How mortgage interest rates work

Interest is the money you pay a lender in return for borrowing from them. You'll pay a percentage of the amount you borrowed – this is called the interest rate. You'll typically want a low mortgage interest rate, as this means you'll pay less to the lender in borrowing costs.

Interest rates are usually set by the lender, but they may follow or be influenced by the base interest rate set by the Bank of England.

There are three interest rate options when it comes to choosing a mortgage – fixed, variable and tracker.

There's no exact number that makes a good interest rate. That's because the interest rate you'll pay depends on a lot of factors, like how much you're borrowing and the size of your deposit.

The important thing is to make sure you'll be able to afford the repayments – as you risk losing your home if not – and that the rate is competitive with what else is out there.

To see a selection of mortgages from across the UK market and get an idea of what interest rates are available, you can compare mortgages with Experian.

Firstly, a rise in the Bank of England rate will only affect you if you have a variable or tracker mortgage.

If you know interest rates are heading higher and you already have a mortgage, you could consider overpaying while the lower interest rate lasts, so you have less to pay off after the rate goes up. Most lenders allow you to overpay by a certain amount (typically 10% of your balance) each year without charge. If you exceed the limit, you may get stung with an early repayment charge. Alternatively, you could try and lock in a good deal by remortgaging to a fixed rate – although if a rate rise is imminent, lenders will take this into account when making an offer. Just remember, you may be charged an early repayment fee if you remortgage during your fixed term. Calculate how much you could save with our overpayment calculator:

What this means

Overpayments are when you voluntarily repay more than the monthly minimum amount.

Making overpayments means you'll repay your mortgage quicker and pay less interest in total. But you should check you're able to do this and won't need to pay any early repayment charges or other fees.

Note that this example assumes your interest rate will remain the same for the full term of the mortgage, which is unlikely to happen in reality.

Before you apply for a mortgage, you should make sure your finances are in the best shape possible, and check if you meet the criteria a mortgage lender may look for. Here are our suggested steps:

Check your credit score

To get an idea of how a lender may view you when you apply for a mortgage, check your Experian Credit Score for free. This is a number between 0-999 – the higher it is, the better your chances may be of getting a mortgage at the best rates.

Check your credit report

Taking steps to improve your credit score may improve your likelihood of being accepted for a mortgage. For an in-depth look at your credit data – including factors affecting your score – check your Experian Credit Report.

Have stable employment and income

Being employed full-time, with a steady income for the previous two years, can help you get a better mortgage interest rate. Mortgage lenders can be particularly strict on the self-employed and may ask for several years of income tax returns to ensure you can meet regular repayments.

Put down a healthy deposit

Generally speaking, the bigger the deposit you put down, the better your interest rate will be. This is usually because the more money you commit, the less you appear as a risk to the mortgage lender. Typically, a 15% deposit should get you some decent deals, while those looking for the best rates may need to put down 25% or more.