When purchasing a property, it is likely that you will need to take out a mortgage in order to finance the purchase. A mortgage is essentially a loan that is secured against the value of your property, and as with any loan, interest will be charged on the amount that you borrow. In the UK, the interest rates on mortgages can have a significant impact on the amount that you pay each month, and understanding how interest rates work is essential if you are looking to buy a property.
In this article, we will explore how interest rates affect mortgage payments in the UK, and what factors you need to consider when choosing a mortgage. Here at Aventine Property clients have different ways to invest and getting a fixed-term loan is one of your options.
How do interest rates work?
Interest rates are essentially the cost of borrowing money. If you take out a loan or a mortgage, you will be charged interest on the amount that you borrow, and this interest is usually calculated as a percentage of the total amount that you owe.
Interest rates are set by the Bank of England, which is the central bank of the UK. The Bank of England has a mandate to keep inflation at a stable level, and one of the ways that it does this is by adjusting the interest rate. If inflation is high, the Bank of England may increase the interest rates in order to encourage people to save more and spend less. Conversely, if inflation is low, the Bank of England may lower the interest rates in order to stimulate spending and investment.
How do interest rates affect mortgage payments?
When you take out a mortgage, you will agree to pay back the amount that you borrow plus interest over a set period of time. The amount of interest that you pay will depend on the interest rate that is in place at the time that you take out the mortgage. Generally speaking, the higher the interest rate, the more you will have to pay each month.
For example, let’s say that you take out a mortgage for £200,000 over a 25-year period, with an interest rate of 2%. Your monthly repayments would be £897.23. However, if the interest rate was to rise to 4%, your monthly repayments would increase to £1,055.07. Conversely, if the interest rate was to drop to 1%, your monthly repayments would decrease to £764.99.
It is worth noting that interest rates can fluctuate over time, and so the amount that you pay each month may also change. If the interest rate increases, your monthly repayments will go up, and if the interest rate decreases, your monthly repayments will go down. This can make it difficult to budget for your mortgage payments, as you may not always know exactly how much interest rate you will need to pay each month. Read more money helper how interest rates affect mortgage.
Fixed-rate mortgages
One way to manage the uncertainty of interest rate fluctuations is to take out a fixed-rate mortgage. A fixed-rate mortgage is a mortgage where the interest rate is set at a fixed level for a set period of time, usually between 2-5 years. During this period, your monthly repayments will remain the same, regardless of any changes to the Bank of England’s base rate.
The advantage of a fixed-rate mortgage is that it can provide you with certainty and peace of mind, as you will know exactly how much you need to pay each month. This can be particularly useful if you are on a tight budget, or if you are worried about interest rates rising in the future.
However, there are also some downsides to fixed-rate mortgages. Firstly, fixed-rate mortgages tend to be more expensive than variable-rate mortgages, as lenders will factor in the cost of offering a fixed rate over a longer period of time. Secondly, if interest rates do fall during the fixed-rate period, you will not benefit from the lower rate.