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Interest rates

This content applies to England & Wales

Interest rates available from mortgage lenders.

It is often very difficult for borrowers to compare the terms offered by different lenders since each one has a different way of calculating their interest rates. As a result, each lender must publicise its rate in the form of the 'annual percentage rate of the total charge for credit' (APR). This includes other costs such as valuation and legal fees and is the equivalent of the rate that would be payable if the interest was paid in one lump sum at yearly intervals at the anniversary of the loan.

Lenders frequently offer special rates of interest for particular purchasers or particular types of loan. The following are some examples:

  • variable rate – this is the usual rate lenders offer for mortgages and it can be varied at any time without notice.
  • discounted rate – lenders frequently offer some buyers a percentage point discount on their usual variable rate, eg to attract first time buyers. The discounted rate usually lasts for a set period, perhaps one to two years, before reverting to the variable rate.
  • fixed rate – the interest rate is fixed for a set period of time, usually for one to five years, before reverting to the variable rate. The advantage of a fixed rate mortgage is that borrowers know exactly how much their monthly repayments will be. If the variable interest rate is increased during this time, they will save money but if it is decreased, they may end up paying more.
  • deferred rate – these are designed to help those who have insufficient income to afford a mortgage at the usual interest rate in the early years of their mortgage but are confident that they will have a significant increase in income later on. The payments are reduced for up to five years during which time the difference between the payments made and what would have been the full payments if the market rate had been charged is added yearly to the outstanding balance and then accrues interest. After this period the mortgage payments will be increased to cover the outstanding amount over the remaining years of the term and at the usual market rate of interest. This method is more expensive than a similar mortgage that is not deferred, as interest will accrue on the unpaid interest in the first five years, and in many case there will be a steep rise in the payments after the initial period has ended.
  • capped rate – repayments will fluctuate, as with a variable rate mortgage, but the interest rate charged will not rise above a certain amount, or 'cap'. Capped rate mortgages are usually available for a set period of time, after which they will revert to a standard variable rate mortgage.
  • base rate tracker – these mortgages have interest set at a certain percentage (usually between 0.5 and 1 per cent) above the Bank of England's base rate. Base rate tracker mortgages are usually available for a set period of time, after which they will revert to a standard variable rate mortgage.

Lenders are more likely to charge an arrangement fee for fixed, discounted, capped, deferred rate, or base rate tracker mortgages. These mortgages may also be subject to the borrower taking out insurance through the lender.

Some mortgage lenders impose redemption penalties on borrowers who redeem the mortgage early or within a specific period of time, for example, within three years of taking the mortgage out. This is also more common with fixed, discounted, capped, deferred rate, or base rate tracker mortgages. Borrowers wishing to change mortgage should calculate the amount of money they would save in reduced interest rates and compare this against any redemption penalty and other charges such as arrangement fees.

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