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Factors that affect mortgage rates
Factors that Affect Mortgage Rates

As part of your mortgage education process, it's important to know about the factors that affect mortgage rates.  Understanding a little bit about how the whole mortgage interest rates system operates and how changes in mortgage rates happen can translate into increased confidence on your part, confidence you'll need when navigating through all the lenders and their marketing buzzwords.

Factor 1: The Bank of England

Don't blame the government for all the factors that affect mortgage rates; changes in mortgage rates are partly down to the Bank of England!  The Bank of England, the central bank in the country, is responsible for setting the base rates that are used by lenders when they set out their own mortgage interest rates. So, if the England base rate rises, then most lenders will increase their standard interest rates.  Luckily, they also generally lower them if that happens to the base rate as well!  The key aim here for the Bank of England is monetary stability, so it uses its rates to keep inflation low and to keep currency confidence. The rates are set by the Monetary Policy Committee.

This may not be one of the factors that affect mortgage rates in the short term for you if you are on a fixed rate deal, but it will have an affect on your mortgage costs and affect changes in mortgage rates if you have a variable deal or a tracker option.

Factor 2: Monetary Supply and Demand

The general economic climate and property market are closely connected when it comes to factors that affect mortgage rates.  Here, it is often a question of supply and demand. So, if lenders are doing well and the economy is buoyant, then they'll have more cash to lend and will be more willing to lend it lower mortgage interest rates. If things are tight (as they are at the moment) then they'll think harder before approving mortgage loans and won't offer such good mortgage rates.  They may also implement changes in mortgage rates.

If things are good, then more people can afford a mortgage to buy a property and, with more people buying, property prices will rise—you can see how demand creates changes in mortgage rates. If things are tight, then people don't have the spare cash to save with lenders, so they don't have so much of a cash surplus, and will therefore be a bit more careful about how and who they give out mortgages. This leads to fewer property buyers which could result in lower property prices, another one of the factors that affect mortgage rates.

Factor 3: Borrower Quality

One of the other factors that affect mortgage rates is credit history. The better the credit-worthiness of the borrower and his or her ability to pay back a loan, the better the mortgage interest rates offered to that borrower. If you have few assets, an impaired credit record, or a less than stable employment history then you will probably have to pay a higher rate of interest.

Factor 4: Lender Type

The final one of the factors that affects mortgage rates is the type of lender. The mortgage interest rates offered will depend on the lender's policies and terms, which can vary greatly from lender to lender. So, you can see a lot of changes in mortgage rates from lender to lender. Generally speaking, conventional lenders (banks and building societies) are usually quite competitive with their mortgage interest rates as they are keen to win new customers, although this is not always the case as economic factors can cause both positive and negative changes in mortgage rates. As always, shop around!


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