First-Time Buyers: How Mortgage Interest Rates Really Work

If you’re struggling to get your head around mortgage interest rates, you’re not alone.

Terms like loan-to-value (LTV), SVR, tracker, “repayment vs interest-only” can feel overwhelming – especially if you’ve never bought a home before.

The good news? Mortgage interest is more straightforward than it looks once you break it down.

This guide explains what interest rates are, how they’re set, and how to put yourself in the best position as a first-time buyer.

Your home may be repossessed if you do not keep up repayments on your mortgage.

1. What are mortgage interest rates?

When you take out a mortgage to buy a property, you agree:

• How much you’re borrowing (the capital)

• How long you’re borrowing it for (the term)

• How much you’ll pay each month

The interest rate is the cost of borrowing that money.

• Higher rate = higher monthly payment (and more total interest over time)

• Lower rate = lower monthly payment (and less total interest, all else equal)

Interest rate is not the only thing to look at (fees, term, and type of deal also matter), but it’s a big part of whether the mortgage is affordable.

2. Repayment vs interest-only mortgages

Broadly, there are two main ways your mortgage can be structured:

Repayment mortgage (capital + interest)

This is what most first-time buyers use.

• Each monthly payment covers interest and pays back some of the capital.

• Early on, most of your payment is interest; over time, more goes towards capital.

• If you make all payments on time for the full term, the mortgage balance should be fully repaid at the end.

Most modern repayment mortgages calculate interest daily but collect monthly – so overpayments can reduce interest sooner.

Interest-only mortgage

With interest-only:

• Your monthly payment only covers the interest, not the capital.

• At the end of the term, you still owe the full original loan amount.

You must have a clear, credible repayment plan for the capital (e.g. sale of the property, investments, other assets). Lenders are a lot stricter about who they’ll allow on interest-only, especially for residential (owner-occupied) purchases.

It can mean lower monthly payments now, but it comes with more risk if:

• Property prices fall

• Your repayment plan doesn’t work out

For most first-time buyers, a repayment mortgage is the standard and safest starting point.

3. How do lenders decide what interest rate you pay?

The “headline rate” you see in adverts is only part of the story. The rate you’re actually offered depends on a mix of factors:

A. Loan to value (LTV)

LTV is the percentage of the property’s value that you’re borrowing.

Example:

• Property price: £200,000

• Deposit: £40,000

• Mortgage: £160,000

LTV = £160,000 ÷ £200,000 = 80%

• Lower LTV (bigger deposit) = usually better rates and more choice

• Higher LTV (smaller deposit) = usually higher rates and fewer options

Rough rule of thumb: lenders tend to see sub-80% LTV as lower risk, but there are important bands (e.g. 95%, 90%, 85%, 80%, 75%…) with different pricing.

For first-time buyers, increasing your deposit even slightly (e.g. from 10% to 15%) can unlock a cheaper rate.

B. Your credit profile

Lenders don’t just look at your “credit score” from an app – they look at your actual credit history:

• Payment history (missed/late payments)

• Defaults or CCJs

• How much credit you already use

• Stability of addresses and accounts

Each lender has its own risk model. You can have a mediocre “score” on a consumer report but still be acceptable to a lender if you avoid the major red flags.

Improving your credit profile (and avoiding new debt just before applying) can help you qualify for better rates and more lenders.

C. The Bank of England base rate

The Bank of England base rate is the interest rate the Bank charges other financial institutions. Lenders use it as a benchmark when pricing:

• Tracker mortgages are directly linked to the base rate

• Other fixed and variable deals are priced relative to it and to wider money market conditions

When the base rate changes, variables and trackers are affected quickly; fixed rates move according to what lenders expect will happen over the coming years.

D. Lender competition and strategy

Banks and building societies also have:

• Their own funding costs

• Market share targets

• Appetite (or lack of) for particular borrowers (first-time buyers, self-employed, higher LTVs, etc.)

That’s why two lenders may offer very different rates to the same person.

4. Types of interest-rate deals

Once you understand the drivers, the next step is understanding the types of mortgage rates.

Tracker mortgages

• Directly linked to the Bank of England base rate (e.g. base rate + 1.5%)

• When base rate goes up or down, your payment normally changes in the next month or so

• Gives you flexibility, but less payment certainty

Fixed-rate mortgages

• Your interest rate is locked in for a set period (often 2, 3, 5 or 10 years)

• Your monthly payment stays the same during the fixed term

• If rates rise, you benefit (you’re protected)

• If rates fall, you don’t benefit (you stay on the fixed rate unless you pay to change deal)

Fixed rates usually come with early repayment charges (ERCs) if you leave before the term ends, so they’re less flexible but more predictable.

Standard Variable Rate (SVR)

• Each lender has its own SVR

• It’s not usually directly tracked to the base rate – the lender can change it when they choose

• When your initial fixed/tracker/discount deal ends, you normally default to the SVR

SVRs are often more expensive than other available deals, which is why many people remortgage or product-switch before they fall onto SVR.

Discount variable mortgages

• These are “SVR minus X%” deals (e.g. SVR – 1.5%)

• If the lender’s SVR goes up or down, your rate moves with it, keeping the discount

• Still variable, so payments can change, but often cheaper than SVR itself

5. Which mortgages tend to have higher interest rates?

As a broad rule (not a guarantee):

• Longer fixed terms (e.g. 5–10 years) often have higher rates than shorter fixes

  • You’re paying for certainty over a longer period

• Higher LTV deals (95%, 90%) usually carry higher rates than lower LTVs

• More flexible products (no ERCs, extra features) can sometimes be priced higher

That said, it’s not always as simple as “fixed is more expensive than variable”. In some markets, a competitive fixed rate can be cheaper than SVR or some variables, especially for riskier LTV bands.

This is why looking only at the headline rate, without comparing fees and total cost over the fixed period, can be misleading.

A good adviser will compare the true cost: Monthly payments Product fees (added or paid upfront) Incentives (cashback, free valuations, legals)

6. How to get better mortgage interest rates

There are several levers you can pull to improve the rate you’re offered:

1. Improve your credit profile

• Pay all accounts on time

• Reduce credit card balances if possible

• Don’t max out overdrafts or limits

• Check your reports for errors or fraud and get them corrected

2. Increase your deposit (reduce LTV)

Even a small increase in deposit can:

• Move you into a better LTV band

• Unlock cheaper products

• Reduce your monthly payments

Consider saving a little longer, or exploring family support or schemes like Help to Buy – Wales or Shared Ownership if appropriate.

3. Use a mortgage calculator

Before you fall in love with a property:

• Use a Mortgage Calculator to see what different rates and terms mean in real monthly payments

• Stress-test yourself: could you still cope if rates were 1–2% higher than today?

4. Compare, don’t just accept the first offer

Different lenders = different pricing and criteria.

• Don’t just go to your own bank and stop there

• Use a whole-of-market adviser who can compare deals across multiple lenders and explain trade-offs

5. Time your remortgage / product switch

If you’re already a homeowner:

• Don’t drift onto your lender’s SVR

• Start looking for a new deal 3–6 months before your current rate ends

7. When you should get advice

If you’re:

• A first-time buyer

• Unsure whether to choose fixed, tracker, discount or SVR

• Using Help to Buy – Wales, Shared Ownership, or family-assisted schemes

• Self-employed or have complex income

…then speaking to a professional mortgage adviser is strongly recommended.

They can:

• Explain what the different rates actually mean for your situation

• Compare products from multiple lenders

• Help you avoid deals that look good on the surface but are expensive over time

Your home may be repossessed if you do not keep up repayments on your mortgage.

8. Next step: Get personalised help

Interest rates don’t have to be a mystery – but they are personal. The “best rate” for someone else might not be the right choice for you.

At Smart Move, we:

• Help first-time buyers in Wales understand how much they can borrow and afford

• Compare interest rates, fees and features across a wide range of lenders

• Guide you through every step from Agreement in Principle to completion

Schedule a free, no-obligation call with our Mortgage Advisor Let’s talk through your plans, your budget and your options – and find a mortgage deal that actually fits your life, not just a headline rate.

Your home may be repossessed if you do not keep up repayments on your mortgage.