How Does Mortgage Interest Work?

When you take out a mortgage, you repay its value on interest every month. A portion of the payment goes towards your principal, which reduces your loan amount and improves your share of the equity. The rest goes towards interest fees. 

How your lender calculates interest will rely on your remaining balance each month, which decreases after making a capital payment. Over time, the interest you pay drops. 

Lenders express mortgage interest rates annually. For instance, 2.4% or 2.8% per annum. To calculate the percentage per month, divide this number by 12. A £100,000 loan with a 2.4% mortgage interest rate, for example, will charge you £200 in the first month. The remaining amount will determine slight changes in your interest—typically no more than a few cents—until you pay off your balance. 

Your interest rate might change more dramatically according to the type of loan you pursue. While interest-only mortgages exist, they are rare to come across.



What is an Ideal Mortgage Interest Rate?

What determines a reasonable interest rate will depend on the loan you take out. The best way to determine the total amount of interest you’ll pay across the span of your loan is to consult an online mortgage calculator. 

Keep in mind that the product with the lowest rate doesn’t always indicate a cheaper or more suitable product. Determine the loan’s value by comparing it to similar products. Take into account your base rate and the current economic landscape. 

You can dictate your mortgage rate with an attractive credit score, or if you can afford to put down a sizable deposit.

What is the Base Rate?

What you borrow from your lender is what your lender will take from the Bank of England to cover the costs. The base rate of your mortgage is what BE charges a smaller, borrowing bank or private mortgage lender. 

Intuitively, a higher base rate means a more expensive mortgage product—but it also makes saving more rewarding. When base rates are high, people borrow less—but save more. The nation’s overall spending and saving habits can directly impact base rates as BE attempts to control inflation. With that in mind, you’ll want to save and spend thoughtfully!

Conclusion

Mortgage interest rates won’t usually stay the same. If you’re vying for something affordable, spend some time researching the appropriate lender and how you can improve your credit rating. Review your financial documents and pay off outstanding debt—you’ll better your chances of loan approval and score a lower interest rate. 

For mortgage funding that always puts your needs first, reach out to us at Willow Private Finance. With over 100 years of experience as a collective team, we have experience with a wide variety of clients and know just how best to navigate even the worst economic storm.