Interest Rates Explained
Interest rates are one of the main concerns of home buyers. A variation of one or two percentage points can make a huge difference to some consumers searching for an affordable mortgage. Unfortunately, interest rates are constantly changing and a predicted rise or fall in the rates may or may not happen.
Individual financial institutions set their own standard variable rate, or SVR. SVR’s differ according to the financial institution, but they are all based on the Bank of England’s current base lending rate. On the first Thursday of each month, the Bank of England holds a meeting of the Monetary Policy Committee, or MPC. The MPC decides the base lending rate for that month. The goal of the Monetary Policy Committee is to adjust the Bank of England’s base lending rate to help stabilize the economy and ensure that the inflation target is met. Before determining the new lending rate, the MPC is presented with current information regarding the UK’s economy situation. The decision can made to increase or decrease the rate, but the rate may also remain the same as the previous month. The standard variable rate of banks and other lenders average about two percentage points above the base lending rate set by the Bank of England.
When the Bank of England is concerned with the country’s level of debt and the present rate of inflation, the base lending rate will usually be increased. An increased base lending rate translates into higher interest rates, which generates more public interest in saving money. All savings accounts will earn more interest income during these times. On the other hand, increased interest rates will slow the demand for borrowing money. Accumulating debt becomes less attractive with higher interest rates because payments, especially monthly mortgage payments, will be increased, sometimes creating a financial burden for the borrower.
When the current economic situation requires a boost from more spending and borrowing, the MPC will typically decide to lower the base lending rate. This results in less interest income for savings accounts, making them less attractive to the consumer. Borrowing money becomes much more attractive, and consumers are much more willing to take out loans, including large loans such as mortgages. Lower interest rates mean lower monthly payments.
When the Monetary Policy Committee decides to increase the base lending rate, financial institutions react by raising their standard variable rates. A decrease in the base lending rate will prompt lenders to lower their SVR, but this may not take effect as quickly as an increase does. Adjustments to standard variable rates are left to the discretion of the individual financial institutions.
It is best to research standard variable rates at a variety of banks and other lending institutions before choosing one to handle your mortgage. Mortgages are long-term commitments and are probably the largest financial investment you will ever make. It will serve you well to take your time and carefully consider your options. Once you have secured a mortgage, you will probably either be unable to get out of it or be required to pay a significant early redemption penalty to end the contract.
Consumers with excellent credit histories have an advantage in the mortgage market. A good credit rating will usually allow you to borrow money at a lower interest rate than someone with an impaired credit record. It is a good idea to keep track of your credit rating to make sure it is accurate. A favorable credit rating is something you need to build over the course of many years. Difficult financial times that last at least a short period of time are a reality for many people. Planning ahead can help you avoid drastic financial pitfalls, but sometimes negative impacts to your credit history cannot be helped. If this is your case, check your credit rating and determine what you can do to improve the score. Make sure all your accounts are up-to-date before looking for a mortgage. The higher your credit score, the less interest you are apt to pay, and this can save you a large amount of money in the long run.
Borrowers, of course, should search for the best mortgage deal. Finally deciding on a specific mortgage type will always be a gamble as far as interest rates are concerned. Even though you can easily study interest rate trends and listen to the current financial news, interest rates are never guaranteed to follow a predicted course. Both a hasty decision and a long, drawn out decision can end up costing you a substantial amount of money. Your best bet is to gather extensive information regarding interest rates, ask for professional financial advice, and make the most educated guess you possibly can.
There are a multitude of mortgages available in the UK, and these will have varying interest rates. Mortgages preferred by consumers, such as capped rate mortgages, usually have a higher interest rate than other mortgage types. Lenders are able to charge a higher rate for preferred loans because there are a limited number of these loans available, and the increased interest rate is considered to be the “price you pay” for a highly attractive loan. Fixed rate mortgages begin at a fixed interest rate then change to the lender’s standard variable rate after a predetermined amount of time, usually between one and five years. If it is important to you to know exactly what your monthly mortgage payment will be for a set amount of time, you will want to consider a fixed interest mortgage. However, if interest rates fall after you secure your fixed rate mortgage, you will likely be paying more each month than someone with a discount variable mortgage. Discount variable mortgage payments fluctuate according to the current interest rate, and it is possible that your monthly payments could decrease. Keep in mind that your payment could also increase if interest rates go up. Be cautious about planning to look for another mortgage if you are unhappy with your current mortgage interest rate; there are heavy early redemption penalties included in the terms of most mortgages. Your lender can give you detailed information about the various mortgages available.