Committing to a mortgage is one of the biggest financial decisions & commitments you will ever have to make. That’s why it’s incredibly important to do your research first to not only make sure you understand what you’re getting yourself into but also find the best deals out there.
There is a lot of mortgage interest rate jargon out there and it can be an overwhelming subject. Today we’re going to walk you through everything you need to know about them.
In order to buy a house most people need to get a loan from the bank or mortgage lender, more commonly known as a mortgage. It’s helpful to know that there are two parts to a mortgage. They are:
On average a bank or mortgage lender will lend up to 95% of the total cost of the home depending on your circumstances. You then agree to pay that amount back, with interest, over a specific period of time. The interest is how the bank or lender makes their money.
The most common mortgage repayment time is 25 years although it can be longer or shorter depending on the person’s financial situation. There are also several different repayment types to choose from and the one you choose will depend on your situation.
A mortgage interest rate is the percentage used to calculate how much interest you will pay on the amount you borrow. Put simply it’s how much it’s going to cost you to borrow the money. The interest rate will usually be determined your deposit and financial circumstances.
If you choose a loan with a higher interest rate your monthly repayments will be higher. If you choose one with lower interest rates your monthly repayments will be lower.
A lender uses a percentage of your mortgage balance to calculate the interest rate. The majority of interest rates used to calculated annually but almost all are now calculated either monthly or daily, this means every time you make a payment your interest is being recalculated and if you make overpayments you will see the benefit straight away.
It’s not that easy to work out what portion of interest you will pay vs what portion of your monthly payment is going toward paying down the loan, this is because the interest is not calculated evenly throughout the term.
Typically the higher your deposit the lower your interest rate, mortgages can be available from as little as 5% deposit but the lowest rates are not available unless you have around 40% deposit.
Mortgage interest rates can be fixed or variable.
If you choose a fixed mortgage rate it means your monthly repayments are fixed for a set amount of time. The time frame can be as short as two years or as long as 15 years. This comes with the security that your monthly payments will not change which assists with monthly budgeting.
If you choose a variable rate mortgage the interest rate can go up or down. This means your monthly repayments are ‘subject to change’.
There are several different types of variable rates, the three most common are tracker rates, discount rates and the standard variable rate.
If you have a tracker mortgage they normally follow the Bank Of England base rate which is currently set at 0.1%. If the base rate changes your interest rate will change too. As an example a tracker rate would be described as ‘base rate +2%’ that means your total interest rate would be 2.10%. Again if the base rate changes then that rate would also change.
The standard variable rate is a lenders default rate if you are not on a fixed rate or a tracker rate or a discount rate or some other type of introductory rate then you will most likely be on standard variable rate.
The standard variable rate is controlled by the lender so they will decide whether the rate goes up or down however generally speaking the lender will only change the standard variable rate if there is a change to the costs of borrowing for example if the base rate was to go up most lenders would follow suit and increase their standard variable rate.
A discounted rate is very similar to a tracker rate mortgage however instead of following the Bank of England base rate a discounted rate follows the lenders standard variable rate for a set period of time.
The lender then discounts their standard variable rate, so for example the lenders standard variable rate could be 3.59% however they would offer a 2% discount off of their standard variable rate for a set period of time.
This would then mean that your payable rate would be 1.59%. If the lender changes their standard variable rate then your rate would also change.