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A Quick Run Down of Mortgage Interest Rates

MORTGAGES | 30.11.2020

The vast majority of loans have interest rates, which is essentially the percentage charged on top of the amount you owe. Interest rates can be seen as a payment that applies for using the services of the particular lender you have chosen. 

This works in a similar way when it comes to mortgages, as the interest is charged as a percentage of the loan amount, which is what’s known as the mortgage rate. The mortgage rate is one of the most important things to consider when looking at mortgage deals, and we wanted to break down mortgage rates for you here, so that you can make a more informed decision…

How does mortgage interest actually work?

When you decide to take out a mortgage, you’ll pay back back the value of your loan plus interest over the term. This of course will involve making monthly repayments, with a portion of each payment going towards the principal. These payments will reduce the loan and build your share of equity, which is the portion of the property you own. Whatever is left goes towards the interest fees.

How is the interest calculated?

The interest on a mortgage is calculated on the remaining balance each month. This decreases as more capital payments are made. So, the amount of interest there is to pay will decrease over time, and as this happens a bigger percentage of the monthly repayment will go towards the capital instead. Interest rates on mortgages are expressed on an annual basis, such as 2.5% per annum for example. When calculating the percentage that will be applied each month, this will need to be divided by 12. (mortgage rate ÷ 12) x remaining balance = monthly interest charge TaylorMade’s mortgage calculator can help you work out the total amount of interest you will pay over the term of a loan. It will let you know how much you can borrow and how much it will cost.  Remember, interest rates can change over time, depending on the type of mortgage you have chosen. Comparing the total amount of interest you will pay over the term isn’t necessarily the best possible way of finding the best deal for you. There’s also the option of interest-only mortgages, which allow you to repay the capital at the end of the term, as opposed to paying it off monthly. However, these types of mortgage deals aren’t as common.

What about the base rate? 

Lenders will borrow money from the Bank of England (BoE) to cover the cost when you decide to take out a mortgage with them. The term base rate refers to the interest charged by the BoE when it lends money to banks, which includes mortgage lenders. Lenders will then pass this cost onto you as the borrower. This is why the BoE’s base rate can have an impact on how much you will have to pay. If the base rate rises then borrowing money will become more expensive, but on the other hand it will also make saving money more rewarding.  People will naturally have a tendency to borrow less money and save more funds when the base rate is higher, and the opposite is often true when it’s low. The BoE adjusts the base rate regularly, as this helps to control inflation. It’s reviewed by the board of governors every month, and can therefore change at fairly short notice.  When comparing products, keep in mind that the one with the lowest rate isn’t necessarily the cheapest or most suitable for you. It’s advisable to always compare your choice against similar products, in order to determine whether a lender is offering a good rate. Of course the base rate and current economic climate at the time you take out a mortgage can change your rate. 

Should I fix my mortgage rate?

Opting for a fixed rate mortgage essentially means ‘locking in’ a certain interest rate for a set period of time. Many people choose this type of mortgage when they feel like they’ve found a ‘good’ rate and they want to give themselves some long-term security and certainty, and to protect themselves from rate rises in the future. If rates rise, you could end up saving a significant amount.  Keep in mind though, if rates remain competitive or even get lower, then you could end up paying more in the long-run. This might not work for you if you also plan on selling your home in the near future, as you’ll be locked in to a minimum term with a fixed rate. Another option is a variable-rate mortgage deal, but you should only look into this if you can afford to pay more should interest rates rise, and you want to be able to take advantage should they fall. Generally speaking, a fixed-rate term can last for 2, 3, 5 or even 10 years. Usually a shorter term means a lower rate, as this will mean less risk for the lender. You might have been better going for a higher rate for a longer time though if interest rates suddenly rise when you come to remortgage. Unfortunately, it’s impossible to really predict when rates will rise or fall, so you need to strike that fine balance between risk and reward in line with your own financial circumstances.

Speak to the experts

If you happen to be on a fixed rate mortgage and it’s not long until your end date, you can seek out the services of an experienced mortgage broker to ensure you are on the right deal.  Likewise, if you’re on a tracker or variable rate and you’ve noticed that your rate has increased, you can also speak to our experts, who are ready and waiting to help you. Our team can guide you through all the options available to you, to find you the best deal for your specific circumstances. For more information get in touch with us today on 0345 305 2540, or at info@taylormade-finance.co.uk.
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