How Interest Rate Affects Mortgage Loans?

Interest rate here, interest rate there. The interest rate will pop out of the fridge soon. You can hear about risk and danger from everywhere. Specialists, bloggers, family and friends scare borrowers who are applying or already have a mortgage. How much do you think your mortgage installment can increase due to a possible increase in interest ?

The interest reference indicator is currently at the lowest level in history. Exactly 1.71%. This condition has been going on for over 5 years. There has never been a situation where the rate has remained unchanged for so long. Increasingly, the question arises in which direction the interest rate will go, and hence, whether the mortgage installments will be smaller or a horribly higher! If so, how much? In this article, I will help you understand the mechanisms and impact of the interest rate on your mortgage.

Home loan interest rate

Home loan interest rate

The interest rate on your loan has the greatest impact on your installment amount. Unfortunately, as of today, most banks calculate loan installments according to the sum of interest rate and margin. Admittedly, quite advanced work on fixed rate is underway, but it is quite an early stage. If you are interested in a mortgage, you will have to consider the option of floating rate loans.

Interest rate definition

Interest rate definition

The interest interest rate is the reference interest rate on loans on the interbank market. The exact definition here is the indicator used by banks to determine the interest rate on mortgage loans, among others. interest plus margin is the sum of your interest. Usually 3M interest is used, less often 6M and 12M rates. Additional markings specify the type of interest rate and information about how often it will change for you.

Impact of interest rate on mortgage installment

Impact of interest rate on mortgage installment

Well, what is the impact? What impact does the interest rate have on the loan installment?
Below is the relationship for the model example of a 300,000 USD loan for 30 years with a 1.5% margin.

The perceptibility of interest rate changes is even more noticeable if we compare the impact on mortgage interest. Simulations based on the same model as above.

The differences are overwhelming. A reduction of interest by 4 percentage points means a saving of USD 260,000 in total interest repaid.

Interest rate and capital repayment

Interest rate and capital repayment

The amount of interest rate has a significant impact on the content of capital in the installment. The loan installment consists of the capital part. What is the ratio depends on the sum of the interest rate and the loan period. The lower the interest rate, the more capital is included in the installment. Thanks to this, the loan is repaid faster and leads to a lower interest rate. Below is a table showing the relationship between the amount of capital for various interest rates.

What should you do in the age of low rates?

What should you do in the age of low rates?

The low interest rate is undoubtedly good news for the average people. Borrowers are happy because their fixed monthly charges are significantly lower, thanks to which the installment amount is less reflected on the household budget. At the same time, however, it is a very good time to overpay the loan. I honestly suggest cyclically overpaying capital, in case of interest growth (which is inevitable in the long run) be prepared for it. It is also worth considering a shorter loan period. Low rates, lower installments, so a shorter loan period can be used. The latter, in turn, will repay with significantly lower interest rates.

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