The interest is the amount the mortgage lender charges for lending you the money and it’s one of the main ways it makes its profits.
The lower the interest rate, the less money you have to pay back over the mortgage term.
Lenders boost their profits still further by charging a range of fees to set up and operate your loan, and it’s important to take these into account too when you’re choosing a deal.
A sneaky trick lenders play
• When lenders offer especially attractive low rates of interest, they are rarely as good as they seem, because there are often high fees attached.
• Conversely, deals with low fees (or even no fees) often come with relatively high rates of interest.
As a borrower, the trick is to find a deal that strikes a good balance.
To do that, you need to know
How to understand interest rates
Interest is charged as an annual percentage of the amount you originally borrowed.
In other words, if you borrowed £100,000 at an interest rate of 6 per cent for a year, you would have to pay £6,000 interest.
Lenders often call this the APR or annual percentage rate.
The interest rate can be:
• variable,
• fixed, or
• capped.
How to understand fees
Lenders are extremely ingenious when it comes to thinking up new ways to make money. Here are some to look out for:
• Set-up fee. This may also be called an arrangement or reservation fee.
• Higher-lending fee. This can also be called an indemnity guarantee, additional security fee or mortgage advance premium.
• Exit fee. Also called a deeds fee, discharge fee, redemption or sealing fee.
To find out what all these are for and whether you need to pay them, read What are all these fees for?
You may also want to read about the difference between interest-only and repayment mortgages.
You’ll probably also want to read How to really find a good mortgage