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How are Mortgage Rates Determined?

When you are looking to buy a home the chances are you will need to take out a mortgage.  A mortgage is essentially a secured loan (the property being the security) which, like any other loan, will require paying interest.  As a buyer, you will no doubt be hoping to find a mortgage with the lowest interest rate possible.  How mortgage interest rates are set is determined by a number of factors some of which you may have an influence on and many that you won’t.

Your Deposit

If you only have a small deposit, for instance ten percent, to pay towards your property you can expect to be paying a considerably higher interest rate than if you have a larger deposit.  This means you will be perceived as having a greater risk of not being able to pay off the capital by the end of the term of the mortgage.  This is why it is important to try to save as much as possible for your deposit.

Loan Interest Mortgage Calculator How are Mortgage Rates Determined?

80x15 How are Mortgage Rates Determined?
Mortgage bankers by [email protected], on Flickr. This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.

Your Employment Choice and Age

If you are getting on in age, a bank or other lender will probably consider that there is a high risk your mortgage will not be paid off although this may be offset by savings and insurance policies.  Some jobs are considered by lenders to be a high risk; this may be due to risk of redundancy or the perception of variable income for the self-employed or start-up employee.  If you are self-employed you may need to show evidence of two years or more of stable income to avoid paying higher interest rates.

Base Rate

The base rate (in the UK) is set by the Bank of England and will be determined by a number of factors including, but not restricted to, the rate of inflation and national and world economy trends.  One of its purposes is to ensure a stable economy.  Banks and other lending institutions use this base rate to determine their own interest rates although they may not always do so.  As an example of how this can work it can be noted that, along with increased competition between lenders, the Bank of England’s decision to introduce the Funding for Lending Scheme has led to a fall in interest rates.

Inter-Bank Lending

Banks often lend to each other.  Again, the interest rate will be determined by the risk, or perceived risk, of the ability to repay.  These rates can be tracked through the London Inter-Bank Offered Rate (Libor).  The amount of interest a particular bank is paying will be reflected in the interest rate you are charged.

house 1483946340 How are Mortgage Rates Determined?

Flachovatereza / Pixabay

Secondary Mortgage Market

You may not be aware that your mortgage may be sold to another investor other than your bank or building society.  There are investors, known as aggregators, who buy mortgages from the bank and earn money from the interest you pay.  Clearly, you will be hunting for the lowest interest rate while the aggregator will be looking for the highest interest rate in order to get the most out of their investment.  It is this combination that helps to regulate the final interest rate the lender decides on.

Type of Mortgage

Tracker mortgages have been popular in the past as they can often offer a lower interest rate than the standard base rate.  As interest rates have continued to drop, however, many people are opting for a fixed rate mortgage for two or five years.

Choosing a mortgage is a difficult but important decision.  Visit this site to read more about how mortgages rates are determined and to use this free mortgage calculator tool.

Greg is a blogger who enjoys writing about personal finance and money topics, he regularly contributes to a number of blogs.

This article is a guest post.  If you would like to write for Money Soldiers, you may visit the Advertise with us menu for details.

Jesse Fin
 

Jesse worked as a journalist for a large tv station in Korea in her past life. She now works full time at home as a blogger and loves to help her friends manage their personal budgets.

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Imran @ Xomba - November 19, 2013

Credit score definitely plays a part. The difference between someone with good credit and excellent credit could be as much as 1%. I know people who are paying twice as much as me for the same amount of mortgage which is crazy. I hope they explained all this to me when I was young, I would have build up immaculate credit and then sorted my deposit in no time and get on the property ladder very quickly. Education is definitely the key.

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    Arnel Ariate - November 20, 2013

    Hi, Imran. It’s never too late to work on improving our credit scores. Goodluck to us. 🙂

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Retta Matson - January 31, 2015

Each element which determines Mortgage rates accurately are defined and explained very informatively.

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