UK Mortgage Interest Rate
If you are trying to work out how UK mortgage interest rates work, you've come to the right place. Everybody knows that the amount you pay on your mortgage will be less if the interest rate is lower. But with people talking about base rate, fixed rate, and variable rate, what does it all mean? Here is a no-nonsense guide to the working of mortgage interest rates in the UK.
Base rate and standard variable rate
The mortgage interest rate that you are charged by your bank is closely related to the base rate. The base rate is set by the Bank of England Monetary Policy Committee each month. When the base rate goes up so does the mortgage rate that is charged by your bank. Likewise the mortgage rate should come down when the base rate falls. The mortgage interest rate is often called the lender's standard variable rate (SVR) because it will vary according to what the underlying base rate is.
Typically the SVR is somewhere between 1 and 2% above the base rate. So if the Bank of England set the base rate at 5% you can expect to pay somewhere between 6% and 7% interest on your mortgage.
Fixed rate
Some lenders will allow you to keep a budget for your outgoings by fixing the rate of interest for a limited time. Typically this could be for 1-5 years at the start of a mortgage but a few will allow longer periods. After this period the rate will revert to the lender's standard variable rate. During the fixed period you will repay exactly the same amount each month.
Discounted rate
Some lenders offer new customers a discounted rate for a limited period of time. This is to attract new borrowers to their products. Lenders are always changing their products but you may find a bank that will give you a discount of 1% on the interest rate for the first year of the loan. This means that the interest rate that you pay can still vary if the Bank of England base rate is changed. However you are paying a special lower rate for the first 12 months. After the discounted rate is finished you will again revert to the standard variable rate.
The way that UK mortgage interest rates are set up means that there are lots of different options for you to find the right mortgage. However these options mean that you need to have a bit of knowledge to understand how the different types of mortgages work.