How does Mortgage Interest Work?
What is a mortgage interest rate?
A mortgage rate is the rate of interest charged on a mortgage by your mortgage lender for borrowing money. Mortgage interest rates are determined by each mortgage lender.
Your interest rate will be specific to the mortgage product you have. These can be over any period, typically from 2 years up to 10 years. While your overall mortgage term may be longer than this, you will have a number of products during the term of your mortgage. Once each product comes to an end you can switch to a new product, with a different interest rate and product term with the same lender. Alternatively, you can look to move your mortgage to another lender at this point, this is known as remortgaging.
So how do they work?
There are different interest rate options when It comes to choosing a mortgage. Here at the Tipton, we offer:
- Fixed Rates; and
- Discount Rates (also known as variable rates)
All mortgages will show an APRC. APRC was introduced by the Financial Conduct Authority (FCA) in 2016 and stands for Annual Percentage Rate of Charge. The purpose is to show you the overall cost of your mortgage. An APRC is a rate that can be used to compare different mortgage products as it includes any fees etc. to give an overall view.
It is worth remembering that the use of APRC’s can be limited. If you decide to switch to a new rate or remortgage to a new lender at the end of your product term, you will not remain on the standard variable rate (SVR), meaning the original APRC, is no longer applicable.
Fixed rate vs discounted (variable) rate
A fixed rate mortgage charges a set rate of interest that does not change throughout a specified period. The monthly payments will stay the same for that duration. This can make budgeting easier for homeowners.
A discount or variable rate mortgage means the interest rate can change throughout the product period. Lenders can choose to reduce or increase their interest rates while you are within the product term, which means your monthly repayments can change with little notice. However, these rates typically tend to be lower than fixed interest rates.
Interest rates are typically higher on fixed rate mortgages, as you are paying for the security of knowing that your repayments cannot change during the product term.
Why are mortgage rates important?
Your mortgage interest rate is important as it impacts on the cost of your monthly mortgage repayments. Put simply, the higher the interest rate the higher your monthly repayments are likely to be.
How are mortgage rates set?
Mortgage rates are decided by your mortgage lender. There are a variety of factors that impacts how mortgage rates are set. This can include:
- The cost of funds: lenders must fund your mortgage in some way. How the lender does this can affect the mortgage rate. Many building societies do this through the savings deposits acquired from their savers, other funding available includes funding through wholesale markets.
- Loan to value (LTV): where you have a lower deposit, the risk of lending to you increases. Due to this, it is not uncommon for interest rates to be lower, the larger deposit you have.
- The market: mortgage rates available in the wider market are likely to influence where your lender will consider setting their rates. Alongside remaining competitive, lenders will also need to consider their own business targets.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE