The rate of interest added to the amount you have borrowed to purchase your home dictates how much your monthly mortgage payments will be. Most people are aware of this, but a large number of people don’t know how interest rates work.

To encourage spending, the Bank of England will set low interest rates, and to slow down spending will raise them. When the interest rates are low, people are more likely to borrow money than save. Although interest rates are low right now, they can increase rapidly and in 1979 reached a high of 17 per cent. The type of mortgage you have will affect how much interest you pay. Typically, if you have an interest-only mortgage you will pay a higher rate of interest.

The amount of interest you will pay with a fixed rate mortgage will remain the same throughout the agreed period. If interest rates increase, you will still pay your fixed rate and don’t have to worry about rate rises. However, if interest rates drop, you will still have to pay the agreed fixed rate and may end up paying more. If you want to be able to budget, a fixed rate offers stability.

If you have a tracker mortgage, your monthly payments will change according to the interest rate. If rates rise, so will your monthly payment, but if they fall, your monthly mortgage payment will too.

To make sure you enjoy the security of having a mortgage that is most affordable for your circumstances, speak to a CeMAP qualified financial adviser.

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