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What is a mortgage?

A mortgage is a loan you take out from a mortgage lender to pay for a property.

If you don't pay back the loan as agreed the lender can take possession of the property and sell it to repay the loan.

The loan is divided into the capital (ie the amount of money you borrowed to buy your property) and the interest (ie the amount the mortgage lender charges for lending you the money - which is why they're in business) .

You'll see hundreds of different names for mortages. Ignore them. They all boil down to the two main types of mortgage,

"Repayment mortgages"

and

"Interest only mortgages" .

What makes mortgages seem complex is the different variations you get on the two basic types.

Things seem more complicated than they have to be. Don't worry it can all be kept fairly simple.

The most significant thing about any mortgage is how much is the interest rate?

The lower the interest rate the less money you have to pay back over the mortgage term.

The other thing to bear in mind iswhat kindof interest repayment arrangement is there? Is it fixed interest? variable? capped?

Here's how it goes

The interest rate

You find a home to buy and approach a mortgage lender to give you a loan to help you buy it.

You will be looking for a mortgage with the lowest possible interest rate.

The interest rate is the most significant thing about a mortgage. Each of the mortgage lenders have their own variable interest rate. They vary a great deal, offering as much difference as 1%.

The lower the interest rate the less money you have to pay back over the mortgage term.

Exit Penalties

The lender agrees to give you the mortgage for an agreed period - the mortgage term.

They will try to get you to stay with them by charging you an exit penalty if you give up the mortgage before the agreed time.

For example if you decide to get a new mortgage with another lender you may have to pay the existing lender, say, 5% of the all the money you still owe them.

(So, if you've got £100,000 left to pay them, you'd have to give them £5,000 in order to get to leave them).

You want to be as flexible as possible and avoid mortgages which tie you down.

The likelihood is that the lower the interest rate the higher the penalties - though this isn't automatic and you can get very good deals by shopping around.

Mortgage Insurance

You insure your home in case it burns down etc.

You insure yourself in case you can't pay the mortgage eg you can't work or you die.

If it's the latter the life insurance would mean your dependents can use the insurance to pay off the mortgage ie at least they'll have somewhere to live if the major breadwinner is toast.

Otherwise they'd have to move out unless they could keep up with the mortgage repayments.

You can read the full section on mortgages and insurance here

Your Investment

You hope that the value of the property rises over the mortgage term ie over the period of the mortgage, when the property finally becomes yours.

It usually will rise significantly because of inflation. This makes the amount you borrowed seem smaller and the value of the property seem higher.

The amount you eventually paid the mortgage lender will be much more than the original cost of the property.

For example, say you paid £100,000 for the house, the mortgage, with its interest charges, could easily cost you £250,000 over 25 years.

However the house will probably be worth £500,000 by then. If you had put the same amount of cash in a bank or in the city it's unlikely it would have seen the same increase.

The parents of todays thirtysomethings paid about £4,000 for their homes. In those days that was a lot of dosh. Now they're worth at least £150,000.