Financial Dictionary - Interest rate
The interest rate is the amount banks and financial institutions pay to their customers for the capital they invest for a period of time. From the opposite perspective, it is the price we have to pay for using money lent by a bank. Interest rates are always reported as a percentage of the capital lent by the bank or invested by the customer.
There are different types of interest rates. The most common are those set by the banks in each country for mortgage and personal loans, and for interest on bank deposits.
Example of interest rates applied to a bank deposit.
The bank returns 12,240 euros to you for a deposit of 12,000 euros. As we can see, this generates a return of 240 euros. These 240 euros are the interest paid or return obtained. The interest rate applied is therefore 2%.
Example of interest rates applied to a mortgage loan.
The interest rate varies depending on the type of mortgage and the term chosen. In this scenario, we are talking about a 15-year fixed-rate mortgage of 150,000 euros, with the following interest rates set by the bank: NIR 2.90% and APR 3.29%.
150,000 euro mortgage.
NIR: 4,350 euros.
APR: 4,935 euros.
Total interest payable: 9,285 euros.
Total amount of the mortgage loan + interest: 159,285 euros.
Variables that influence interest rates.
The variables that influence interest rates are mainly due to the law of supply and demand as established in the market. The lower the interest rate, the higher the demand for funds; the higher the interest rate, the lower the demand for funds.
However, the market is not the only factor that influences their value. Other variables that can influence interest rates include:
- Public debt and the real interest rate.
- Inflation and the Consumer Price Index (CPI).
- Liquidity premiums.
- The interest risk of each maturity term.
- The issuer's credit risk premium.
- The current economic, social and political situation in the country.