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Mortgages: What is a Mortgage?

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A mortgage is a debt taken out (which you use to buy your house as the borrower) which gives the lender (mortgagee) a property as security for the repayment of a loan

What is a Mortgage?

Many of us have a mortgage but aren't quite sure what it means to have a mortgage. It is important to look at the small print of your mortgage agreement regardless which bank or lender its from, as the wrong type of mortgage could cost you much more then it should.

Lenders normally secure the loan against the property being purchased.

Importantly, it must be remembered that the lender has a legal charge on the property. This means that if you don't keep up with your repayments, the lender has the right to take possession of the property.

The loan is for a fixed period, usually 25 years, and interest will be payable on the amount borrowed.

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Types of mortgages

You'll see hundreds of different names for mortgages. However, they all boil down to the two main types of mortgage, Repayment mortgages and Interest only mortgages.

One of the first decisions to make is how the loan is going to be repaid, then consider what type of mortgage to go for. There are two main types:

Repayment - the monthly payments pays back the capital borrowed, plus the interest, which will clear the loan by the end of the agreed term.

Interest only - this is also known as an ISA, *pension or endowment mortgage. Each month you pay the lender interest on the loan.

Part of the deal will be to invest in a policy, which will pay the loan as it matures. With this comes the risk of the final pay-out being lower than the amount of the loan. (Sometimes you could be left with something left over.)

*The pension mortgage is mainly for self-employed people. Monthly payments are made up of interest payments on the loan and a contribution to a pension scheme. On retirement, you are left with a lump sum to pay off the loan and have a pension.

What interest rate?

The next thing to consider is what type of interest rate to have on your mortgage. There are three main ones to chose:

Fixed rate - the interest rate you pay will be fixed for a set period (between 2 - 5 years). You won't be affected by a rate rise but you also won't benefit from any reductions. You know exactly how much your monthly repayments will be during this time. At the end of this set period the rate will go back to the standard variable rate. Watch out for any penalties for changing mortgages.

Capped rate - this is similar to the above as it guarantees that the mortgage will not go beyond a certain point, but it may come down. Therefore, capped rates are often higher than fixed ones. The capped rate will be fixed for a set term and penalties may be payable if you want to change to a different type of mortgage at the end.

Variable rate - this offers the standard rate by all lenders. It moves in accordance with changes in the interest rates. You will benefit if the interest rate is reduced, but, lose out if it's increased.

Mortgage term

The longer the mortgage term, you pay more in interest to the lender. Conversely, the longer you take to pay it back, you pay less each month. A typical mortgage is over 25 years. To get any benefits you have to stay in your home for at least 5 years. The reason being that only interest is paid in the first five years of a repayment mortgage.

Final points to consider

As there are many different kinds of mortgages on offer, don't feel panicked and more importantly don't rush into anything. Read the small print, understand it and pay particular attention to any penalties for paying the mortgage early or missing a payment. Know what you are buying, look out for dates when a discount or fixed rate ends.

With an interest-only mortgage, check regularly to ensure you're on track to paying the mortgage off. If not, get saving! For further details about mortgages please go to