How Mortgage Interest Rates Work

If you are planning to buy a home, it is important to understand how mortgage interest rates work. In the UK, mortgage interest rates are set by the Bank of England's Monetary Policy Committee. The committee sets the rate at which commercial banks can borrow money from the bank. This rate is called the "base rate."

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The Bank of England Base Rate- What is it?

The bank base rate is the interest rate that banks use when they lend money to each other. This rate is set by the Bank of England's Monetary Policy Committee (MPC) and can move up or down depending on economic conditions. When the base rate changes, it usually has an impact on other borrowing rates, such as mortgage rates.

Mortgage lenders will use the base rate as a starting point when setting their own interest rates. They will then add a "margin" on top of this rate to cover their costs and make a profit. The size of the margin will depend on a number of factors, including the type of mortgage you are taking out and your personal circumstances.

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What determines what rate I will get offered?

The biggest factor in detemring this is the risk to the lender. This comes from a variety of sources which are mainly in the borrowers control, those being the size of the deposit and their credit profile which in turn dictates what lenders are willing to lend and therefore what type of products are available. The bigger the deposit, the lower the rate you generally will be offered. The smallest deposit you can currently offer a lender at time of writing is 5%, (although 0% deposits are available with the support of lender schemes and family support options), and rates change at trances of 5%'s thereafter as a rule of thumb being 10%, then 15%, 20%, 25% and then 40% deposit until you have a maximum of 40% deposit where anything after isnt going to improve the rate you are offered.

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What Happens if Interest Rates go up?

If interest rates go up while you have a mortgage, your monthly payments will also go up if you are on a variable type of mortgage. This could make it difficult to keep up with your repayments, especially if you're on a tight budget. If you're worried about this happening, you could consider taking out a fixed-rate mortgage. With a fixed-rate mortgage, your interest rate - and therefore your monthly payments - will stay the same for a set period of time, typically 2-5 years.

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What should I do about future rates?

No-one knows exactly what way interest rates are going to keep going, it is key to speak to an qualifed, professional adviser who has the knowledge and experiance to look at your individual circumstances to give you a reccomendation individually on your needs and preferences going forward.

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