How Are Mortgage Rates Calculated?

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If you have looked at mortgage products, you will know that mortgage rates can vary wildly between lenders. This can be confusing, especially if the products are comparable or similar.

Why are mortgage rates different and what factors determine the mortgage rate you will be offered? We look at how mortgage rates are calculated.

What is a Mortgage Rate?

A mortgage rate is an interest rate that a lender puts onto a secured loan. Mortgage rates are calculated as an Annual Percentage Rate (APR) and all UK lenders are required to show the interest rate in an APR format.

Some lenders will show an APR but calculate interest rates in different ways. For example, you may find your lender calculates interest daily, which means if you make an early repayment, you don’t pay any more interest than is owed on the day of making the early repayment.

In short, your APR is your headline rate and is the maximum a lender can charge in interest for any fixed rate product.

Why Are Mortgage Rates Important?

Mortgage rates allow lenders to manage risk. By having an interest rate a lender generates profit on the mortgage and ensures they can continue lending and account for any losses on their books.

For example, lenders will factor in that some people will not repay their mortgages and your interest rate will price in this risk. This is similar to how car insurance premiums are calculated, with the overall risk of a claim being made impacting the price of your personal policy.

The rate itself is calculated across many parameters which are outlined in the sections below.

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What Market Factors Affect Mortgage Rates?

There are a number of market factors that affect mortgage rates with the primary factor being the Bank of England base rate.

Bank of England Base Rate

The Bank of England sets a base interest rate. This base rate is the amount they charge lenders for borrowing money from them. For example, if a building society wants to borrow money to loan out to customers, they will approach the Bank of England and borrow at that base rate.

If the base rate increases, mortgage rates increase because the cost of borrowing money has increased for banks. Mortgage rates increase to cover this cost and are passed onto customers.

This passing on can be good as well as bad. With mortgage rates, and for borrowers in general, a rising base rate is bad and your borrowing interest rates will increase. For savers though, a rising base rate can mean a bank passes on a better interest rate for savings accounts.


To a lesser extent, competition plays a part in how lenders calculate their interest rates. Because the mortgage market is highly regulated and there are strict rules in place, it is often difficult for lenders to compete for customers.

Within the regulations, a lender may try to either offer a lower rate or a slightly different product. Most ‘high street’ lenders have broadly similar interest rates, and you should not see a huge variance in the interest rates offered between these lenders.

What Personal Factors Affect Mortgage Rates?

Personal factors affect a mortgage rate, such as the amount you wish to borrow, the amount of deposit you can put down and your credit score.

Credit Score

The ‘high street’ lenders have a very low risk profile and tend to lend to people with good or higher credit scores – this is reflected in typically lower interest rates.

Off the high street lenders can offer mortgages to people with adverse credit and have a better risk appetite. As a result, the interest rates they apply to their mortgages can be much higher.

How Much You Wish to Borrow

A lender calculates their mortgage rates on how much profit they make on the loan. A lender will typically have a sweet spot in the middle of their mortgage range where interest rates are lowest. This sweet spot is normally a sum where the lender can make a good profit level but isn’t over-stretching the amount they lend – which increases risk.

For example, a lender will not generate much profit on a mortgage of £50,000 compared to a mortgage of £300,000. Likewise, if the loan is substantial, such as £600,000, this is a lot of money for a lender to lose if the mortgage isn’t paid. Mortgage rates are calculated in part by how much you wish to borrow as a result.

Your Deposit Amount

In general, the higher the deposit you can put down, the better the interest rate. This is because if you fail to pay the mortgage, the lender can repossess the property and claim back the loss through equity. Many first time buyers struggle to save for a deposit which can impact the rate they are offered.

If a lender has lower equity, they know when the property sells at auction, they will recoup those costs. If a lender has a higher equity percentage, they could make a loss at auction (where sale prices are lower) or negative equity could prevent them recouping the loan in full.

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How Can I Estimate My Mortgage Rate?

As you can imagine, there are many factors that contribute to your overall mortgage rate, and you won’t be able to get a truly accurate mortgage rate unless you speak to a lender or mortgage broker.

You can get a rough estimate of a mortgage cost by using a mortgage calculator, but it is important to note these are generalised and the rate you might be offered could be substantially different. Using a whole of market mortgage broker is advantageous because they will be able to compare mortgage rates across a diverse range of lenders – finding you the best rate for your circumstances.

Boon Brokers is a UK-based Whole of Market Mortgage, Insurance and Equity Release Brokerage. Boon Brokers offers FREE, impartial, no obligation advice so contact us today to find the best mortgage rate for you.

Gerard BoonB.A. (Hons), CeMAP, CeRER

Gerard is a co-founder and partner of Boon Brokers. Having studied many areas of financial services at the University of Leeds, and following completion of his CeMAP and CeRER qualifications, Gerard has acquired a vast knowledge of the mortgage, insurance and equity release industry.