interest-rates

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What is Amoritisation

Readers Question: What is  Amortisation ? Amoririsation is the running down of a loan through regular payments. A good example is a capital repayment mortgage. In this case the homeowner pays monthly installments paying both interest on the loan and also capital repayments. This means that after 30 years the loan will be paid off. The opposite of amortisation is an interest only mortgage. With an interest only mortgage, only interest payments are made. This means that the capital debt of the loan remains. Usually, with an interest only mortgage the…

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Gross, Net and Gross AER Interest rates

Gross interest rate This is the total interest payable before any deductions such as tax and charges. For example the gross interest rate on a savings account may be 4.25% Net Interest Rate. This is the total interest payable after any deductions. For example in the UK, the net interest rate will be the gross interest rate – basic rate of income tax. Therefore, if the gross rate is 4.25%, the net rate will be 3.40%. Gross AER. This is the Gross Annual Equivalent rate. This applies to all accounts…

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Highest Interest Rate of Commercial Banks

Readers Question: In general what do commercial banks receive their higher interest rates from? I’m afraid I don’t really understand this question. But, I will make these points. Commercial banks will lend money at a higher rate than they pay to savers. This difference in interest rates enable them to make a profit. For example, if you went to a commercial bank such as Natwest, Halifax or HSBC, they may charge you 7-8% for a loan. These tend to be the highest interest rates commercial banks will charge. If, however, you…

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Why are there so many different Interest Rates?

I’ve been studying economics for 13 years and I still get confused at the bewildering array of interest rates. Basically, interest rates can range from anywhere between 0% and 2,316% The most important rate is the base rate (sometimes referred to as the repo rate). This is the rate set by the Bank of England. (In US by the Federal Reserve). This is important because it determines the rate at which banks borrow money from the Bank of England. Therefore, if the Bank of England changes the base rate the…

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Predictions for US Interest Rates

October 31st, 2007, the US federal reserve cut interest rates by a quarter of a point to 4.5%. This follows on from a half point cut, a few weeks ago. The logic for falling interest rates in the US includes: Weak Housing Market – House prices falling, sales plummeting. This negative wealth effect is likely to reduce consumer spending and weaken inflationary pressures. Strength of Oil Prices – The US economy is heavily dependent on oil. Higher oil prices, effectively reduce disposable income Concerns over Credit Markets. Many financial institutions have been burnt…