The interest rate on a mortgage is generally set to be either:

• Fixed over the life of the loan
• Variable, changing periodically with changes in market interest rates (this is the most common applied);
• Or some combination of the two; for example a fixed interest rate for a number of years, then varying (lately applied by several banks).

Over the life of a variable-rate loan changes in the interest rate may be determined by one or more factors such as:

• A published index of inflation
• An index of market interest rates
• Changes in the rate the lender pays on deposits
• The discretion of the lender

As a general principle, a lender should vary the interest rate that it charges on its mortgages frequently enough to track changes in the interest rate that the institution will pay for the funds that it uses to finance the loans, always maintaining a satisfactory positive spread between the two rates. The indexing scheme should also create an understandable and reasonably predictable payment structure for the borrower.

Where a reliable index of inflation or interest rates exists, a lender may choose to tie both the interest rate that it charges on its mortgages and the rate that it pays on deposits to changes in the index, assuring a positive interest spread for the institution, and transparency for the mortgage borrower.

Amortization schedule refers to how the outstanding balance on a mortgage loan changes over its life. Under most mortgages the outstanding balance is consistently reduced over the loan’s life to ensure that the unpaid balance on the loan will never exceed the estimated initial value of the property that serves as the primary collateral. Fixed-interest-rate mortgages are generally self-amortizing such that the principal declines consistently and the loan is fully paid off by the end of its term. Mortgage payments, which are typically made monthly, contain a capital (repayment of the principal) and an interest element. The amount of capital included in each payment varies throughout the term of the mortgage. In the early years the repayments are largely interest and a small part capital. Towards the end of the mortgage the payments are mostly capital and a smaller portion interest. In this way the payment amount determined at outset is calculated to ensure the loan is repaid at a specified date in the future. This gives borrowers assurance that by maintaining repayment the loan will be cleared at a specified date, if the interest rate does not change.

Once the funds have been disbursed one of the most important documents issued by the bank is the loan amortization schedule which clearly outlines the payment dates of the monthly installments. For the mortgage loans amortized with fixed monthly payments (capital plus interest), the loan payment starts thirty days after the disbursement date (according to the mortgage product type). The installments are paid on fixed date of each month (taking in consideration also the holidays).

The customer should pay the monthly installment in due date as already specified in the schedule in order to avoid penalties and fees. Banks strictly follow mortgage re-payments and in case of delays take immediate action to contact the borrower.

Mortgage loans in emerging markets are generally denominated in either

• The local currency in the country; or
• One or more reserve currencies of developed markets, such as the US dollar or Euro.

As a general principle, lending institutions should match the currency in which they offer mortgages to the currency of the funding source they are using to finance the loans. In markets in which the value of the local currency is unstable or where inflation is running at very high rates, lenders face significant challenges in offering loans denominated in the local currency.