The Bank of England often announces changes to the base interest rate. When this happens, it's likely to have a knock-on effect on mortgage rates.
You might remember headlines back in 2023 about mortgage rates reaching their highest level in 15 years because the cost of borrowing (interest rates) was so inflated.
That was bad news for those wanting to get on the housing ladder and many people chose to wait for interest rates to come back down to avoid large monthly repayments.
Well the good news is, mortgage rates have generally been going down since around August 2024, when the Bank of England's base interest rate was cut.
In 2025, there have been several more cuts that have all helped bring mortgage rates back down from the record highs we saw two years ago - but the drops in interest rates have tended to be smaller than decreases in the base interest rate.
So, how do changes to mortgage rates affect your total loan and monthly payments?
First, you need to understand what influences mortgage rates.
How do mortgage rate changes happen?
Your mortgage rate is the amount of interest you need to pay on your mortgage each year. So if you have a 4% mortgage rate then each year 4% of the amount you owe is added to your mortgage.
With most mortgages, this is calculated monthly and you’ll pay the interest off each month as well as paying off some of the actual loan.
So, lower interest rates mean there’s less interest to pay each month.
Mortgage rates are set by your mortgage lender, and they’ll have their own set of rules that they go by. But they'll also take into account the base interest rate, which is set by the Bank of England.
You can find out more about how mortgages work in our guide.
How the base interest rate changes
The Bank of England sometimes changes its base interest rate depending on how the country’s economy is doing. This is so it can keep the cost of living, or inflation, from getting out of control.
When the Bank of England announces it’s lowering the base interest rate, it’s likely mortgage lenders will also lower their interest rates.
But, if the Bank of England instead decides to raise the base interest rate, mortgage rates are likely to go up.
How do mortgage rate changes affect me?
Simply put, your mortgage rate is how much interest you pay on the money you borrow to buy your home.
So, if you take out a mortgage with a lower interest rate, you’ll have less to pay back than you would if the rate was higher.
When you take out a fixed-rate mortgage, you agree to an interest rate that won’t change until the end of the fixed term. After that, you have the opportunity to look for a different rate. So, you want interest rates to be nice and low when your fixed-term finishes!
If you take out a tracker mortgage, also known as a variable rate mortgage, the amount of interest you pay will change month-to-month.
How do mortgage rate changes affect my monthly mortgage payments?
Let’s look at the numbers.
A quarter of a percent (0.25%) might not seem like much when you’re choosing between mortgages, but this is actually quite a lot of money when you consider how much you’re going to be borrowing to buy your house.
Let’s imagine you want to buy a house for £350,000 with a 10% deposit. Your bank has offered you a 25-year mortgage with a 5% interest rate fixed for two years.*
Take a look at the tables below to see how taking 0.25% off that 5% could make a big difference to the amount you pay back. It reduces your mortgage payments by almost £50 a month and would mean you'd have £14,000 less to pay back in total (assuming this mortgage rate didn't change)!
*Figures from MoneySavingExpert’s mortgage repayment calculator.
| Deposit amount | Loan amount | Interest rate | Loan amount with interest (the total amount you'll pay) | Monthly payment (repayment mortgage) | Amount of monthly payment that's interest |
|---|---|---|---|---|---|
| £35,000 | £315,000 | 5% | £552,637 | £1,842 | £1,313 |
| Deposit amount | Loan amount | Interest rate | Loan amount with interest (the total amount you'll pay) | Monthly payment (repayment mortgage) | Amount of monthly payment that's interest |
|---|---|---|---|---|---|
| £35,000 | £315,000 | 4.75% | £538,511 | £1,795 | £1,246 |
How can I avoid a high mortgage rate on my first home?
If you’re getting ready to buy your first home, you’re likely keeping a close watch on mortgage rates.
The best way to make sure you’re getting the best deal that’s available at the moment is to use a mortgage adviser. They will be able to shop around on your behalf and find products that you’re likely to be accepted for.
There are a few factors that could also work in your favour:
- If you're a first-time buyer. As a first-time buyer, you may find that some providers offer mortgages with fairly low interest rates that are only available to people who have never owned a home before.
- If you're happy to fix your mortgage rate longer term. You may also be able to get a lower rate if you agree to a longer fixed term. Banks will often offer lower interest rates for longer fixed terms - but not always.
- If you agree to pay back your mortgage quicker. Similarly, if you agree to pay your mortgage back over a shorter amount of time (e.g. 20 years rather than 30 years), you’ll be paying less interest as you’ll pay the debt off quicker. But this will mean higher monthly payments as you’ll be paying more off the mortgage each month.
- If you have a bigger mortgage deposit. One of the best ways to avoid paying a high mortgage interest rate is by saving up as much as possible for a mortgage deposit. This will mean banks are more willing to offer you lower rates and you’ll also have less money to pay back so they're taking less risk lending to you.
Introducing OneFamily's Lifetime ISA
If you’re looking to build up a deposit for a first home, a OneFamily Lifetime ISA could be a good option.
You can invest up to £4,000 each tax year, and you’ll get a 25% government bonus on everything you put in.
This means you can get up to £1,000 from the government each tax year to help you get on the property ladder!
Just make sure you plan to use the money to buy your first home, as you’ll have to pay a 25% government withdrawal charge if you withdraw money for anything else (this charge stops applying after you turn 60).
OneFamily's Lifetime ISA invests in stocks and shares. While gives your money has good potential to grow, but the value of your investments could go down as well as up and you could get back less than you've put in.
