Understanding mortgage interest rates – a key to successful home buying

Whether you are a first-time buyer or already a few steps up the property ladder you probably have some rough idea about what the mortgage interest is. After all, buying a house is the biggest lifetime investment for the majority of us and getting the right product tailored to our circumstances is crucial. And we usually got it right. But what if the economy is set for a long period of rock-bottom interest rates with many borrowers losing on competitively priced products? What if your exorbitant fixed rate mortgage falls behind available base-rate trackers? Perhaps it’s time for you to rethink your old strategies and gain a deeper insight into what’s currently on the offer.



There are five main mortgage rate options available to begin with. Even though their characteristics may seem confusing at first, the underlying concepts are relatively simple and easy to follow. By looking at each of them in turn you should be able to build a clear picture of the mortgage interest rates.

Fixed rate mortgage is a type of mortgage where the amount repaid by the lender each month is at a fixed interest rate for a specified period of time. This happens regardless of the changes in the base interest rate governed by the central bank. The most typical terms for fixed rate mortgages are two and five years respectively. It’s worth noting that after the fixed term period the rate will normally convert to the lenders Standard Variable Rate (SVR). There is also a variation to fixed rate mortgage known as a capped rate mortgage. The only difference here is that if the variable rate drops below the capped rate, the borrower will make payments based on the lower variable rate. However, in the event of rates increase the payments will be ‘capped’ and will not rise over the capped rate.



Another type of mortgage rate is a discounted rate. This is a one-off discount on SVR offered for a specific period of time. As the discount is linked to the standard variable rate, if rates rise the borrower’s payments will increase. However, should rates decrease, the borrower will benefit from lower payments. Anybody considering a product linked to a discounted rate has to be prepared for a steep increase in monthly repayments after the discount expires.



The last two types of rates, which quite often people get confused about, are: variable rate and tracker rate. Both are pegged to the base rate and are usually targeted at lenders looking to re-mortgage or the ones with high share of the equity. With the tracker rates, as their name suggests, mortgages change to follow ‘track’ changes in the base rate to which they are linked. Therefore, if the base rate increases by 1%, the pay rate will increase accordingly and vice versa. The difference between these and variable rates lies in the fact that the lender may adjust the rate of variable mortgage in accordance with market conditions.



Remember that regardless of what your preferences are, you might not always be able to qualify for the best deal. There are other factors to be considered before you can grab that lowest tracker on the market. But having a good understanding of how the interest rates work is certainly a first step on the road to successful mortgaging.