November 10, 2026
Mortgage Basics
How Mortgage Interest Rates Work
Mortgage interest rates explained: how Bank Rate and the markets shape them, how fixed, tracker and variable rates move, and how to compare deals including fees.
Mortgage interest rates are the price you pay to borrow money for your home. They’re shown as a yearly percentage of what you owe. Your rate depends on two things: the cost of money across the whole economy, which is heavily influenced by the Bank of England, and how risky your particular loan looks to a lender.
This guide explains how rates are set, why fixed and variable rates move differently, what lenders look at when they price your deal, and how to compare rates fairly, including fees.
Key points
- The Bank of England sets Bank Rate, but lenders set their own mortgage rates.
- Fixed rates are priced from market expectations of where Bank Rate is heading, so they can move before Bank Rate does.
- Tracker and variable rates usually change soon after Bank Rate changes.
- A bigger deposit and a clean credit history can open up lower rates.
- The lowest rate isn’t always the cheapest deal once fees are added.
4%Bank Rate, raised from 3.75% on 5 November 2026
4.63%average rate on new mortgages in September 2026
8 timesa year the Bank of England decides Bank Rate
£Mortgage repayment calculatorSee your monthly payment and total interest at any rateTry it →
What are mortgage interest rates?
The Bank of England describes an interest rate as the amount you’re charged for borrowing, shown as a percentage of the loan. With a mortgage, that percentage is applied to the balance you still owe.
In simple terms, interest is charged on the balance you still owe. On a repayment mortgage, part of each payment covers that month’s interest and the rest pays off the loan itself, called the capital. Early on, interest takes up a big share of each payment. As the balance falls, more of each payment goes towards the capital.
Illustrative example
£200,000 repayment mortgage at 4.5% over 25 years.
Monthly payment: about £1,112.
First month’s interest: £200,000 × 4.5% ÷ 12 = £750.
Paid off the loan in month one: about £362
Lenders’ exact methods vary, so this is a simplified illustration.
How rates are set: Bank Rate and the wider market
Mortgage rates start with the cost of money across the economy. Lenders then add their own margin on top.
Bank Rate
Bank Rate is the UK’s core interest rate, and the Bank of England sets it. Its Monetary Policy Committee decides eight times a year, roughly every six weeks, whether to change it. The Government gives the Bank a target of keeping inflation at 2%, and Bank Rate is its main tool for doing that.
The Bank says that when it raises Bank Rate, banks will usually increase how much they charge on loans, and the reverse happens when it’s cut. It’s also clear that the rates banks set depend on more than just Bank Rate.
Market interest rates and fixed deals
Fixed rates aren’t simply Bank Rate plus a margin. A Bank of England article explains that a two-year fixed mortgage rate is priced off a two-year market interest rate. That market rate is affected by Bank Rate and by expectations of where Bank Rate will go next. Lenders then add a margin for things like the risk of borrowers not repaying and competition between lenders.
This is why fixed rates can rise or fall before the Bank of England changes anything. If markets start to expect Bank Rate to go up, new fixed deals may get dearer straight away, and the same applies in reverse.
For a look at how much rates have moved over the years, see the history of mortgages in the UK.
How different types of mortgage rate work
The type of deal you choose decides how your rate behaves over time. Our guide to fixed, variable and tracker mortgages goes into each one in more depth.
| Type of rate | How it’s set | When it can change |
|---|---|---|
| Fixed | Set when you take the deal, usually for 2 to 10 years | Not until the fixed period ends |
| Tracker | Bank Rate plus a set margin, for example 4% + 0.75% | When Bank Rate changes |
| Standard variable rate (SVR) | Your lender’s own default rate | Whenever your lender decides |
| Discount | A set amount below your lender’s SVR | When your lender’s SVR changes |
MoneyHelper notes that fixed rates are usually higher than variable rates, but your payments stay the same for the fixed period. A standard variable rate is usually higher than other deals and can be up to 5% above Bank Rate. It also warns that some trackers allow the lender to raise the rate even if Bank Rate hasn’t changed, so the small print matters.
When a fixed or discount deal ends, you usually move to your lender’s SVR unless you choose a new deal. Our guide on what happens when your fixed-rate mortgage ends explains your options at that point.
What happens to mortgage interest rates when Bank Rate changes
How a Bank Rate decision reaches you depends on your deal.
- On a tracker: your rate follows Bank Rate. MoneyHelper explains that if Bank Rate rises by 0.25%, a tracker rate rises by the same amount, and falls in the same way after a cut.
- On an SVR or discount deal: your lender decides whether to pass a change on, and by how much. SVRs usually follow Bank Rate movements.
- On a fixed rate: your payment doesn’t change until the deal ends. The Bank of England notes that fixed-rate borrowers aren’t affected by Bank Rate during the fixed period.
Illustrative example
£200,000 tracker mortgage over 25 years, at Bank Rate 4% plus 0.75%, so 4.75%.
Monthly payment at 4.75%: about £1,140.
If Bank Rate rose by 0.25%, to give a rate of 5%: about £1,169.
Change: about £29 a month more
A 0.25% cut, to 4.5%, would bring the payment down to about £1,112. These figures are illustrative only.
Even on a fixed rate, Bank Rate still matters when your deal ends. The rates on offer then will reflect the market at that time, which could be higher or lower than your current deal. MoneyHelper notes that you can usually start looking at new deals in the last six months of your current one.
Why mortgage rates differ between lenders
Two lenders can offer quite different rates on the same day. The Bank of England explains that lenders add their own margin on top of market rates, reflecting things like their costs, the risk of borrowers not repaying and how hard they’re competing for customers. It also says lenders consider the risk of a loan not being repaid: the greater they think that risk is, the higher the rate they’ll charge.
Mortgage interest rates on offer also change often. UK Finance points out that mortgage offer rates can change significantly, sometimes even daily.
What affects the rate you’re offered
Beyond the wider market, a few things about you and your loan can change the rate you’re offered.
- Your loan-to-value This compares the size of your mortgage with the value of your home. MoneyHelper says lower LTVs mean better interest rates, and a lower LTV can widen the range of deals available to you.
- Your credit history MoneyHelper explains that a poor credit history can mean being offered a higher rate than advertised, being asked for a bigger deposit, or being turned down.
- The type and length of deal Fixed, tracker and discount deals are priced differently, and so are two-year and five-year fixes.
- The fee you pay Some deals with lower rates come with higher arrangement fees.
Our loan-to-value calculator shows which LTV band you’re in and how much more deposit would move you into a lower one. For more on saving up, see how much deposit you need to buy a home.
How a small rate difference adds up
When you compare mortgage interest rates, a difference that looks small on paper can add up to a lot over the life of a mortgage.
Illustrative example
£200,000 repayment mortgage over 25 years.
At 4.0%: about £1,056 a month, about £116,702 interest in total.
At 4.5%: about £1,112 a month, about £133,499 interest in total.
Difference: about £56 a month, or about £16,797 over 25 years
This assumes the rate stays the same for the whole term, which is unlikely in practice.
Comparing rates: why fees matter
The headline rate is only part of the cost. MoneyHelper warns that an upfront fee may get you a lower rate but might not save you money overall. It suggests comparing the total cost, not just the interest rate.
| Two-year fixed deal | Deal A | Deal B |
|---|---|---|
| Interest rate | 4.2% | 3.9% |
| Arrangement fee | £0 | £999 |
| Monthly payment | £808 | £784 |
| Interest + fee over 2 years | £12,319 | £12,427 |
Figures are for a £150,000 repayment mortgage over 25 years and are illustrative only. Here, the lower-rate deal costs about £108 more over two years once the fee is added. On a £300,000 mortgage, the same two deals would come out the other way round, with Deal B about £783 cheaper. Loan size makes a big difference to whether a fee is worth paying.
The APRC
Every mortgage comes with an APRC, or annual percentage rate of charge. MoneyHelper explains that it shows the yearly total cost of the mortgage, including fees and charges, and lenders must state it. It assumes you keep the mortgage for the whole term, so it’s most useful for comparing like with like rather than for a two- or five-year deal on its own.
Tip
When you compare deals, it may help to work out the total of the payments plus fees over the deal period, not just the headline rate. Our new payment calculator shows the monthly payment for any rate.
What is a good mortgage rate?
There’s no single “good” rate, because what’s available depends on the market at the time and on your own circumstances. One useful benchmark is the average. Bank of England figures show the average interest rate on newly drawn mortgages was 4.63% in September 2026, and the average across all outstanding mortgages was 4.03%.
A deal that suits one person may not suit another. A fixed rate gives you certainty. A tracker may cost less if rates fall, but more if they rise. The right balance depends on your budget and how you’d cope with change.
A fixed rate could mean
- the same payment every month for the deal period
- easier budgeting
- protection if rates rise
But it can also mean
- a rate that’s usually higher than variable deals at the start
- no benefit if rates fall
- an early repayment charge if you leave early
Across the UK
Bank Rate and the way mortgage rates work are the same across England, Scotland, Wales and Northern Ireland. Individual lenders’ rates and criteria can still vary.
Important
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
♥Free mortgage health checkCheck how your own deal could be affected, in 2 minutesStart →
Summary
Mortgage interest rates are shaped by Bank Rate and by market expectations of where it’s heading, with each lender adding its own margin. Fixed rates move with the market before you take them, while trackers and variable rates can change during your deal. Your deposit, credit history and the fees on a deal all affect what you pay, so comparing total cost may give a truer picture than the headline rate, depending on your circumstances.
Frequently asked questions
How are mortgage rates set?
Each lender sets its own mortgage rates. They’re shaped by Bank Rate, which the Bank of England sets, and by market interest rates, which reflect where Bank Rate is expected to go. Lenders then add a margin for their costs, the risk of borrowers not repaying and competition. Trackers follow Bank Rate directly, while fixed rates are priced from market rates.
Why do rates differ between lenders?
Each lender adds its own margin on top of market rates, reflecting its costs, its view of the risk of borrowers not repaying and how hard it’s competing for customers. Lenders also price deals differently depending on the loan-to-value, the length of the deal and the fees charged. That’s why two lenders can offer quite different rates on the same day, and why offers can change often.
Does my credit score affect my rate?
It can. Lenders look at your credit history when you apply, and MoneyHelper says a poor credit history can mean being offered a higher rate than advertised, being asked for a bigger deposit or being turned down. Checking your credit reports early gives you time to correct mistakes before you apply.
What is a good mortgage rate?
There’s no single good rate, as it depends on the market and your circumstances. A useful benchmark is the Bank of England’s average rate on new mortgages, which was 4.63% in September 2026. It’s also worth comparing the total cost including fees, as a slightly higher rate with no fee can sometimes cost less overall.
How often do rates change?
The Bank of England reviews Bank Rate eight times a year, roughly every six weeks. Lenders can change the rates on their new deals at any time, sometimes even daily. If you’re on a fixed rate, your rate won’t change until the deal ends, while tracker and variable rates can change during your deal.
Sources
- Bank of England – Interest rates and Bank Rate: our latest decision
- Bank of England – What are interest rates?
- Bank of England – Inflation and interest rates FAQs
- Bank of England – About a rate of (general) interest: how monetary policy transmits
- Bank of England – Money and Credit – September 2026
- MoneyHelper – Understanding mortgages and interest rates
- MoneyHelper – How will interest rates affect my mortgage?
- MoneyHelper – How to prepare for an interest rate change
- MoneyHelper – How much deposit do I need for a mortgage?
- MoneyHelper – Remortgaging to get the best deal
- MoneyHelper – Can you get a mortgage with bad credit?
- UK Finance – Trends in the Economy and Lending: what global tensions mean for your mortgage
Last updated: 10 November 2026. This guide is general educational information only and is not regulated financial advice.
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Mortgage Owl provides general educational information only, not regulated financial advice.
About the author: Steve
Steve is the founder of Mortgage Owl and is training to become a mortgage adviser. He’s currently studying Module 1 of 3 of CeMAP, the Certificate in Mortgage Advice and Practice.
He originally studied business, finance and accountancy, then spent 30 years in policing and the merchant navy before returning to his first passion: helping people make sense of money.
He writes every Mortgage Owl guide in plain English, so you can feel informed before you speak to an adviser.
Qualifications: Registered student with the London Institute of Banking & Finance (LIBF), studying for CeMAP.
He originally studied business, finance and accountancy, then spent 30 years in policing and the merchant navy before returning to his first passion: helping people make sense of money.
He writes every Mortgage Owl guide in plain English, so you can feel informed before you speak to an adviser.
Qualifications: Registered student with the London Institute of Banking & Finance (LIBF), studying for CeMAP.
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