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What criteria are used to set financial interest rates?

Each and every day that we look at the financial press we see mortgage rates have moved up and mortgage rates move down, loan rates have moved up and loan rates have moved down and other financial instruments seem to change on a regular basis. But what drives these underlying interest rates and their constant movement?

UK base rates

UK base rates indirectly impact upon the cost of borrowing in the money markets although do directly impact upon tracker mortgage rates.

Money markets

UK money markets bring together lenders and borrowers who trade at specific interest rates depending upon the counter parties involved. The Libor rate is central to the cost of money in the UK and is often referred to by financial institutions.

Credit score

As you would expect, somebody with a high credit score and somebody with a low credit score will not attract the same interest rate due to their risk profiles. Institutions are taking into account credit scores more than they used to and adjusting their packages accordingly.

Equity in your property

If you are buying a property, it has become apparent over the last few months that the larger your deposit the lower your mortgage interest rate will be. The idea is that the buffer between what you borrow and the value of the property will determine a vital risk element for the transaction. If you have a large deposit then the buffer between the value of the property and the value of the mortgage works in your favour.

These are just some of the issues which financial institutions will take into account when transacting with customers.

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