Mortgage interest rates are closely linked to decisions made in the wider economy - specifically, decisions taken by the Bank of England.
The Bank of England's Monetary Policy Committee sets the base rate every month which is the bench mark for lenders and other financial institutions when setting their interest rates.
This is slightly over-simplified, as banks have a rate they use when lending to each other known as LIBOR and the money markets have rates they fix for longer-term lending known as swap rates which affect fixed-rate mortgages.
The Bank of England changes the base rate in order to try to control inflation within the UK economy.
When the base rate drops, there are a number of knock-on effects on consumers. For example:
Changes in the base rate will have a knock-on effect on your mortgage interest rate - either immediately or in the future. Each type of mortgage deal will be affected by base rate changes in a different way. For example:
Fixed-rate mortgage deals have rates that are set for between two to five years typically, though they can be longer.
This means you are locked into that rate for that length of time so it won't change immediately when the base rate is altered. The advantage is that it gives you certainty for the time of your fix but you could miss out if base rates drop during that time.
Of course, any base rate change does affect the interest rates offered on new fixed-rate deals.
In contrast, tracker mortgage rates aren't fixed, but usually have interest rates directly related to the Bank of England base rate.
(Tracker rates can be capped so that they never go above a certain rate agreed at the outset. Alternatively, it can have a collar meaning it can't drop below a certain level, but these are rarer.)
This means that if you have a tracker deal and the base rate goes up, the interest rate on your mortgage is also likely to go up immediately.
And in contrast, if interest rates are falling, it can make financial sense to opt for a tracker rather than a fixed deal.
Every mortgage lender has a Standard Variable Rate (SVR) for its mortgages - which it sets itself.
Many of a lender's mortgage deals will be linked to the SVR in some way. For example, a discount variable rate mortgage is usually a lender's SVR minus or plus a pre-set percentage.
When a particular mortgage deal comes to an end, the chances are that you will end up on your lender's SVR, unless you actively switch to a new deal.
In practice, a lender's SVR is usually the base rate plus an extra percentage (added to ensure the lender makes a profit). That means if the base rate rises, SVRs will generally follow suit quite soon afterwards.
An offset mortgage allows you to use your savings and current account credit balances to offset some of your mortgage.
For example, if you owe £150,000 on your mortgage and have £30,000 in savings, offsetting will allow you to effectively reduce your mortgage balance to £120,000. But you won’t earn any interest on the savings used to offset your home loan.
The main advantage of offsetting relates to the amount of interest you pay: In a nutshell, you won't have to pay any interest on the offset portion (in the example above, £30,000).
And by paying less interest in this way, you should be able to pay off your mortgage more quickly.
This interest rate guide explains how interest rates work, how your loan will be affected when interest rates go up and down, and what you should do about it.
|Lender||Initial Rate||Duration||Standard Rate||Overall Cost For Comparison||Max Loan To Value||Fee|
|2.59%||2 years||5.69%||5.4% APR||75%||£999|
|2.69%||2 years||4.99%||4.9% APR||75%||£495|
|2.94%||2 Years||5.69%||5.4% APR||75%||£199|
|2.99%||2 years||4.99%||4.9% APR||85%||£495|
|2.99%||3 years||4.99%||4.6% APR||70%||£499|
|3.0%||2 years||5.69%||5.5% APR||80%||£999|
|3.19%||5 Years||4.79%||4.2% APR||80%||£995|
|3.35%||To Jul 2014||4.95%||4.6% APR||75%||£999|
|3.5%||2 years||5.49%||5.1% APR||75%||£595|
|3.84%||2 years||3.94%||4% APR||90%||£499|