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Surely anyone who has gone through the process of buying a home or is immersed in it, is absolutely familiar with the different types of mortgages or with the process of going from bank to bank to see which one gives us the best interest rates.

To this, we add having to decide between a fixed or variable mortgage and having to be aware of that word that even seems to be scary, the famous ‘interest rate’ and that can make it vary ostensibly.

At this point, and if you are starting this process of getting a mortgage, believe us when we tell you that it is in your interest to continue reading this article to understand what interest rates are and how they can affect the price of mortgages.

 

What are interest rates?

By official interest rates we mean the rates set by the central banks of each country or region, in our case the European Central Bank (ECB), which help to regulate the amount of money in circulation in order to maintain global economic stability.

We can say that interest rates help to maintain an equal economic policy between countries whose influence is present in factors such as inflation, economic growth, employment and financial stability.

In Europe, the European Central Bank considers three types of interest rates with different objectives or functions:

  • Main refinancing operations interest rate: this rate is the rate that commercial banks pay to the central bank to obtain funding for a specific period.

 

  • Deposit facility rate: this is the interest that the central bank pays to commercial banks for depositing their excess liquidity with the central bank.

 

  • Marginal lending rate: the rate that commercial banks pay when they need urgent funding and borrow from the central bank for one day.

What does it depend on whether interest rates rise or fall?

Talking about the reasons for the rise or fall of interest rates is really complex.

What must be understood is that it is a mechanism used by Central Banks to maintain and control prices to keep them as stable as possible and thus avoid inflation.

In general, the interest rate tends to rise or fall depending on factors such as inflation, economic growth or employment.

To understand this, let’s say that if inflation is high, the tendency is for interest rates to rise in order to curb consumption and stabilise prices. Conversely, at low inflation levels, interest rates fall to encourage consumption, investment and economic growth.

To put it simply, inflation can be defined as the generalised and sustained increase in the prices of goods and services in an economy over a period of time.

 

What is the relationship between the interest rate and the price of mortgages?

The interest rate whether it is high or low. It has a direct bearing on the price that a person will pay for his mortgage to the bank with which he enters into the contract.

Thus, the higher the interest rates are, the higher the interest the banks will charge on the amount of the mortgages and vice versa. When interest rates are lowered, mortgages become much more accessible and usually involve much more movement in the real estate market.

What is the biggest problem in many situations?  It is not always easy to choose between a fixed and a variable mortgage. Generally, fixed mortgages have a slightly higher interest rate, but you have the peace of mind that you will always pay the same monthly amount as stated in your mortgage contract,

However, in variable rate mortgages, in the same way that when the interest rate is low, your instalments will be lower, they are the mortgages, and mortgagors, most affected by interest rate rises, as their instalments increase as the official interest rates do.

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