Average interest rate

What is the average mortgage interest rate

Simon Banks

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Mortgage interest rates can be complicated. There’s a lot to take in from the initial rate to the SVR and from fixed rates to trackers. Setting aside the different options available for one moment, many buyers want to know the average mortgage interest rate. Understandably, knowing the average rates gives you an indication of the quality of your mortgage deal. With that in mind, this guide has the lowdown on average mortgage interest rates and what they could mean for you.

What is the base rate?

First and foremost, it’s necessary to understand how interest rates work. The majority of lenders model their interest rate on the base rate. This is the official interest rate for the UK, which the Bank of England sets.

Yet, that doesn’t mean all mortgage rates are the official rate. The lender adds their rate on top, so it’s unlikely that your mortgage product’s interest rate is just the Bank of England’s rate. Essentially, your mortgage interest rate is likely to be the base rate plus the additional amount from the lender.

How are average interest rates calculated?

Landing on the average interest rate can be tricky, especially as borrowers offer different rates to remain competitive. Several factors go into determining interest rates, including your credit score, the amount you want to borrow and the average length of mortgage.

What is the average mortgage length?

Indeed, the average length of mortgage has a pivotal role to play. The average mortgage length is 25 years, though they can last for as long as 40 years. The interest rate will vary depending on the length of the mortgage. Generally speaking, longer mortgages come loaded with higher interest rates.

The role of the deposit

It’s important to remember that these are just averages. Again, many factors come into play – for example, the lower the loan to value (LTV), the lower the interest rate. So if you have a higher deposit, you’ll likely pay a lower interest rate. For example, someone paying a 5% deposit (95% LTV) on a mortgage of £250,000 will pay higher interest rates than someone paying a 35% deposit for the same mortgage.

What’s the average interest rate?

If we look at an adjustable-rate mortgage between one and five years (also known as ARM), the average rate is currently 3.43%, according to data from specialists S&P Global.

A 15-year fixed rate has an average interest rate of 3.37%, while a 20-year fixed-rate sees average interest rates of 3.85%. These numbers might give you an idea of average rates, but what does it look like in real-time?

Let’s say you borrowed £200,000 to buy a home costing £250,000 on a 15-year fixed rate with an interest of 3.37%. In that scenario, your monthly repayments would be in the region of £985 per month.

What about shorter fixed-term mortgage rates?

Lenders typically offer an initial rate (also known as discounted rate and reduced rate) to entice buyers to get a mortgage with them. This initial rate is usually fixed for a set amount of time.

Traditionally, the fixed period is between two and five years, although longer-term options are becoming increasingly common on the market. The average rate for a five-year year fix is about 1.74%. After the initial five-year period, the mortgage would revert to the SVR, which is usually around 4.1%.

And how about longer-term mortgages on a fixed rate?

Longer-term mortgages with a fixed rate are becoming more popular with buyers. Some of these fixes can last for 20-30 years and, in some cases, as long as 40 years. Currently, the average interest rate for a 30-year mortgage is 4.19%. That doesn’t mean you’ll pay 4.19% on every 30-year-fixed-rate mortgage, but it does give you some idea of the current averages.

Final thoughts: average mortgage interest rates

The average mortgage interest rate is just an indication and not what you can expect to pay. Mortgage interest rates are incredibly varied as they’re based on several factors, including the average length of mortgage. Therefore, it’s important to do the research and see which lenders offer the best rates for your circumstances.

Start by checking out Molo’s interest rates for FlexLife mortgages, a long-term residential option with fixed rates for between 15 and 40 years.

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