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Home Mortgage mortgage interest

Why are mortgage rates rising?

The mortgage interest rate is one of the most important elements of monthly charges on a mortgage. In addition to the repayment of the mortgage itself, this component also plays a major role in determining the amount of those monthly charges. The most important thing to know about mortgage interest is that it rarely stays the same. For example, when you take out a mortgage, with a variable contract, that interest rate may suddenly increase or decrease depending on inflation and the economic situation.

To know why mortgage rates are rising, we must first research how they work. Here you will find answers to the most important questions.

mortgage interest accumulated coins

How exactly does mortgage interest work?

In fact, mortgage interest rates work like everything else related to the global economy, namely on the basis of supply and demand. When consumers put their savings in the bank over that receive interest, the level of that interest is determined by the current economic situation.

On the other hand, consumers may also need money to purchase a home and therefore borrow money from the bank. In that case, they actually pay interest on the amount borrowed.

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Factors that determine the amount of your mortgage interest rate

Mortgage interest rates rise in large part due to inflation and changing economic conditions. In addition, the absolute interest rate will also depend on the type of contract (variable or fixed).

Below you get an overview of the main factors that have a major influence on the level of mortgage interest rates. Consequently, these elements (in part) cause interest rates to rise today.

1. The amount of your mortgage itself

To determine your interest rate to be paid, the mortgage lender bases its decision first and foremost on the amount you borrow from the bank in relation to the value of the home you are purchasing. For example, if your mortgage is 90% of that value, you will pay more interest than if you only take 40% of the home value out of your mortgage.

The reason why goes without saying: in the first case, the mortgage provider runs a higher risk, since when you sell your home, you are less likely to be able to pay back the loan amount immediately.

2. The type of mortgage you choose

Next, the type of mortgage also plays a big role in the amount of your mortgage rate. First-time buyers looking for their first home can usually choose:

  • An annuity mortgage
  • A linear mortgage
  • A (partially) repayment-free mortgage

In addition, for those who already have a mortgage, it is also possible to choose other mortgage types. Keep in mind that the interest you pay on an interest-only mortgage is usually higher than on a straight-line or annuity mortgage.

3. The fixed-rate period of your mortgage

Finally, the amount of mortgage interest you pay will also depend on the fixed rate period of the mortgage itself. First of all, as a mortgage borrower, you have a choice between a fixed rate or a variable rate.

In the first case, it is possible to take a short fixed rate period, say 5 years. However, you can also choose to fix that interest rate for 10, 20 or even 30 years.

The choice you make actually largely determines the risk you take:

  • With a short fixed rate period, the interest rate is likely to be lower, but you may pay more after that short period
  • With a longer fixed-interest period, you pay more interest, but have more certainty about the amount of mortgage interest in the longer term

The main causes of today's rising mortgage rates

At the end of 2022, mortgage interest rates rose sharply. This is mainly due to rising interest rates in the capital market for long-term debt, as well as rising interest rates in the money market for short-term debt. As long as inflation remains high and interest rates in the markets also rise, mortgage rates cannot help but make the same upward movement.

Finally, the ECB (European Central Bank) also has an influence on interest rates that should not be underestimated because of the approach it takes or because certain measures are delayed. The current situation in Ukraine, which is adding to inflation, will only push mortgage rates higher in the period ahead.