Mortgage Interest Rates Explained

Mortgage calculator. House, noney and document. 3d

Mortgage interest rates determine how much it will cost for you to borrow money to buy a property, borrow money or get a loan from almost anywhere.

The amount you pay for your monthly repayments will depend on your mortgage interest rate. Interest rates around the world are managed slightly differently. For example, in the UK, The Bank of England controls the base rate, which controls the country’s interest rate, whereas, in the US, the Federal Reserve has this job.

Why is your interest rate important?

It is important to be aware of your mortgage interest rate as this will determine how much you will be paying each month. If your interest rate is higher, your overall monthly repayments will also be higher. Importantly, you may not know when you will need to get any type of fast loan or what type of loan you will need and so, being aware of interest rates can help inform your decision as to which loan type and the amount is best for you.

The exact interest rate will depend on the amount of your mortgage; interest rates are calculated as a percentage of the value of the mortgage.

Depending on the type of mortgage that you have, you will usually repay a set amount of the principal mortgage amount back per month plus interest.

How do you know which mortgage interest rate you will pay?

When choosing a mortgage, you have the option to choose a fixed-rate mortgage or a variable-rate mortgage. Mortgages are quite unique when compared to the likes of medical finance in the USA (source: GlobMed) or even credit to purchase a car, as the consumer has more choice when it comes to the type of interest arrangement they will have with the lender.

Fixed-rate mortgages are mortgages in which the interest rate is fixed for a certain period of time – this can be anything from two to ten years. With a fixed-rate mortgage, your monthly mortgage repayments will be the same each month.

Variable-rate mortgages, on the other hand, have interest rates that could fluctuate from month to month meaning that your mortgage repayments will change. There are a few different types of variable-rate mortgages that adhere to different base rates.

For example, tracker mortgages typically track the Bank of England base rate and will fluctuate in accordance with that value. Discount mortgages, however, follow the lender’s standard variable rate – a rate that is defined by the lender. The lender will set a certain standard variable rate and you will pay an interest rate of this rate minus a discount.

How can you find the best mortgage interest rates?

The exact interest rate you pay will depend on the lender you are working with, the mortgage amount you are borrowing, and the type of mortgage. Not only that, it will also depend on your specific financial circumstances. Here are some key steps on how to maximize your chances of getting the best interest rates for your mortgage:

  • High deposit value – typically, you will receive the best rates if you borrow at a low loan-to-value ratio; this means that you are only borrowing a relatively small percentage of the property value. The higher the deposit you are able to put down, the less you will need to borrow and the more likely you are to receive better mortgage interest rates.
  • Good credit score – mortgage providers will want to check your credit history when approving whether or not you are eligible for a mortgage and at what rates. If you have a good credit score, it demonstrates to lenders that you are reliable at repaying your debts.
  • Compare the market – there are many different mortgage lenders and types of mortgage products. It is worth comparing different options to see what might be the most suitable deal for your specific circumstances.
  • Work with a mortgage broker – mortgage brokers can help you save time and effort by advising about which mortgage providers are most likely to accept you and which could offer you the most competitive rates to suit your financial circumstances.


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