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A Quick Guide To Interest Rates in UK |
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In the media we hear constant references to interest rates and how important they are to the economy. But what are the different types of interest rates? |
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| Author: Giles Hardcastle |
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This the UK's main interest rate. It's is also known as the 'repo rate', at which the Bank of England trades in the market. The Monetary Policy Committee ( MPC) sets the base rate at its monthly meetings. The MPC has five members from the Bank of England and four government-appointed members.
The MPC bases its interest rate decisions on the goal of keeping annual inflation on target. It considers economic factors such as the Consumer Price Index, earnings growth, house prices, Gross Domestic Product, retail sales and the level of sterling.
The base rate is the main influence on lending rates. If the MPC changes the base rate then banks react by changing their key lending rates, so the banks maintain a profit margin above the base rate. The margin will vary depending upon the product and the financial institution.
High interest rates will slow consumer spending and make it more expensive for companies and individuals to borrow. Investors are more likely to move from shares to cash, which helps to lower share prices.
Halifax Mortgage Rate
This is the standard mortgage rate, which is set higher than the base rate to give the lender a profit. The Halifax has the largest share of the UK mortgage market.
Interbank rates
These are the rates at which bank lend to each other. They are the best indicator of short-term rates.
Annual Percentage Rate - APR
The APR is the annual percentage rate, which must – by law - be displayed by every credit advert and promotion. Use this as a yardstick when you compare loans and mortgages.
The APR doesn't just represent the interest charged but the all the costs charged over the lifetime of the loan. It's very important to note: some lenders make the misleading mistake of displaying this as only the interest charged.
The lower the APR the better for the borrower. If the loan has a discount rate, beware that the APR displayed may only apply to the discount period, and not to the period after the discount has ended.
The APR calculated by the formula:
APR = ( 1 + i/m)m - 1.0
Where i is the interest rate quoted as a decimal and m is the number of compounding periods per year.
How frequently the interest is paid has an impact on the APR. If this is calculated every day it benefits the borrower who immediately gains from the reduction in the size of the outstanding loan. The more often interest is calculated the better. This is a feature of flexible mortgages. When the interest is calculated annually, then the payments made throughout the year have no impact on reducing the amount paid.
So if you are borrowing, go for products where the interest is calculated more frequently.
About Author
Giles Hardcastle writes advice on loan issues for iSecured Loans - http://www.iSecuredLoans.co.uk
Article Source:
http://www.1888articles.com
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