Mortgages explained

Mortgages are high value loans taken out over a set period of time, intended for the purpose of buying property, usually for a home purchase or an investment property.

Key features of a mortgage

The repayment periods of mortgages tend to be much longer than for standard loans; this is to take account of the fact that the amount of money borrowed is much higher. They are usually offered by building societies and banks, though some other money lenders have now started offering mortgages also.

The costs of a mortgage typically include mortgage rates and mortgage fees: the former shows the rate of interest of the loan, while the latter reflects any additional fees for the arrangement of the mortgage charged by mortgage lenders or mortgage brokers.

It is important to assess the cost of the mortgage using these figures – a mortgage calculator (there are plenty of free calculators available on Google) can help compare mortgages – as an unaffordable mortgage may result in repossession (the property being taken back by the lender).

Anyone whose property has been repossessed is likely to find it very difficult to get a mortgage in the future, due to the damage done to their credit rating; so it is advisable that those having trouble keeping up repayments contact their lender or one of the charities or registered bodies that offer free debt advice.

Repayment Mortgages

Repayment mortgages are the most standard type of mortgage.  They are so called because any payments made on the mortgage repay both the amount of money borrowed (initial debt) and the interest added to it. In this way, once the mortgage loan is repaid, the borrower will own the property.

Interest Only Mortgages

Interest only mortgages, on the other hand, leave the person taking out the mortgage only paying enough to cover the interest on the property – the capital sum owed does not reduce. While this will result in lower monthly payments, it means that at the end of the mortgage term another way must be found to fund the original loan amount. If the mortgage cannot be paid, then the property will need to be sold.

Endowment Mortgages

One way to fund the purchase of the property is with an interest only mortgage with an endowment. Endowment mortgages work by investing regular payments (a structured savings plan) in shares and/or property, with the idea that upon mortgage redemption the property is paid for by the profit proceeds of the investment. These types of mortgage products are not so popular these days.

Other Types of Mortgage

Fixed rate mortgages are those in which the interest rate is fixed for either the whole of the mortgage, or more commonly for an introductory period, after which the interest rate usually reverts to a higher level.

Variable rate mortgages, on the other hand, are mortgages which in the UK fluctuate according to the Bank of England (BOE) base rate and commercial decisions by the lender. Tracker mortgages tend to stick more closely to the base rate, while capped rate mortgages are variable but have an upper cap which they will not go above.

Aside from this, the increasingly popular offset mortgages pool the mortgage with any savings the borrower has to reduce interest payments.

For people that want to join together to buy property, there are joint mortgages and shared ownership mortgages (these are typically part mortgage and the balance value is paid in a ‘top-up’ rent payment). The former are for when two or more people wish to own a property together; that latter for when a person or couple may not have the capital necessary to buy a property outright but are able to secure part of the funds from a housing association or similar body, who will then own part of the property.

There are also a number of mortgages aimed at specific types of property buyer. First time buyer mortgages are aimed at those that have never owned property before, while buy to let mortgages target buyers that wish to rent out the property once they have purchased it. The business community are served by commercial mortgages, while groups, couples or individuals wanting to build their own home can apply for self build mortgages.

Remortgaging and Refinancing

It is also possible to use mortgages as a means of refinancing, and sometimes to access capital growth from their home/investment property – known as equity release. Remortgaging also allows holders of mortgages to replace their present mortgage with one that has a better interest rate, or a more beneficial repayment schedule.

Second mortgages can be taken out and added to an existing mortgage to provide funds for things such as home improvements, holidays and debt consolidation.

Reverse mortgages, however, are slightly different: they allow people who have paid for their property to take out a loan (releasing equity) which can be received as a monthly payment. This loan is then only repayable back to the specialist lending company, when the property is sold or the owners die.

 

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