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You Are Here: Home > Personal Finance > Mortgages > Introduction
Mortgages and Interest Rates

They're more complex than first thought

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With Mortgages it's important to differentiate between the interest rates because they're not all the same.

This page goes into more detail.

Official base rates


  • These are set by the Bank of England which meets every month
  • In normal economic situations they'll change infrequently perhaps 1-3 times a year
  • But when the economy starts going crazy (up or down) rates can move dramatically, for example they might be slashed from 5% to 1% over a year, the reverse is a less common occurrence but it can also happen

Why this is important to understand

The interest rates for most mortgage styles are only based on the Bank of England rate which means they won't always track it. So if base rates were to fall 0.5% it's possible for your mortgage rate to stay the same.

What is the all-important SVR (Standard Variable Rate)


  • Each lender will have a mortgage interest rate called the SVR
  • This is the rate that we mortgage holders pay unless we're on a specialised deal such as a discount or fixed interest rate etc
  • The SVR will always be higher than official base rates in the 1% - 3% region
  • So if official rates are 4% expect the lender's SVR to be somewhere between 5% - 7%

Note that each lender sets their own SVR and it's entirely possible for say the ABC bank to have an SVR of 4.55% whereas the XYZ bank's is 3.70%.

What is the APR rate

The APR (Annual Percentage Rate) is normally the advertised interest rate you'll see on a mortgage. The concept of APR was introduced by the government to stop finance companies playing games with the interest rates they charge for borrowing money.

  • The calculation for APR takes into account the basic interest rate, when it is charged (i.e. daily, weekly, monthly or annually), all initial fees and any other costs payable
  • As all lenders calculate APR in exactly the same way it enables you to make direct cost comparisons between lending products
  • So if one bank offers a mortgage with an APR of 5% that should be cheaper than one offered at 5.5%
Different interest rate options are available

The good news is that because of the flexibility introduced into the mortgage market over the last decade borrowers now have plenty of interest rate options open to them. The main ones being -

  • Variable - the interest rate will move up and down with the mortgage provider's SVR

  • Discounted - perhaps your mortgage deal offers a discounted rate of 1% below official base rates for the first 18 months but when the deal expires the rate reverts to the lender's SVR

  • Fixed - as its name suggests the interest rate is fixed for a period of years, usually between 2-5 but it can be as high as 10-20. With a fixed rate mortgage it doesn't matter what happens to the official base rate (or the lender's SVR) as your monthly repayment will stay the same until the fixed rate period is over. This is great news if rates climb significantly, not so good if they fall significantly

  • Tracker - similar to variable but the rate tracks (+ premium) the official Bank of England interest rates. So a tracker with a 0.75% premium will mean a rate of 3.75% if official interest rates are 3%

  • Capped - the interest rate is variable but has a cap or a ceiling which limits it. A 6% cap will mean that if rates climb to 9% or even higher the mortgage rate can never charge above 6%. But if rates fall to 1% then the mortgage rate will also drop because it's variable

Some mortgages will combine 2 or more of the above different styles. For example you might be offered a discounted capped rate mortgage. This would offer a 0.75% interest rate discount (from official base rates) for the first 2 years with an interest rate cap of say 6%.

How is interest calculated - Look for daily interest

The mortgage lenders often love to play games to increase their revenues and profits. Normally they can get away with this because they're selling to an uneducated clientele. It is important to note that when I say 'uneducated' I'm referring to being uneducated in financial products, not generally.

A favourite trick with mortgages is how the interest is charged on the loan.

Some mortgages base their interest calculation on a yearly basis, others on monthly or daily.

Daily is by far the best because as soon as you pay your mortgage less interest is charged the following day. For example -

  • Your mortgage is £100,000
  • Today you pay £1,000
  • The following day interest charged on £99,000

That may sound logical to you and of course it is. But if interest is charged monthly it will work like this -

  • On the 2nd of the month you pay £1,000
  • But this is not credited to your account till the end of the month so for the next 30 days you'll be charged interest on £100,000

It's therefore even worse if interest is calculated on a yearly basis and to put it bluntly any bank that does this should be ashamed.

My advice to all of this is simple - always try to make sure your mortgage charges daily interest and if it doesn't consider remortgaging as it will save you money.

Loan-To-Value (LTV) - It's important when setting the interest rate
The LTV is the size of the mortgage in relation to the value of the property, for example -
  • If a property was worth £100,000 and you borrowed £100,000 the LTV would be 100%
  • If the property was worth £100,000 and you borrowed £75k the LTV would be 75%

LTV deals primarily in risk as someone borrowing 100% of a property's value is a riskier bet than somebody who puts up 30% cash and borrows 70%. Why, because if the property's price falls when borrowing 100% the mortgage will be worth more than the property's value, so called negative equity.

So lenders will usually assign different interest rates to different LTVs, probably in bands, for example -

  • LTV of 95%+ : Interest rate of 6%
  • LTV of 85% : Interest rate of 5.75%
  • LTV of 75%: - Interest rate of 5.5%
  • LTV of less than 50% : Interest rate of 5%
Your personal credit rating will also influence your interest rate
  • For a more in-depth explanation of your Credit rating see the LearnMoney.co.uk Credit File help section

Your credit file consists of three important parts -

  1. Your personal details, name, date of birth, address etc
  2. A list of your present financial commitments that involve credit, so details of your mortgage, credit cards, loans, bank accounts and mobile phone contracts etc
  3. You historical payment records, ie how have you been paying your bills, on time, late, never etc. This will also include details of any defaults or CCJs (County Court Judgments)

Interestingly what is not taken into account are your assets or salary/income.

This means that theoretically it's possible for somebody who is unemployed to qualify for a £2,000 loan whereas a well-paid dentist earning £150k a year might be refused. Why, because the unemployed person has always paid his bills on time whereas the dentist is always exceedingly late, basically he's chronically financially disorganised.

If your credit rating is excellent then you'll be viewed as a good risk and might be offered a £100k mortgage at 4%. But if your rating is so-so, perhaps you've been late paying your bills a number of times over the last 12 months, you might be offered the same loan but with an interest rate of 4.75%.

The extra 0.75% is down to risk, you are seen as a higher risk than the man whose credit rating is almost perfect.

But if you're got some defaults or CCJs on your file then it's highly unlikely you'll be able to qualify for a mortgage at a competitive rate. The best advice I can give is to check out these 3 articles -

LearnMoney Comment :
Mortgages on the whole are excellent financial products and both parties, the borrower and the lender, get a pretty good deal. The main advantage for borrowers is the competitive interest rates as no other loan is cheaper.

Use the information contained on this page and from the Mortgage Section in general to make sure you fully research the ins and outs of these products. Education is so important and it's the only way that you can be sure of getting the right mortgage at the best price.

Conversely, a lack of education is the number one reason why so many get taken advantage of when sorting out their home loan.

We are in control - Not the lenders

Finally, realise that consumers normally have the upper hand over the lenders when looking for a mortgage. We have the luxury of choosing who to do business with (assuming our credit files are sound), not the other way around.

Believe me, the banks and building societies are desperate to sign up new business so -

  • Take your time
  • Do your research
  • Never rush into anything
  • Use our free guide how to pick a good mortgage guide and you'll have the confidence and knowledge to get a good deal
FREE Report: How to get the right mortgage at the best price
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How to make sure you don't overpay on charges
Learn to quickly sort through the market maze
How to get a flexible deal - why this is so important
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