The mortgage interest rate determines how much the balance of the loan will grow each month. The higher the interest rate, the higher the monthly repayments. Interest rates are always calculated as a percentage of the mortgage’s balance.

Most people have a repayment mortgage. With this type of mortgage, a set amount of the balance is paid each month, plus interest on top of that. Those with interest-only mortgages pay interest but none of the capital. However, there should be a mechanism to repay the capital by the end of the mortgage term.

Mortgage interest rates are either fixed or variable.

Fixed-rate mortgages

With a fixed-rate mortgage, the interest rate – and therefore monthly repayments – are fixed for a certain period. This can be as short as two years or as long as 10 years. Fixed-rate mortgages carry the same interest rate throughout the entire length of the loan. When a fixed rate mortgage deal ends, the mortgage will revert to the lender’s standard variable rate (SVR) of interest. This could be an opportunity for a financial spring-clean, as it may be possible to switch to an even better deal.

Variable-rate mortgages

With a variable rate mortgage, the interest rate could go up or down from month to month, meaning the amount to repay is subject to change. Most tracker mortgages follow the Bank of England base rate (which is currently 0.1%). The rate might be described as the ‘base rate + 2%’, which means that the interest rate would be 2.1%, but if the base rate changes, so too will the interest rate. It is important to note it is likely there will be a floor that the tracker is not able to go below. 10 years ago, in 2011, the average standard variable rate was 4.79%.

Some tracker mortgages follow the Libor rate instead of the base rate. The Libor is the borrowing rate banks charge to each other – though it is being phased out at the end of this year.

Tracker deals might be as short as two years or run for the entire term of the mortgage. Discount mortgage deals follow the lender’s standard variable rate (SVR), which the lender sets and can change at any time, minus a set percent. So, if the lender’s SVR was 6.2% and the discount was 4%, the payment rate is 2.2%. With most mortgage deals, the interest rate will revert to the lender’s SVR after the initial period ends. SVRs tend to be relatively high, so it often makes sense to switch – or remortgage – before being moved onto the SVR.

Which mortgages come with the lowest interest rates?

Generally, the interest rates on fixed-rate mortgages will be higher than those on offer from variable deals. This is because borrowers are paying a bit more for the security of knowing what their repayments will look like every month. The same thinking applies with longer fixed-rate deals of five years or more. The lender is taking on a bigger risk by offering these deals as rates in the wider market might rise during that time, so a longer-term fixed rate will often be higher than a shorter-term one.

What are the predictions for interest rates for 2022?

The cost of living surged by 4.2% in October, the highest rate in almost 10 years, due to rising fuel and energy costs and second-hand cars and the global supply chain disruptions according to new data from the Office for National Statistics.

The consumer price index measure of inflation is now more than double the Bank of England’s target of 2%. Commentators are saying that this increase in inflation as well as the improvement in employment statistics should put pressure on the Bank of England to raise interest rates, but the country’s slowing GDP growth could hinder that path.

In response to rising inflation and in anticipation of an increase in interest rates lenders have been raising their mortgage rates over the past few weeks.

Zoopla forecasts house prices will increase three per cent next year, a far more moderate gain than the double-digit leaps seen across the UK in the past 12 months.

Get in touch with us now to lock in rates whilst they are at historic lows.

At Beaufort Mortgages, we find the best mortgage rates for First Time Buyers, Home Movers, those looking to Remortgage and landlords requiring Buy To Let mortgages. Get in touch with Dan Godfrey, our independent mortgage adviser.