Why Does The Interest Rate Of Your Mortgage Change?
The biggest difference between a mortgage and other types of loan is the fact that the interest rate changes throughout the term of the loan. Why is this? And which type of interest-rate arrangement is best?
The reason the interest rate varies across the term of the mortgage is probably due partly to the fact that mortgages are taken out over longer periods than most other types of loan. It is impossible for companies to predict what interest rates in general are going to do so they like to have the option of changing them.
This was always an issue people were concerned about with fixed rate mortgages. It was felt that you could easily lose out by fixing yourself up with several years of interest at a rate that would be higher than the market if there was to be a period of dropping rates.
The real benefit of a fixed rate mortgage is not for those people who like to save every penny that can, but rather for those who like to know for sure what their monthly outgoings are going to be. There are never really any surprises with a fixed rate mortgage. And if you keep an eye on the Base Rate so you can see whether a rise is likely on your mortgage once the fixed rate ends, you shouldn’t get into problems then either.
Modern fixed rate periods tend to be quite short, commonly, in the region of two to five years. There was a time in the nineteen sixties when you could easily get a fixed rate mortgage for ten years and even longer, sometimes for the entire length of the mortgage. Perhaps they disappeared because lenders lost too much money?
Bank of England
Interest rates fluctuate because the Bank of England sets a Base Rate of interest which then affects the entire economy of the country. Lenders always peg their interest rate slightly above the Bank of England Base rate. It is regularly reviewed and it is then up to the individual lending company to decide whether they will adjust the interest rate on their loans accordingly. Frequently people on a variable rate mortgage won’t get affected by all the minor fluctuations of the base rate.
Influencing the High Street
The base rate varies as the Bank of England tries to stimulate a sluggish economy, in which case the rate comes down, or if it is trying to put the brakes on a growing economy, then the rates will go up. There was a period not so long ago when all the talk on the news was of the Bank wanting to stimulate growth and so rates came down.
When this happens it should affect all types of loans, credit cards included, but that’s not always the case.
Quite often you will also hear the phrase, “limiting consumer spending”, this is a direct result of the Bank of England putting rates up – they put the Base Rate up and mortgage companies put your mortgage interest up which affects how many pounds you have in your pocket and hence your spending power.
What type to choose?
Whether you chose to go for a variable interest rate, one that is capped or one that is fixed for some years, will depend entirely on your own individual circumstances. It is a good idea to hunt around the Internet for different mortgage rates and read all the small print on each one.
Failing that, speak to an Independent Financial Advisor who will recommend specific products from the entire market. Don’t ask at a bank for advice or at a building society unless you have decided their mortgage is the one you want – neither of these institutions is allowed by law to recommend any other product except theirs.
Security or bust
Frequently the way you want the interest treated boils down to things other than hard cash. There are going to be numerous circumstances that will dictate whether you want to have the security of knowing how much you are going to have to pay every month or not and you will each have individual preferences on how much security you want from the products out there.
Just remember, never apply for a loan that is more than you really can afford to repay. There is no point in buying a house only to lose it in twelve months time because you can’t afford it.
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