A mortgage is a long term commitment and is a loan that is normally taken out over twenty five years, and sometimes longer, although shorter periods are also available to those that want them. Unlike personal loans, this type of loan is offered at a variable rate, which means that the interest rate, and subsequently the repayment, on the loan can change. The good news is that the interest rate can fall as well as rise, which means that your repayment could go down – but there again it could go up based upon what happens with the interest rate. So, why exactly does the interest rate on mortgages change?
Interest rates on mortgages are affected by the base rat set by the Bank of England, and this rate can change periodically. The interest rates set by the Bank of England have a knock on effect on the economy, and this means that lenders have to alter their interest rates accordingly. This is good news if the Bank of England drops interest rates, as it means that your mortgage interest rate will fall, and so will your monthly repayment. However, if the interest rate set by the Bank of England rises, your mortgage interest rate will also rise, and so will your monthly repayment.
Mortgages are loans that stretch over a long term, and this is why lenders are unable to offer a fixed rate over the whole period of the loan – unlike a standard personal loan which is repaid over one to five years, the mortgage can run for several decades and lenders could lose out by fixing interest rates over such a long term because it is impossible to predict how interest rates will fluctuate seven, ten, or twenty years into the future.
The good thing about changing interest rates is that falling interest rates could mean lower repayment, but because interest rates can also rise, and your repayments may therefore rise as well, it can make it very difficult to budget and determine just what your outgoings are going to be from one month to the next. Although interest rates don’t tend to change on a regular basis, they can plummet – or rocket – and this can make budgeting far harder.
If you want to avoid the confusion and budgeting hassles of fluctuating interest rates, one option is to take out a fixed rate mortgage. This is where your interest rate is fixed at a rate that is slightly above the base rate for a specified period, such as three or four years. Although you may be paying slightly more on your repayments than those on the current variable interest rate, you can enjoy the peace of mind that in the event the interest rates rise yours will not be affected. You will make the same monthly repayment over the term of your fixed rate period, and you can budget more effectively as you will know just what your monthly outgoing are. The downside is that is the base interest rate falls, you will still have to pay the higher interest rate that your mortgage is fixed at, so you have to work out whether you want to take this gamble in exchange for having the same fixed repayments for a number of years.
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