Mortgage interest rates available to new borrowers, whether buying or remortgaging, are constantly changing. These changes are caused by the economic environment as well as the appetite for lending from each mortgage provider at the time. Economic conditions affect major directional changes in the interest rates available. Mortgage lenders are then constantly making minor adjustments to control the amount of lending they do.
The most common types of mortgage interest rates are fixed, tracker and discount. The mechanism by which each of these rates are changing differs. This affects when and how the rates available to prospective borrowers change and we’ll explore this in more detail in this blog.
Firstly, it’s important to note the interest rate on a fixed rate mortgage is secured at the point of application for the duration of the product term. Conversely, the interest rate on tracker rates and discount rates will continue to vary throughout the product term depending on changes in the underlying interest rate benchmark.
Fixed rate mortgages are largely determined by swap rates. Without going too deeply into what these are, interest rate swaps are necessary for mortgage lenders to mitigate the risk in offering fixed rate mortgages. Swap rates are calculated from market predictions on interest rates over the term of the swap rate. This affects the interest rate lenders charge on fixed rate mortgages over the same term. If swap rates are changing, mortgage lenders will increase or decrease the cost of fixed rate mortgages to ensure they remain profitable and competitive.
Tracker rate mortgages are linked to the Bank of England base rate. Base rate is adjusted by the Bank of England as part of its role to maintain price stability, controlling inflation. Mortgage lenders apply a margin above the base rate to form the interest rate charged to borrowers on tracker mortgages. The margin is set at the point of application, but the actual rate charged will alter with changes to the base rate. An increase or decrease in the Bank of England base rate will cause a change in monthly mortgage payments.
Discount rate mortgages are linked to the standard variable rate (SVR) set by each lender. SVR represents a default rate which borrowers may fall onto at the end of the product term, before a remortgage or product transfer goes through. SVR is predominantly determined by the current economic climate. However, as it is moved at the discretion of each lender, it has the potential to be more volatile than the Bank of England base rate. Mortgages lenders apply a margin below their SVR to form the interest rate charged to borrowers on discount mortgages. The margin is set at the point of application, but the actual rate charged will alter with changes to SVR. An increase or decrease in SVR will cause a change in monthly mortgage payments.
Media often imply a direct correlation between the Bank of England base rate and the interest rates available on fixed rate mortgages. The reality is fixed rate mortgages have generally moved well ahead of an announcement to a change in the Bank of England base rate. Variable rate mortgages, such as the tracker rates and discount rates discussed, move at the time of change to the underlying interest rate benchmark. If you’re wanting to know more information related to mortgage interest rate changes, what type of mortgage interest rate would be most appropriate for you or if you have any other mortgage and life insurance queries, we’re here to help with free, professional advice.