Interest rates and mortgages explained

A quick overview

Learn how mortgage interest rates impact your monthly repayments and the total amount you repay over the life of your mortgage. Explore the differences between fixed rate and variable rate mortgages, helping you understand the options available when choosing a mortgage.

Transcript

When you take out a mortgage, you’re essentially borrowing a big loan from a lender. 

Each month, you'll repay a portion of the amount you’ve borrowed. 

But that’s not all. You also need to consider the interest rate, which you'll be paying every month as well.

The total amount you’ll repay to your lender depends on the interest rate of your mortgage. The higher the interest, the more you repay over time.

So how does this work?

For a moment, let’s imagine interest rates don’t change and you take out a mortgage of £100,000.

If you had a 2% interest rate for 20 years, over the 20 years you would repay the lender £100,000 and an additional £21,412 in interest. 

So over 20 years, you’d repay £121,412.

If the mortgage interest rate was 5% instead of 2%, you'd still repay the £100,000 loan, but this time an additional £58,389 in interest.

So over 20 years, you’d repay £158,389.

Over time the interest rate can make a real difference to the total cost of your mortgage.

What are the different types of interest rates? 

In our example, we imagined interest rates never change. But in reality, things can be a bit more complicated. The base interest rate in the UK does change. That’s why there are different types of mortgages. The majority of mortgages are either fixed rate or variable. 

With a fixed-rate mortgage, the interest rate you pay is fixed for a set length of time. This is usually between two to five years. Because your mortgage is ‘fixed’ your monthly repayments would stay the same, even if interest rates change.

With a variable rate mortgage, the interest rate can change depending on the base rate. If you chose a variable rate mortgage, like a tracker or discounted product, your monthly repayments could go up or down based on the changes to that interest rate.

So which is better – fixed or variable?

There’s no wrong or right answer. But if you need help deciding what’s right for you, speak to your lender.

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