an immediate impact on your mortgage repayments if there is an interest rate rise.

Those on a standard variable rate mortgage will probably see an increase in their rate in line with any interest rate rise. The change is decided by your lender, so this isn’t guaranteed but highly likely. If you’re unsure, check your mortgage terms and conditions in your original mortgage offer document.

People with fixed-rate mortgages are likely to be affected once they reach the end of their current deal. An interest rate rise could make re-mortgaging or a product transfer to a new fixed rate more expensive.

Having a financial plan in place

It’s a good idea to have a financial plan in place to deal with any potential interest rate changes. Current forecasts indicate that changes are likely to be small but steady, so while a 0.25% rise might not set alarm bells ringing, there have been five rate rises so far in 2023 which have had a significant difference to mortgage rates.

How to protect yourself against a mortgage rate rise

We’ve put together some information on how you can protect yourself against rises in mortgage rates. The first thing to check is what type of mortgage you’re on (if you don’t know this already). The effect of an interest rate rise depends on the type of mortgage you have.

If you’re on a tracker mortgage

If you’re on this type of mortgage, you may have found your payments increased with various hikes to the Bank of England’s base rate since 2021.

• Check what rising interest rates could mean for your monthly payments
• Check whether there’s an exit fee if you decide to switch over to a fixed-rate mortgage instead, as this could provide you with more stability
• Seek advice from a lender to help you find the best deal going forward

If you’re on a fixed-rate mortgage

The majority of people on a mortgage in the UK are on this type of mortgage. As it’s a fixed-rate deal, their mortgage rate won’t be affected by rises in interest rates, and the monthly payments will stay the same. If you’re on this type of mortgage, you’ll see a change in your monthly rate when your current fixed rate ends instead. When it comes to finding your next deal, be aware that the rises in rates over the last year mean your next fixed rate could be more expensive than what you’re currently paying.

• If you know your fixed-rate mortgage is coming to an end in the near future, plan ahead (even up to six months before it ends if you can).
• Pop a reminder in your diary to look into this as most lenders will offer new fixed-rate products which can be secured months in advance of your existing rate ending – which offers security should another rise come into play.
• Also bear in mind, though, if rates were to drop, you might lose your reservation fee to switch rates again – check out what’s on the market and available to you well in advance, and reach out to lenders for guidance too. (Under the Mortgage Charter, as of June 2023, you may be able to lock in a new fixed deal up to six months before your current fix ends, then if a new, better fixed rate becomes available from your lender, you can change your agreement up to two weeks before the new fixed rate deal begins.

If you’re on a standard variable rate mortgage

If you’re on a standard variable rate mortgage, things are a little more complicated. People sometimes find themselves moved on to this type of mortgage if their existing rate has ended and they haven’t chosen a new deal in time. With this type of mortgage, the interest rates tend to be higher than with other types, like the fixed-rate or tracker mortgages. The rates you pay each month can change at the discretion of the lender so if you choose to stay on this type of rate, it can be difficult to know what’s coming up each month and plan ahead.

• Do some research to see if you can switch to another type of product, which would make budgeting each month easier
• If you want to stay on this type of mortgage, have a look for a more competitive deal
• Consider the possibility of any fees you’ll need to take into account when comparing deals on the market
• Speak to your lender if you need some further guidance

Be mindful of fees

It’s important to check whether you’d incur any fees – such as an early repayment charge (ERC) – by switching when you’re mid-way through your current deal. A lender will be able to talk you through your options and help you identify the best way forward.

Seven tips for managing an interest rate rise on your mortgage

Find out what mortgage you’re on

How you’ll be affected by an interest rate rise depends on what mortgage you’re on and when your deal comes to an end. If you don’t know, check your paperwork or check with your mortgage provider.

Work out how an interest rate rise will affect you

Now you know what mortgage you’re on, you’re in a better position to find out how this will affect your finances and when you’re likely to see this change. Use the MoneySavingExpert Calculator to work out the impact.

Work out what you can afford

If your mortgage repayments are likely to go up, work out if you can afford the increase. Create a budget and see if there are any areas you might be able to cut back. If the increase is likely to be in the future, then start building up a savings buffer so you’ll be able to afford your mortgage when they happen.

If you’re worried about how to afford this

You don’t have to be in debt to seek help. A debt advisor can help you budget and assess your Income and Expenditure early before you get into financial difficulty – we’re here to help! Speak to your lender about available options they can help and support with, such as extending the term or making reduced payments – but don’t stop paying.

Build up your credit score

It might seem a strange time to be focussing on this, but by working to improve your credit score, you’ll be able to get a better deal when your deal comes to an end or it’s time to remortgage.

Make sure you’re on the best deal

If your current deal is coming to an end, look at switching to make sure you’re on the best rate. A lot of lenders will let existing customers secure a new rate up to six months before their existing one ends. It can also be worth looking around at different lenders if you’ve got some time left on your current deal. You might have to pay some fees but, if the savings are worth it, it’s worth considering remortgaging, especially if your property value has increased since you took out your original mortgage.

Overpay your mortgage

It might be a little while before an interest rate rise hits you in the pocket, so take advantage of the low rate you’re currently on and pay extra if you can. There are limits on how much you can overpay, and there might be charges, so check with your mortgage provider first.