Understanding mortgage interest and how it’s calculated
Key takeaways
Mortgage interest is the cost of borrowing money to purchase a home, calculated as a percentage of the loan amount
The longer your mortgage term, the more you’ll pay in total interest over the life of the loan
Paying more than your contractual monthly payment reduces the capital faster, lowering the overall interest paid
The interest rates on available mortgage deals change frequently, in line with market conditions and other factors
What is mortgage interest?
Mortgage interest is the cost you pay to a lender for borrowing money to buy a property. In simple terms, it’s the fee for borrowing the money.
It’s charged as a percentage of your loan (the interest rate)
For every pound you owe, you’re charged interest at an agreed rate.
Your monthly mortgage payment usually includes both interest and repayment of the loan
At the start of the mortgage, you typically pay more interest than later on in your mortgage term
Mortgage interest rates can be both fixed for a set period, or variable. This will depend on the type of mortgage you take out. Read our guide to find out more about the types of mortgage available.
How does mortgage interest work?
Mortgage interest is how lenders charge you for borrowing money – it’s calculated on what you still owe.
Mortgage paid over the length of your mortgage deal – the ‘term’.
As a simple example, if you borrowed £100,000 at an interest rate of 2%, you’ll have to pay £2,000 per year in interest.
Most mortgages are repayment mortgages. This means that, as well as paying off the interest every month, you also pay back a chunk of capital (the original amount you borrowed). This way, by the end of the term, you’ll own the property outright.
It’s important to understand that the longer the mortgage term, the lower your monthly payments will be, but you will pay more in interest overall.
For example, if you borrowed £200,000 at an interest rate of 4% over 20 years, you’d repay a total of £290,870 (including £90,870 interest). If you borrowed the same amount over 30 years you’d repay £343,738 (£143,738 interest).
Interest-only mortgages work in a different way. Your monthly payments are lower, but only cover the interest charged on loan. On a £200,000 mortgage at 4% over 20 years your monthly payment would be £667. However, you’d still owe £200,000 at the end of the deal, and you’ll need to have some way of paying off the debt.
How do lenders set mortgage interest rates?
The interest rate you’ll pay on a mortgage depends on a mix of market forces, risk assessment, and business strategy.
A key driver is the Bank of England's Bank Rate which influences how expensive it is for banks to borrow money.
Banks and building societies know they need to offer a competitive rate to attract borrowers, while also making enough in interest payments to make a profit.
Lenders offer different interest rates on different mortgage products, aimed at different borrowers.
When deciding how much interest to lend you, lenders will consider the following factors:
The cost of the money
Where the lender gets their money from, which they will then lend to you, influences the interest rate. It might be from savings deposits from its existing customers or borrowing from the market as a whole.
The Bank of England Base Rate also has an impact on the cost of funding for the lender. The base rate is the rate at which banks lend to each other.
Your credit history
Your credit history will have a strong bearing on the interest rate you’ll be offered. For example, if you’ve had debt problems in the past and missed debt repayments, you could have a low credit score.
Lenders will be wary that you might miss payments again in the future. This means you're likely to be offered higher mortgage rates than other borrowers with a stronger credit record.
Check your credit score for free and pick up tips on how to improve it with MoneySuperMarket’s Credit Score service.
The risk to the lender
When deciding what interest rate to charge you, the lender needs to ask what the chances are of you defaulting on the mortgage. If so, how will they recoup their losses?
This is where the loan-to-value ratio (LTV) is important. The higher the proportion of the property’s value you wish to borrow, the more risk for the lender.
For example, if you borrowed £90,000 on a mortgage to buy a £100,000 home, your LTV would be 90%. Should you default, the bank could repossess your home. However, the property is only worth £10,000 more than the bank lent to you.
In contrast, if you only need to borrow £60,000 for the same home, your LTV would be 60%. This is because you would own more equity in the property. If you then fell into difficulties and couldn’t keep up with repayments, the bank could take ownership of the property, and there is more equity there for it to recoup its money.
For this reason, the lower your loan-to-value ratio, the lower the interest rates you’ll be offered by lenders.
Lender’s targets and competition
Competition in the mortgage market will affect the interest rates on offer. If lenders are keen to attract new business, they might offer low rates to get new customers onto their books. This would act as a way of competing with other banks and building societies.
Conversely, when they want to limit their mortgage lending, they might increase rates to reduce the amount of new business coming in.
How often do mortgage interest rates change?
Mortgage rates can change very frequently – sometimes daily. How changing rates will impact you it depends on the type of mortgage you have.
Fixed-rate mortgages
New product rates can change daily or even multiple times a week
If you have a fixed rate mortgage, the rate will not change until the end of the fixed term (normally 2, 3 or 5 years)
Tracker mortgages
New product rates tend to change in line with changes to the Bank of England base rate (usually every 6 weeks)
If you have a tracker mortgage, the rate will change after base rate has gone up or down
Standard variable rate (SVR)
Lenders can alter their variable rate mortgages whenever they want
Movements often (but not always) follows base rate changes
In general, mortgage rates go up and down in line with the Bank of England base rate. Changes to this rate depend on inflation and other economic drivers.
Read this article to find out whether mortgage rates are likely to go up or down in 2026.
How does mortgage interest work with different mortgage types?
When it comes to taking out a mortgage, your choice is not limited to repayment or interest-only. You can also decide the type of mortgage you wish to go for, which will affect the amount of mortgage interest you’ll pay. The three most common types of mortgage are:
A fixed-rate mortgage
With a fixed-rate mortgage, the interest rate remains the same throughout the entire deal period. This is typically two to five years, although it is possible to get 10-year fixed rates too. This means you’ll know exactly what your monthly repayments are each month, making it easier to budget.
With a variable-rate mortgage the interest rate you pay is determined by your lender and can change from month to month.
A tracker mortgage
A tracker mortgage is a variable-rate mortgage that tracks the Bank of England base rate as it moves up and down. So, if the base rate changes, your mortgage rate will change too. You can monitor how base rate changes will affect your mortgage repayments by using our base rate calculator.
A standard variable rate (SVR)
A standard variable rate (SVR) is an interest rate set by your lender, usually a few percentage points above the Bank of England’s base rate. You will normally be switched to your lender’s SVR when your fixed rate mortgage expires.
A discounted variable-rate mortgage
A discounted variable-rate mortgage tracks a mortgage lender’s SVR. This means that, if the SVR goes up or down, so does your mortgage interest rate.
For more information, see our guide on how to choose the right type of mortgage.
How long does it take to pay off interest on a 30-year mortgage?
You pay interest on all mortgages up until the end of the agreed term. So, by definition, it takes 30 years to pay off the interest on a 30-year-mortgage.
You can reduce the time it takes to pay off the interest on a mortgage (and the overall amount of interest you’ll pay) by:
Choosing a shorter term: Opting for a 20-year or 25-year mortgage will mean you pay fewer monthly instalments and less interest overall. However, with a shorter loan term you’ll have higher monthly payments
Overpaying: Most mortgages allow you to pay more than the agreed instalment every month. This helps you reduce the capital you owe more quickly and means you’ll pay less in interest overall. However, there is usually a limit to how much you can overpay before you face an early repayment charge. So, make sure you check this beforehand
Use our free mortgage calculators to work out how much you can borrow or your future mortgage repayments.
What is an interest-only mortgage?
As the name suggests, with an interest-only mortgage, you only pay the interest on your home loan every month. However, you’ll have to pay off the capital at the end of the mortgage term. So, you’ll need to have a repayment plan in place to qualify for an interest-only mortgage.
Fewer lenders now offer interest-only mortgages than in previous years. This is largely due to concerns that many borrowers lack a clear plan to repay the original loan, which could leave them unable to pay back the capital at the end of the term.
Compare mortgages with MoneySuperMarket
It’s easy to find and compare mortgages from a range of lenders with MoneySuperMarket.
Whether you’re looking for a fixed-rate or variable-rate mortgage, our mortgage comparison tool can help you find a great deal for your individual circumstances.
When comparing deals, it’s not just the headline interest rate to consider. You should also factor in any fees, such as an arrangement fee to set up the mortgage, and potential early repayment charges.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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Emma Lunn
Personal finance expert
Emma has written about personal finance for almost 20 years, with a career spanning several recessions and their inevitable consequences. Emma’s main focus is helping people learn to manage their...
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Senior Content Editor
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