Many people freeze like deer in the headlights at the mere mention of mortgage interest rates. Their eyes glaze over at terms like loan-to-value, standard variable rate and fixed rate, but mortgages don’t have to be that complicated.
Many people freeze like deer in the headlights at the mere mention of mortgage interest rates. Their eyes glaze over at terms like loan-to-value, standard variable rate and fixed rate, but mortgages don’t have to be that complicated. Come with us while we explain the different mortgage interest rates in the UK. Afterwards you should be able to make an informed decision about which mortgage (and mortgage rate) is best for you.
A good deposit is important
The bigger your deposit, the lower your interest rate. According to Money Super Market, the best mortgage rates are reserved for people who can put up at least a 40% deposit, but even a 10% deposit can get you relatively low interest rates.
When you’re shopping around for mortgages, one of the terms you need to look out for is loan-to-value (LTV). LTV is the deposit to loan value, so mortgage deals with a 90 LTV require a 10% deposit, while a 60 LTV deal requires a 40% deposit. 90 LTV mortgages are great for first-time buyers because they don’t have to come up with a massive deposit to get on the property ladder, while 60 LTV deals are more accessible for those who are moving up the property ladder as they have more equity.
Your mortgage term also affects your interest rates. For instance, you might be able to get comparably cheap interest rates on a 30-year mortgage, but overall you’ll pay more interest than on a 20-year mortgage with slightly higher interest rates. You need to decide whether you want to save money now or in the long-term. Remember that when you’re talking decades, even a small difference in interest rates can be significant.
Interest rates and the different types of mortgages
National interest rates are determined by the Bank of England Monetary Policy Committee, which sets the base rate. The base rate affects mortgage interest rates, but the two are seldom the same. The type of mortgage that you have also affects your interest rate, so let’s break them down.
- Fixed-rate mortgages
A fixed-rate mortgage is when your interest rate doesn’t change for a predetermined period of time (between one and five years, according to Zoopla). You might get a great deal on fixed interest rates for that time, but when the period expires, you could suddenly find yourself paying much higher mortgage rates on a standard variable basis. You should start shopping around for good mortgage rates (fixed or otherwise) two to three months before the term ends and consider switching mortgage providers if you find a better deal. Just be sure that you won’t have to pay hefty termination fees when you leave your current mortgage provider.
- Tracker mortgages
Tracker mortgages effectively track the base rate, so any difference to national interest rates will have a direct impact on your mortgage repayments. Tracker mortgage deals often allow you to overpay every month so you can pay off your mortgage more quickly, but like fixed-rate mortgages, they’re usually only available for a limited period of time before the lender applies standard variable rates.
- Standard variable rate mortgages
Standard variable rate mortgages use the base rate as a guide, but mortgage providers can change their interest rates whenever they choose. This means that your interest rates are dependent on your mortgage provider and not the BoE, which can make proper budgeting interesting. Standard variable deals last the entire term of your mortgage. According to Money Advice Service, they don’t usually charge penalty fees for overpayments or for switching to a different provider.
- Capped-rate mortgages
Capped mortgage interest rates are also determined by your provider’s standard variable rate, but only up to a capped (maximum) percentage. According to Zoopla, while capped rates minimise the risk of escalating interest rates, they can be higher than other types of mortgages to compensate for the cap. So you could end up paying the same interest overall as other types.
- Daily interest mortgages
As a rule, interest is calculated on a yearly basis, so even if you are able to overpay every month, the difference to your capital amount will only be reflected when the financial year ends. Some mortgage lenders have taken to calculating interest daily (or monthly or quarterly), which means that any overpayments immediately affect your overall balance. This means you could pay off your mortgage much sooner than you expect.
You should always compare mortgages from different providers before making a final decision. You can use online mortgage comparison sites or you can consult a mortgage broker. If you’re going to compare mortgage deals on your own, you need to consider more than just the interest rates. You also need to look at all associated costs and fees, especially if there are early repayment fees or termination or exit fees. You don’t want to be penalised for overpaying your mortgage and reducing your overall mortgage term. And you don’t want to be penalised for finding a better deal elsewhere.
While you’re sorting out all the mortgage rigmarole, you can start approaching estate agents to find a house in your (estimated) price range. Tepilo not only helps people sell houses online, but we can help you find property too.