Interest rates are affected primarily by the inflation rate which exists at any given time. To control a rising rate of inflation, the interest rate is increased.
Inflation is what happens to prices over a period of time. When more money is spent in the economy, prices go up, inflating them, thus the term inflation. When too much money is spent in the economy (demand is outrunning supply) interest rates are adjusted upward to make the cost of money (loans) more expensive, to slow the amount of money entering the economy.
Mortgage lenders understand the premise behind inflation. They are acutely aware of how inflation can erode the value of their money over the timeline of a loan, whether it is a new loan or a remortgage. The interest rate is their tool against losing or gaining money over the term of a loan. Without having the tool of interest rate adjustment at their disposal, most lenders would bite the dust in a very short amount of time. Over the life span of a loan the lender is constantly planning on the adjustment in interest rate to compensate for the loss of money, or the loss of value in money, due to inflation.
What does this mean for the remortgage loan you are considering? The remortgage loan will have repayment based on interest rates. The lender will make money off the loan product you purchased through interest rate charges and other loan associated fees. Basically, it is the cost of borrowing money. If your loan has an interest rate secured with it that changes, your payment will fluctuate up or down with that change in interest rates.
Therefore, you can see how the inflation rate is important when considering repayments on the remortgage loan. As the inflation rate rises or falls, a corresponding change in interest rates takes place.
