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Understanding mortgage interest rates

Learn how they work so you can unlock your options as a homeowner.

  Mortgage advice is available throughout the UK. This service is provided by StepChange Financial Solutions, part of StepChange Debt Charity. We are not a lender. We find products that suit your needs.

Interest rates have been rising. Many people are worried about how this could affect their mortgage repayments.

If you are:

  • Remortgaging, or
  • Looking for a new provider

We have put this guide together to explain the different types of mortgage. It can help you decide what mortgage might be right for you.

If you are worried about:

We can help you. Find out more about our free debt advice.

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Standard Variable Rate - SVR

This is the interest rate charged by the mortgage provider when an initial fixed or tracker rate period comes to an end.

Each provider sets its own SVR. This is the default interest rate that you will be charged if you do not remortgage.

SVRs tend to be much higher than the rates on other types of mortgage.

Fixed rate

A fixed rate mortgage has an interest rate that can be set for a period of time. This could be up to ten years.

Your interest rate will not change. You can be sure your repayments will stay the same throughout the mortgage period.

The risk is that if interest rates fall and you want to move to a better deal, you could be charged if you choose to exit the mortgage deal before the end of the term.

Discounted variable rate

This sets the interest rate you pay below a specific lender’s SVR for an agreed period. For example, 2.74% below the SVR of 5.74%.

The interest rate is not fixed. It could rise or fall if the lender decides to change their SVR.

The discounted variable rate will not change during the agreed period with the lender.

We provide free mortgage advice suited to your needs. Whether you are a first-time buyer or looking to remortgage for a better deal.

Tracker rate

A type of variable rate. This tracks a base rate, such as the Bank of England base rate, below a certain percentage. This can be for a defined period, or an open period.

If the base rate goes up, the tracker rate will go up too. This could affect your repayments.

Early Repayment Charge - ERC

You could be charged a fee by your mortgage lender if you leave a mortgage deal early.

You may also have to pay this if you want to change your mortgage terms during the fixed rate period.

True cost

This is the overall amount you will pay in both:

  • Capital borrowed
  • Interest paid over a set period of time

This is usually for the period of a fixed rate deal. It includes any fees and costs attached to a mortgage deal.

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Loan to Value - LTV

This is the overall balance of your mortgage, compared to the value of your property. It will be shown as a percentage (%).

For example, a £60,000 mortgage with £100,000 property value = 60% LTV.

Lenders offer rates are based on LTV. The lower the LTV (lower mortgage and higher property value), the lower the rate.

Porting

This is when you move your current mortgage balance and deal to another property with the same lender. Without charge or restriction.

Decision in principle

Sometimes known as an agreement in principle or mortgage in principle.

A decision in principle is an indication of how much your lender would be willing to lend you for your mortgage.

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