MORTGAGE RATES
The interest rate on a mortgage affects how interest is charged and can affect the amount you pay each month. Some mortgages provide a fixed rate for an agreed period, while others have a rate that can change.
Understanding how fixed, variable and tracker mortgages work can help you compare the different ways mortgage interest may be structured.
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THE BIG PICTURE
What does the interest rate on a mortgage affect?
A mortgage interest rate determines how interest is charged on the money you borrow. The way that rate is set can also affect how predictable your mortgage payments are.
MORTGAGE BALANCE
The amount you owe
The amount of mortgage borrowing outstanding.
INTEREST RATE
How interest is charged
The rate used to calculate interest on the borrowing.
REPAYMENT STRUCTURE
How the mortgage is arranged
How the mortgage is structured, including the term and repayment method.
MORTGAGE PAYMENTS
The resulting mortgage payment
The resulting payments depend on the terms and structure of the mortgage.
The interest rate is only one part of a mortgage
Fees, the mortgage term, repayment method and other product features can also affect the overall cost and suitability of a mortgage.
FIXED RATES
With a fixed-rate mortgage, the interest rate is fixed for an agreed period. During that period, the rate does not normally change because market interest rates move.
MORTGAGE START
The initial mortgage arrangement begins.
FIXED-RATE PERIOD
Rate fixed for the agreed period.
FIXED PERIOD ENDS
The mortgage moves to the next arrangement specified by the mortgage terms unless another arrangement is made.
WHAT A FIXED RATE CAN PROVIDE
Greater predictability of the interest rate during the fixed period.
Greater predictability of payments where other relevant factors remain unchanged.
WHAT TO CHECK
How long the fixed period lasts.
What happens when it ends.
Whether early repayment charges apply.
Fees and other product terms.
Fixed does not mean fixed for the whole mortgage term
A fixed rate usually applies for a specified period rather than for the entire mortgage term. What happens afterwards depends on the terms of the mortgage and any action you take.
VARIABLE RATES
With a variable-rate mortgage, the interest rate can change. If the rate changes, the amount of interest charged — and potentially the mortgage payment — can also change.
VARIABLE RATE
The applicable rate can change
The mortgage interest rate can change in accordance with the terms of the mortgage.
MAY CHANGE
INTEREST
The interest charged may change
If the mortgage rate changes, the amount of interest charged can also change.
MAY AFFECT
PAYMENTS
Payments may be affected
Depending on the mortgage structure, a change in the rate may also change the mortgage payment.
WHEN THE RATE CHANGES
The effect depends on the mortgage
The effect on payments depends on the mortgage structure and the size of any rate change.
PRODUCT TERMS MATTER
Not every variable rate works in the same way
Different types of variable mortgage determine how and why the applicable rate can change.
Variable does not mean rates will necessarily rise
A variable rate may move up or down depending on how the particular mortgage rate is determined. Future rate movements cannot be known in advance.
TRACKER MORTGAGES
What is a tracker mortgage?
A tracker mortgage is a type of variable-rate mortgage. Its interest rate is usually linked to a specified external reference rate, plus or minus a stated margin.
REFERENCE RATE
The rate being tracked
The external reference rate specified in the mortgage terms.
+
MORTGAGE MARGIN
The margin in the mortgage terms
The amount added to or deducted from the reference rate according to the mortgage terms.
=
TRACKER RATE
The resulting mortgage rate
The mortgage rate produced by applying the stated margin to the reference rate.
HOW CHANGES CAN FLOW THROUGH
REFERENCE RATE CHANGES
The rate being tracked may move.
TRACKER RATE MAY CHANGE
The tracker mortgage rate may change in accordance with the mortgage terms.
INTEREST CHARGED AND PAYMENTS MAY CHANGE
A change in the mortgage rate can affect the interest charged and, depending on the mortgage structure, the mortgage payment.
Check exactly what the mortgage tracks
The mortgage terms should explain the reference rate, the margin applied and how changes are reflected in the mortgage rate.
COMPARING RATE TYPES
The rate type is only one part of the comparison
Fees, early repayment charges, flexibility, mortgage term and other product features may also affect the overall comparison.
END OF A FIXED PERIOD
The fixed-rate period is only one stage of the mortgage. It is important to understand what the mortgage terms say will happen when that period finishes.
What happens next?
The mortgage itself does not necessarily end with the fixed period
The fixed-rate period and the overall mortgage term are different. When the fixed period finishes, the mortgage continues according to its terms unless another arrangement is made.
RATE CHANGES
The reason a variable mortgage rate changes depends on the way the particular mortgage rate is set.
Check how the particular mortgage rate is determined
Always check the terms of the particular mortgage to understand how its rate can change.
WIDER COMPARISON
The headline interest rate is important, but it does not describe every cost or feature of a mortgage.
LOOK BEYOND THE RATE
A mortgage can differ in several ways beyond the headline interest rate.
01
Fees
Arrangement, advice, valuation, legal and other costs may affect the overall comparison.
02
Early repayment charges
Some mortgages may charge for repaying or changing the mortgage during a specified period.
03
Mortgage term
The length of the mortgage can affect monthly payments and the total amount repaid over time.
04
Repayment method
How the mortgage is repaid affects how the balance and interest are dealt with over the mortgage term.
05
Flexibility
Features such as permitted overpayments or other options may differ between mortgages.
BEFORE YOU DECIDE
Understanding how you would feel about changing payments, and what you expect from the mortgage, can help frame a conversation about the available options.
QUESTIONS TO CONSIDER
Looking beyond the headline rate can help you understand how different mortgage arrangements may work in practice.
01
How important is payment predictability to you?
Consider how useful it would be to know the applicable mortgage rate for an agreed period.
02
How would a change in mortgage payments affect you?
Consider how changes in mortgage payments could fit within your wider household finances.
03
How long does the initial mortgage arrangement last?
Check how long the initial rate or arrangement applies and what happens when it ends.
04
What fees and charges apply?
Consider mortgage fees, early repayment charges and other costs as part of the overall comparison.
05
How much flexibility might you need?
Check whether the mortgage terms provide any features that may be relevant to how you expect to manage the mortgage.
COMMON QUESTIONS
What is a fixed-rate mortgage?
What is a variable-rate mortgage?
What is a tracker mortgage?
Can a fixed-rate mortgage payment ever change?
What happens when a fixed-rate mortgage ends?
Is a fixed or variable mortgage better?
MORTGAGE GUIDES
Continue exploring
Mortgage costs & fees
Understand the costs and charges that may arise when arranging a mortgage.
Remortgaging
Understand what to consider when reviewing or changing an existing mortgage.
GUIDE COMING SOON
Mortgage repayment options
Understand how repayment and interest-only mortgages work.
MORTGAGE ADVICE
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MortgageAdvice.co.uk can introduce you to a selected mortgage adviser who can provide regulated advice based on your circumstances.
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Your home may be repossessed if you do not keep up repayments on your mortgage.
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