How_Money_Works_-_The_Facts_Visually_Explained

MORTGAGES

Mortgage rates

Banks offer a range of mortgages

with different interest rates, each

of which offers a different ratio of

risk to affordability.

Fixed-rate mortgages offer the

borrower fixed monthly payments

for a set period of time. In the US,

fixed rates of 10, 15, or 30 years are

common. The borrower either then

remortgages to a new fixed-rate

mortgage product or the original

mortgage defaults to a variable rate.

Fixed rates are not altered by

changing interest rates or other

economic conditions. This means

the lender, not the borrower, carries

the main interest rate risk.

Variable rates

Variable- or adjustable-rate

mortgages have rates that can

change during the mortgage term,

sometimes tracking a market index

such as the country’s central bank

base rate. Monthly mortgage

payments will therefore increase

or decrease depending on

fluctuations in the base rate. This

means the interest rate risk is

carried by the borrower, who will

need to be sure they can still

afford the mortgage should the

interest rate increase. Incidences

of variable-rate mortgages vary

from country to country.

Types of mortgage rates

Generally, the greater the guarantee of security for the borrower,

the higher the fees involved. Somedeals also lock borrowers in to

a particular rate, offering less flexibility.

Why interest matters

Small variations in the interest

rate can make a big difference to

the total amount of interest paid

over the mortgage term.

Mortgage

deal 1

Fixed-rate mortgages

❯❯The interest rate is set for a period or for the life of the

loan, regardless of the base rate. This offers certainty,

as borrowers pay a set monthly amount.

❯❯These often have higher down payments and fees,

and payments will stay fixed even if the base rate falls.

Adjustable-rate mortgages (ARMs)

❯❯The lender can raise and lower interest rates, which

may be influenced by the central bank’s base rate,

but can also be changed regardless of the base rate.

❯❯These are usually less expensive than fixed-rate mortgages,

but borrowers are vulnerable to interest rate increases.

BA SE R ATE BA SE R ATE

Usually for a set period of time Indefinite time period

Jan

4% 4%

8% 8%

Monthly repayments

to bank over 25 years

$948

Loan^

$200,000

over 25 years

Total

repayment

= $284,400

3% interest

Interest =

$84,400

BANK BANK

FIXED RATE AT 3%

ARM

US_214-215_Mortgages_2.indd 214 13/10/2016 16:22