You are now sitting across from a professional loan officer in a meeting at a lending institution who is now evaluating your mortgage application and must explain to you how that mortgage interest rate was first calculated and finally arrived at. Many things affect mortgage rates—which is why they fluctuate.

So it is critical to understand a little about how mortgage interest rates are generated before you jump on the bandwagon and commit yourself.

The more you know and understand how the economic factors affect the rate changes in your local economy, the more prepared and armed with the knowledge to be able to play this game.

Finding the right and affordable interest rate

You are able not only to negotiate and find the perfect home loan but in addition find a preferable and affordable interest rate that’s perfect for your budget as well.

Market Conditions

When the Reserve Bank raises or lowers rates, there is usually an impact on the rate you will get for your fixed-rate home loan, although it’s not as direct as it may seem.

The Reserve Bank adjusts the federal funds (prime rate), which is the rate at which banks lend to each other. When the federal funds (prime rate) decrease, we tend to spend more.

Mortgage rates tend to be longer-term rates that are affected by concerns about inflation as well as other economic indicators like job growth and losses, currency fluctuations, global disasters (pandemics), major global technological shifts, or political climate (elections) changes in major developed countries that eventually adversely affect local developing economies.

Assessing the market conditions

So it’s more accurate to say that mortgage rates are indirectly affected by the Reserve Bank as they change the rates up or down, and are more directly affected by what happens every day in active public economic markets.

The market (invisible hand) sets the interest rate, and then a margin is added to the index to determine your final mortgage interest rate.


Since interest rates change daily, the longer a lender locks in a rate, the higher the risk that the market will move against them. Therefore, you pay more (in points) for a longer guarantee. If interest rates appear to be on an increasing trend, it makes sense to lock in your rate.

If they are steadily dropping, it makes sense to float your interest rate so that you can take advantage of a shorter lock-in period, saving you money.


You can often receive a lower mortgage interest rate by paying extra points – mortgage costs that are up-front rather than built into the interest rate. Each point equals one percentage point of the total amount of the loan.

For example, one point on a $100,000 loan is the equivalent of paying $1,000 to ensure you get a lower interest rate that saves you money over the life of your loan.

Credit and Payment History

A less-than-perfect track record may make you seem like a high credit risk, which means you’d only be eligible for higher mortgage interest rate loans. If you find yourself in this position, don’t worry – there are other options that could still help you make your dream a reality.

A perfect financial track record reduces credit risk

Debt-To-Income Ratio

Your monthly debt obligations are calculated against your current income. The higher the ratio, the higher the risk, which could mean a higher interest rate.


The loan-to-value is the amount you need to borrow versus the value of the home you want to buy. The more equity you have or the more money you give as a down payment, the lower a lender’s risk, often resulting in a lower rate for you.

It is highly unlikely that the bank will give you a 100% home loan. Usually, they require a minimum of a 10% deposit (down payment) and maybe more, depending on the bank you are negotiating with.

Property Type

Lender risk plays a big part in your rate. For instance, a loan for a single-family home is less risky than one for a multi-family home because there are fewer variables. The less risk, the better the rate.

house keys investment


If you plan on living in your new home, you will probably get a better rate than a loan on a rental unit, which carries more risk for the lender.

The area in which you are buying also plays a part in the consideration of whether to grant you the mortgage or not, especially if it is a crime-ridden, notorious area or an abandoned or dilapidated property or the high credit risk is generally high in that area (as a result of job losses) and/or the zoning(township or suburbia) in that area.

All of these factors do contribute to the lending institution’s decision on whether to finance those properties in those areas or not, and also determine the interest rates they charge.

Size of the Loan Amount

The amount of money you want to borrow could affect the interest rate you are charged. The larger the loan amount size, the higher the interest rate added to it, as there are more uncontrollable variables and it carries more risk for the lending institution.

Thank you for visiting our website and for reading this blog post. I trust that you have learned so much about how interest rates are calculated, and now armed with this knowledge, you will now know how to approach and negotiate your reasonable and affordable home loan. Please do not hesitate to leave a comment. Please share.