A home loan is a mortgage that uses property as security. The mortgage rate is the interest rate charged on that loan — the cost you pay to borrow, expressed as an annual percentage of the principal.
Two Main Types of Mortgages
Mortgages are broadly classified into two categories:
- Residential mortgages — These use the borrower's self-occupied home as collateral. This is the most common type for individuals and families purchasing a place to live.
- Commercial mortgages — These use non-residential property such as offices, retail shops, or industrial spaces as collateral. They are typically taken out by businesses rather than individuals.
In both cases, the property itself secures the loan. If payments are not made, the lender can recover funds through the collateral.
Beyond the rate itself, several factors shape what a borrower ultimately pays on a mortgage. The loan term, down payment size, and the borrower's credit profile all influence the interest rate a lender offers, as do broader economic conditions and central bank policies. Prospective homeowners should also consider whether a fixed-rate or adjustable-rate structure better suits their financial situation and long-term plans. Shopping around and comparing offers from multiple lenders can reveal meaningful differences in both rates and closing costs. Understanding the full picture — not just the advertised rate but the annual percentage rate and total cost over the life of the loan — helps borrowers make informed decisions when financing a home purchase or refinancing an existing property.
How Mortgage Rates Are Applied
The interest rate on a mortgage determines the total cost of borrowing over the life of the loan. Even a small difference in rate can significantly affect monthly payments and the total amount repaid. Rates are influenced by broader economic conditions, the borrower's credit profile, and the specific terms of the loan product.
Understanding the distinction between residential and commercial mortgage rates is important, as the two markets operate under different risk assessments and pricing structures.