Mortgage interest rates
Mortgage rates are the additional amount of pounds charged on a loan, secured by a real estate property. In some cases, these rates are set by lenders. They can either be fixed or variable. Fixed rates are the same throughout the life of the mortgage loan, while variable rates fluctuate according to many factors.
Current factors that affect rate movements
Understanding how and why interest rates rise and fall is a wise move to keep your financial situation healthy.
- The credit union, mortgage company or bank (e.g. Nationwide, Abbey, HSBC, Northern Rock) that grants a mortgage loan does not hold on to the real property given as collateral. Instead, these lending institutions sell mortgage securities to the “secondary mortgage market.” A third-party investor known as the aggregator, buys the mortgage from the lender and packages it with other loans. This package is called a mortgage-backed security (MBS). The aggregator divides the MBS into shares (tranches) and sells them to other investors. The final investors then receive a return on their investments, which come from the mortgage payments. If the mortgage rates are low, homebuyers find it attractive. While on the side, for the investors it is a better deal if the mortgage rates are higher. The aggregator and the lender will then offer the rate that balances the interest of both the homebuyers and final investors.
- Another fact drawn from this market is that the final investors have the greatest influence on current mortgage rates, as they decide the amount of money they are willing to invest in MBS. This in turn determines the price of the MBS, and eventually sets the price at which the aggregator is willing to spend for the mortgage loan from the bank/lender.
- Supply of MBS may rise beyond the market demand when mortgage loans skyrocket in a certain period of time. The higher the demand for MBS means the more of a need for prices to drop so MBS can be attractive to investors. The price cut results in a yield (bond rate) increase that pushes mortgage rates to move up.
- Inflation is the upward movement of prices. A strong, healthy economy has a moderate or consistent inflation. For lenders, this economic phenomenon poses an inevitable problem—the money borrowed today will have a lesser value in the future when borrowers are ready to pay their loans back. If it is predicted that the inflation rate will likely increase, investors will push the market to raise mortgage rates to cover their losses. On the other hand, if there is little or no risk of inflation, rates will likely decrease.
How to get the best mortgage deals?
- Check the reports on your credit history and financial activities. If you find out that your credit record contains erroneous information, fix it as soon as possible. Nowadays, lenders give much importance to credit scores. They give more mortgage deal options and lower interest rates to borrowers who have high credit scores.
- All your paperwork must be ready so that you can make the move once a good rate appears.
- Determine the length of time you will have to keep the loan. This is vital as it can change the type of mortgage quote you want to commit to, whether it is with a fixed or variable rate.
- It is important to know your risk tolerance by setting your monthly budget. Are you going for a 15-year mortgage loan with a higher interest rate or a 30-year loan with a lower rate? You must take note that the 30-year loan may prove to be more costly, as you will be paying more in interest over the years.
- Shop around and compare rates. To get the best deal, it is necessary to have as many options as you can possibly have. Furthermore, if you plan to take out many mortgage or remortgage contracts, don’t “put all your eggs in one basket,” unless you have built a good business relationship with just the one lender. Contact lenders such as PTSB or Halifax to just name a few.
- Don’t focus on rates alone, but on fees as well, so you have an idea of your mortgage loan’s true cost. The rates offered may be low, but there could be hidden costs that would render the loan expensive.
- Monitor mortgage rates, so you will know when to hold on to your property and when to jump in and obtain another loan.
- Crunch the numbers utilizing a mortgage calculator. This will help you decide when borrowing whether to take a high mortgage rate without the points or a low mortgage rate with the points. Moreover, through calculations, you can make a more informed choice between a short and long-term loan. Please check out both the mortgage repayment calculator and the mortgage overpayment calculator that this site offers for further assistance in this area.