What Determines Mortgage Rates?
Mortgage rates are influenced by several factors, from global economics down to your personal financial situation. Understanding these helps you make sense of the rates you're offered.
The Bank of England Base Rate
The Bank of England sets the base rate (or Bank Rate) which influences the cost of borrowing across the economy. When the base rate rises, mortgage rates typically follow. When it falls, mortgage rates usually drop too - though not always immediately or by the same amount.
Swap Rates
Lenders use 'swap rates' to hedge their fixed rate mortgages. These are financial instruments that let them lock in their own borrowing costs. When swap rates rise, fixed mortgage rates typically rise too, sometimes before the base rate changes.
Swap rates can rise or fall independently of the base rate, which is why fixed rates sometimes move when the base rate hasn't changed. Lenders are pricing in expected future changes.
Factors That Affect Your Personal Rate
Beyond the general economic factors, your personal circumstances determine the exact rate you'll be offered.
Personal factors affecting your rate:
- Loan-to-Value (LTV) - lower LTV = better rates
- Credit score - better credit = better rates
- Property type - standard houses get better rates than flats above commercial premises
- Employment type - employed often better than self-employed
- Mortgage amount - some lenders have minimum loan amounts for best rates
- Repayment type - repayment often cheaper than interest-only
LTV and Rates
Your Loan-to-Value ratio has a significant impact on the rates available to you. Lenders price in bands, typically 95%, 90%, 85%, 80%, 75%, and 60% LTV.
Example: A lender might offer 5.5% at 95% LTV, 5.0% at 90% LTV, 4.5% at 75% LTV, and 4.0% at 60% LTV. That extra deposit really does make a difference!
Headline Rate vs True Cost
Don't just compare headline interest rates. Consider the total cost including fees. A slightly higher rate with no fee can be cheaper than a lower rate with a £1,000+ arrangement fee, especially for smaller mortgages or shorter fix periods.
True cost factors to consider:
- Interest rate
- Arrangement/product fee
- Valuation fee (if charged)
- Legal fees (if not included free)
- Early repayment charges (if you might move)
- Cashback offers (subtract from costs)
We calculate the true total cost for every mortgage we recommend, factoring in all fees and incentives. That's why our recommendation might not always be the lowest headline rate.