Mortgage rates explained
How loan-to-value bands, fixed, tracker, variable and discount rates, early repayment charges and overpayments work. Written for first-time buyers, useful to anyone choosing a mortgage.
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What decides the rate on a mortgage
The rate you pay depends on three things: how much you borrow compared with the value of the property (loan-to-value), what type of rate you choose, and how long the deal lasts. Each deal also carries rules on leaving early and paying extra, which affect what the mortgage costs if your plans change.
This page explains each one. For today's rates, use our live mortgage rates. For a word you do not recognise, see the first-time buyer glossary.
Loan-to-value (LTV) bands
Loan-to-value is the mortgage as a percentage of the property's value. A £180,000 mortgage on a £200,000 home is 90% LTV, which means a 10% deposit.
Lenders price their deals in bands, usually in steps of 5%: 95%, 90%, 85%, 80% and so on down. Each band has its own set of products and rates, and a bigger deposit moves you into a lower band. Where the bands fall is set by each lender.
LTV is worked out on the lender's valuation of the property, not necessarily the price you pay. It also changes over time: paying the mortgage down lowers it, and a change in the property's value moves it either way. That is why it matters again when a deal ends and you remortgage or switch to a new deal.
Read more about saving a deposit and how much you can borrow.
Types of mortgage rate
There are four main types. Each has a different answer to the same question: what happens to your monthly payment if rates change?
1. Fixed rate
The interest rate stays the same for a set period, so your monthly payment does not change during it. Fixed periods commonly run for 2, 3, 5 or 10 years.
If rates fall during the fixed period, your rate does not fall with them. If you want to leave the deal early, an early repayment charge usually applies. When the fixed period ends, the mortgage moves to the lender's standard variable rate unless you switch to a new deal first.
2. Tracker rate
A tracker follows another rate, usually the Bank of England base rate, plus a set margin. When the base rate moves, your rate moves with it, by the same amount, and so does your monthly payment.
Some trackers last for a set period, such as 2 years. Some last for the full term of the mortgage. Some have early repayment charges and some do not, so check the illustration for the deal you are looking at.
3. Standard variable rate (SVR)
The SVR is the lender's own default rate. The lender sets it and can change it at any time, and it does not have to follow the Bank of England base rate.
Most people meet the SVR when a fixed, tracker or discount deal ends and they have not switched. An SVR mortgage usually has no early repayment charge, so you can leave without a penalty. See rate switches for moving to a new deal with your current lender.
4. Discount rate
A discount rate is a set amount below the lender's SVR for an initial period. The discount stays the same, but the SVR it comes off does not, so your rate and payment move when the lender changes its SVR.
Choosing between them
There is no single best type. The choice comes down to how much certainty you need in the monthly payment, how long you expect to keep the mortgage, whether you may want to leave or overpay during the deal, and how much deposit you have.
We are independent and whole of market. We compare deals across our lender panel for your LTV, your income and your plans, and show you the early repayment terms and overpayment allowance alongside the rate. Before you apply, a mortgage in principle and a clean credit file are the two things worth having in place.
Early repayment charges (ERCs)
An early repayment charge is a fee the lender charges if you repay some or all of the mortgage during the deal period, beyond what the deal allows. It is there to cover the lender's cost of the deal ending early.
When an ERC applies
Remortgaging to a different lender before the deal ends
Selling the property and repaying the mortgage in full
Repaying the whole mortgage from savings or an inheritance
Overpaying by more than the yearly allowance (see overpayments below)
How the charge is worked out
The ERC is a percentage of the amount you repay. It often steps down each year of the deal. As an illustration only, a five-year deal might charge 5% in year one, 4% in year two, 3% in year three, 2% in year four and 1% in year five. The percentages are set by the lender and are shown in the illustration you receive before you apply.
On a £150,000 balance, repaying in full during year two of that illustration would cost 4%, which is £6,000.
When it stops
An ERC normally runs for the initial deal period only. When the deal ends, you can usually move to a new deal or leave without one.
Moving home
Some mortgages are portable, which means you can transfer the deal to a new property rather than repay it and trigger the ERC. Portability is set by the lender and the new property and your circumstances still have to meet the lender's criteria.
Overpayments
An overpayment is any amount you pay on top of your required monthly payment. A common allowance is 10% of the balance each year without an ERC, but this is set by the lender and varies by deal. Check whether it is worked out on the balance at the start of the deal or at the start of each year.
As an illustration, a 10% allowance on a £150,000 balance is £15,000 a year. An ERC is usually charged only on the amount above the allowance, not on the whole overpayment.
Ask your lender or adviser how an overpayment is applied. Some lenders let you choose between reducing the term of the mortgage and reducing the monthly payment. Others apply it one way only.
Use the mortgage repayment calculator to see monthly payments at different amounts, the mortgage balance calculator to see how the balance falls over time, and the offset calculator if you are considering an offset mortgage, where savings are held against the balance instead of being paid into it.
Frequently Asked Questions
What does LTV mean?
Loan-to-value is the mortgage as a percentage of the property's value. A £180,000 mortgage on a £200,000 home is 90% LTV, which means a 10% deposit.
Does a bigger deposit change the rate I can get?
Usually. Lenders price their deals in LTV bands, so a bigger deposit moves you into a lower band, with its own set of products and rates. Where the bands fall is set by each lender.
What is the difference between a fixed and a tracker rate?
A fixed rate stays the same for the deal period, so the monthly payment does not change. A tracker follows another rate, usually the Bank of England base rate, plus a set margin, so the payment moves when that rate moves.
What happens when my fixed rate ends?
The mortgage moves to the lender's standard variable rate unless you switch to a new deal. You can remortgage to a different lender or take a new deal with your current one, see rate switches.
What is an early repayment charge?
A fee the lender charges if you repay some or all of the mortgage during the deal period beyond what the deal allows. It is usually a percentage of the amount repaid, and it normally runs for the initial deal period only.
Can I overpay my mortgage without a charge?
Usually up to a yearly allowance, commonly 10% of the balance, but each lender sets its own. Overpaying above the allowance during the deal period can trigger an early repayment charge.
Can I take my mortgage with me if I move?
Some mortgages are portable, which lets you transfer the deal to a new property. It depends on the lender, and the new property and your circumstances still have to meet their criteria.
Which type of rate is right for me?
It depends on how much certainty you need in the payment, how long you expect to keep the mortgage and whether you may want to leave or overpay during the deal. We compare the options for your situation, speak to an adviser via get in touch.
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