How will interest rates impact my mortgage payments?

How do interest rates work?

Interest is basically the cost of borrowing money. When you take out a mortgage, you're borrowing the funds you need to buy a house, and the lender charges you interest as a fee for lending it to you. The interest rate offered to you will affect the total cost of the mortgage as well as your monthly payments.

Lenders don't pluck interest rates out of thin air. They are influenced by a range of factors, including: 

• The Bank of England (BoE) base rate. This rate often acts as a benchmark for other interest rates, including mortgages 

• Industry swap rates. Swap rates reflect the anticipated costs of borrowing money in the financial markets, so are often used by banks to predict future interest rates

• Wider economic factors. The overall health of the economy (such as inflation, employment rate and political stability) can influence interest rate trends

• Loan-to-value of your borrowing. This is the ratio of the mortgage amount to the property's value. Borrowers putting down a bigger deposit may be offered more competitive interest rates as they’re seen as a lower risk

• The type of mortgage you choose. Different types of mortgages carry different levels of risk, and that can influence the interest rate

• Your personal and financial circumstances. Lenders assess factors such as your credit history and affordability to determine what rate to offer you.

The higher the interest rate, the more expensive your mortgage will be both monthly and in total. Lower interest rates will result in smaller monthly mortgage payments and a lower total cost.

If interest rates change, how will this impact my monthly payments?

It’s likely that any change in either the Bank of England base rate or the interest rate determined by your lender will ultimately impact your monthly mortgage repayments. How quickly you notice the impact depends on the type of mortgage you have. 

• Fixed-rate - Your rate is fixed for a specific length of time so your monthly payment won’t change for the duration of your deal. However, any changes in interest rates will impact the rates available to you when your deal ends and you look to remortgage.

• Tracker rate - This type of mortgage has an interest rate that directly tracks the Bank of England base rate, plus a set percentage. If the base rate rises or falls your monthly payment will be impacted immediately. 

• Standard variable rate (SVR) - Your rate will be determined by your lender, based on various factors at their discretion. If your lender decides to increase or decrease their SVR, your monthly payments will be affected straightaway. 

• Discount rate - Your rate is set at a fixed percentage below your lender’s standard variable rate. Your monthly payments will therefore be impacted immediately if your lender decides to change their SVR. 

Looking for a new mortgage deal? Keep an eye on the mortgage market

The majority of borrowers are on a fixed-rate mortgage deal, which means their interest rate stays the same for the duration of their deal. This is usually two or five years, though some lenders offer the option to fix for longer. 

You may choose to remain blissfully unaware of interest rate changes happening in the market until your deal ends. But you may be in for a shock when you come to remortgage, as interest rate rises or cuts can make a huge difference to the amount you pay each month. It’s, therefore, well worth keeping an eye on what’s happening in the mortgage market so you know what to expect when your deal comes to an end. 

When should I lock in my rate?

I’m buying a new home

If you’re a first-time buyer or home mover, you’ll accept a rate when you apply for a mortgage. That doesn’t necessarily mean you’re locked in to that rate, though. Sometimes it can take months between receiving a mortgage offer and completing on a property - and interest rates can shift during that time. 

If you're thinking about changing your mortgage rate before completion, it's usually possible as long as it’s before funds are released. Do keep in mind that different lenders have different policies though. Some may allow you to make changes up until a few days before completion, while others may offer a bit more flexibility. Generally speaking, though, the earlier you make the change, the easier it is to adjust everything. 

When you work with us, we’ll proactively liaise with your lender to explore available options and ensure you're securing the most competitive deal possible. 

If you do decide to change your rate, a quick reassessment of your application might be necessary, particularly if the new rate affects your affordability. But don’t worry - this is usually a smooth process, and your broker will guide you through it. 

I’m remortgaging

We recommend looking at new deals up to six months before your current deal ends. That’s because most lenders will allow you to lock in a new deal around three to six months in advance.

You’ll be pleased to know you’re not tied into a new mortgage deal until the previous one ends. So it’s possible to secure the best rate available well in advance and have the option to switch again if interest rates happen to fall before your new deal kicks in. 

A mortgage advisor will help you to explore your mortgage options and will guide you through the process of checking and changing rates.