Inflation is key as it’s interest rates. When a surge in inflation occurs, a corresponding increase in interest rates takes place.
Over time prices of goods tend to steadily increase. For example, you could buy a basket of goods for a pound today. And with the same pound in a few months or years, the basket of goods the pound is able to purchase will be determined by inflation. Lenders are very aware that inflation will erode the value of their money over the time period of a loan, so they increase interest rates to compensate for the loss. This is how lenders are able to maintain their consistency over time with multiple borrowers and multiple outstanding loans. Adjustments are made to interest to recoup the loss made when money loses value.
The basic premise is this, low interest rates put more buying power in the hands of consumers. When more money is spent in the economy, prices go up, naturally creating inflation. If there is then a chance that the economy can grow too fast (demand outpaces supply) interest rates are increased, which slows the amount of money entering the economy.
Remortgage loans have repayment based on interest rates. Interest rates are basically the cost of the money borrowed, it is how a bank or lender makes money by letting you borrow money. If you have a loan that has an Interest rate that fluctuates then your payment will increase or decrease according to the change in interest rates. Interest rates in turn increase or decrease according to the activity of the inflation rate.
An interest rate is the price of money. A mortgage interest rate is the price of money loaned against the security of a piece of property. When going through a remortgage negotiation it is imperative that you understand how interest is calculated. This helps you understand where the total monthly payment comes from.
The rates shown everywhere by lenders are annual rates. Traditionally for home mortgages, the interest payment is calculated monthly. Therefore, the rate is divided by 12 before calculating the payment.
As an example, take a 5 per cent rate, and a loan amount of 100,000. In decimals, 5 per cent is .05 and when divided by 12 it is .0042. Multiply .0042 by 100,000 and you come up with 420 pounds as the monthly interest payment.
Say the borrower pays 520 pounds a month. Then 420 pounds of the total covers interest on the remortgage. While 100 pounds goes toward principal (the original loan of 100,000) of the remortgage loan. Another month later the balance is 99,000 and the interest is 419.58 pounds. The interest rate stays the same, but the interest payment is lower because the principal is lower.
It is important to understand where figures come from and the meaning of terms. This is the only way you can help yourself ultimately reach your financial goals.
For more information, speak to our financial advisor or get a quote.