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Published on : March 1, 2018 11:00

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How does interest on mortgages work? The simple and definitive guide.

One of the biggest considerations when choosing a mortgage is the Interest rate you’ll be charged. In this article, we look at how interest works with mortgages and how you can choose the best rate for you.

My Interest Rate
In general, the lowest mortgage rates are only available to those people who have larger deposits, or in the case of those remortgaging, enough equity in their property.

On the main, this means you’ll need a deposit of a least 40% to be eligible for the very best rates. Most people don’t have access to these sorts of deposits so a smaller deposit, usually 10%, would be needed at the sacrifice of a larger interest rate. View the latest mortgage rates here.

What does Loan-to-Value (LTV) mean?
When looking at mortgage & interest rates you’ll usually see it advertised as a loan-to-value. For example, if you see a mortgage with a 60% LTV it means you can borrow up to that amount of the properties value. In the case of a property worth £150,000, it would allow you to borrow £90,000 making the minimum deposit you’ll need for this property 40%. This rate differs from mortgage to mortgage. A mortgage with an LTV of 90% would mean you’d only need a 10% deposit.

How do I calculate my own LTV?
You can calculate your own LTV by dividing your mortgage amount by the value of the property and multiply it by 100. If it’s a Monday morning, and you can’t deal with the maths, you can use an LTV calculator such as this one here.

How does a Mortgage work?
Your mortgage is made up of the amount you’ve borrowed and the interest charged on the loan. This capital, the amount you need to pay back, forms part of your repayment process over a given time period. This is typically over 25 or 30 years, monthly, but can be lower depending on the mortgage you choose.

Most of the Mortgage payments go towards paying off the interest, with a smaller amount going towards the overall loan (capital). As you reach the end of your mortgage term this gradually changes so you’re paying off more capital each month.

Again you can choose the type of interest rate you want based on the type of mortgages available to you, and your individual circumstances. You can read about the various mortgages here, but your best bet would be to speak to a mortgage expert for additional advice. At Edward Mellor, our financial services team offers a range of free advice to help you through the mortgage application process. It’s free for a chat so why not give us a call on 0161 443 4548 or complete our form below.


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