What is a mortgage?

A mortgage is simply a secured loan on property or land. By the nature of the mortgage market place the types of mortgage available are numerous, where the industry has had to adapt to the needs of customers to ensure that there is a mortgage to suit everybody.

Why is a mortgage called a mortgage?

There are two thoughts on the derivative of the term mortgage.

Some say that the term mortgage is derived from the French words ‘mort’, meaning dead and ‘gage’ meaning pledge. The principal meaning is that the person taking out the loan on the land or property pledges that the land and property is security for the debt and is dead to him should he fail to pay, and dead to the lender if he does pay.

The other thought says that the term mortgage has been derived from a 14th century English word ‘morgage’, simply meaning pledge.

What is the term of the mortgage?

Mortgages can be taken out over any term that a lender is prepared to agree, usually a mortgage is for a term of 20 to 25 years.

What type of mortgages are available?

Principally there are two types of mortgage. Repayment mortgage and interest only mortgage.

A repayment mortgage is a mortgage paid over a period that is paid off in full at the end of the term.

An interest only mortgage can be paid back through many various forms of savings or investment plans that build independently over the term to equal the amount of the original mortgage debt. The savings or investment plan may equal the original mortgage debt before the predicted term or may take longer.

It is often the case that during periods of high interest rate many people would be persuaded towards an interest only mortgage. When interest rates are high the amount paid to the lender is often less throughout the term and the Savings or investment plan matures faster or more cheaply with the increased interest rate. (see interest rates below)

It is often the case that during periods of low interest rates many people would be persuaded towards a repayment mortgage. When interest rates are low the amount paid to the lender is often less throughout the term and the mortgage is paid off in full at the end, where Savings or investment plans mature slower with the reduced interest rate. (see interest rates below)

Repayment mortgage - A repayment mortgage is where a lender will agree to secure a loan against land or property, and the borrower will make payments towards the interest charge and a small amount off the underlying debt.

Interest only mortgage

There are several types of interest mortgage, that doesn’t mean that they are necessarily any better than a repayment mortgage but they certainly offer more Varity.

What Interest only mortgages are available?

There are principally three types of interest only mortgage repayment options;

Endowment mortgage – An endowment mortgage is used to provide life insurance and invest money to grow to the value of the original loan. An endowment mortgage may mature before the term, however it is worth considering that it may not mature for many years after the term where the borrower will still be responsible for paying the interest on the mortgage for as long as the debt remains.

Pension mortgage – Pension mortgages require the borrower to invest in to a pension scheme offering tax-free lump sum to pay off the mortgage debt. These are not common and contain a certain element of risk.

ISA mortgage (Individual Savings Account) – An ISA mortgage is exactly the same principal as the endowment mortgage the borrower invests money in an ISA to grow to the value of the original loan. As with an endowment mortgage the ISA may mature before the term but equally it might not.

How will you know which mortgage to choose?

Mortgage lenders have a variety of options available to find a mortgage that suits your needs. All mortgage lenders operate within a legislative code of conduct but it’s recommended that you find one that belongs to the council of mortgage lenders mortgage code to ensure that they do not miss-sell you a mortgage. You should also check if they charge for their advice and mortgage recommendations.

Which mortgage is best for you?

Once you have been accepted for a mortgage the mortgage lender will offer you a mortgage that fits with your needs. It’s important that you consider exactly want you want before you decide which mortgage to choose.

Principally you should consider how long you’d like the mortgage to last, and realistically assess you future plans. If considering a joint mortgage with someone else such as a spouse or partner you should consider the implications or penalties that may occur should your situation change.

Choose a mortgage that suits your criteria, most mortgages are over a term of 20-25 years. Where will you be in 20-25 years? Will your circumstances have changed? Will the mortgage accommodate those changes?

How much does it cost?

The cost of a mortgage depends on a many different factors, the interest rate, whether it’s a fixed rate mortgage or variable rate mortgage and the length of the term.

Your circumstances will also effect both the type of mortgage available and the rate that you will be offered, e.g. The higher the risk of you not being able to repay the mortgage the more you’ll pay.

Interest Rates

The type of mortgage you choose is as important as the type of interest rate that accompanies it. Many mortgage rates have early redemption penalties, these are charges that you will incur should you choose to terminate or change the terms of your mortgage before the agreed time. E.g. if your mortgage is to be repaid over a 25 year term, the interest rate fee agreed may be for 5 years. Should you decide within the 5 year period to change your mortgage to a different lender the original lender may impose an early redemption fee.

This is just one of the reasons for other mortgage companies to have interest rate options that offer a cash back deal so that you can pay you existing mortgage, the redemption fee and start with the new mortgage company without having to borrow more to cover the fee.

What type of interest rates are available for my mortgage?

Fixed Rate Mortgage – A fixed rate mortgage is where the interest rate on the mortgage is fixed at a rate for a set period, the period normally varies from 3-5 years and often have early redemption penalties.

Fixed rate mortgages offer a fixed rate for the set period regardless of any fluctuation in the bank interest rate and is ideal for any one who needs to budget. If the mortgage rate goes up then savings can be made, however should the mortgage rate go down then the mortgage could be more expensive than it needs to be. Should this happen it’s worth considering whether the early redemption penalty charge is less than the cost of continuing with the mortgage fixed rate set period.

Example: If your mortgage repayments are fixed at £900 per month for 5 years but in year three you find that you could acquire another fixed rate mortgage for only £600 per month there would be a potential saving of £300 per month. Consider that if the redemption penalty fee is £4500 in year three and the current interest rate looks stable you could consider that the remaining term of the Fixed Rate mortgage agreement is 18 months therefore 18 x £300 = £5,400 so consequently £5,400 - £4,500 = £900 that you could potentially save over the remaining fixed rate mortgage term.

Standard Variable Rate Mortgage – A standard variable rate mortgage is where the rate can fluctuate as often as the mortgage lender feels the market dictates, this type of mortgage holds less risk with the mortgage lender and can be easily acquired without time frames or redemption restrictions.

Capped Rate Mortgage – A capped rate mortgage is a combination of both a fixed rate mortgage and a standard variable rate mortgage, A capped rate mortgage can fluctuate as often as the mortgage lender feels the market dictates, but will be capped at a certain rate. A capped rate mortgage is often used by mortgage lenders to prevent loosing customers to other lenders as shown in the example of a fixed rate mortgage above, because the mortgage rate will drop when the market rate drops but will never exceed the limit set. As with the fixed rate mortgage the mortgage lender would usually impose early redemption penalties.

Discounted Rate Mortgage – A discounted rate mortgage is exactly the same as a variable rate mortgage except the rate is discounted below the standard rate for a fixed period. One major difference between a discounted rate mortgage and a variable rate mortgage is that early redemption penalties are likely to be imposed.

Cashbacks – Cashbacks aren’t actually a mortgage interest rate option but they are often offered with reduced rates as an enticement to encourage customers to agree the mortgage, whilst there are obvious advantages for customers moving into a new home to have cash available to help cover the expense, the rates can be slightly higher, again it depends on circumstance at the time. Whilst the mortgage might turn out to be more expensive in the long run the increase immediate cash flow could be more important under the circumstances.

Flexible mortgage – A flexible mortgage is a mortgage that can be tailored to your cash flow needs, they allow you to pay lump sums, take payment holidays, reduce your payments and increase your payments. A flexible mortgage is best suited to individuals that have do not receive a regular fixed income, such as someone who is self employed. Whilst a flexible mortgage might sound appealing it does require a good understanding of finances and a high degree of financial control.

Regardless of the mortgage rate you choose you should be realistic about your future plans, consider choosing a mortgage that will have the flexibility to accommodate changes and ensure that your repayments are achievable even if the rate fluctuates.

It’s important to remember that mortgage lenders hold the deeds to the property or land during the term of the mortgage. Breeching the mortgage agreement by not repaying the loan could result in the bank repossessing the property and recovering the outstanding debt by selling it.

If you feel that you are struggling to keep up repayments on a mortgage it is worth talking to your mortgage lender or IFA and make them aware of your situation. As they should be able to offer suggestions that may help ease the situation.

Equally it is often a prerequisite and certainly advisable to ensure that you have sufficient insurance to cover the mortgage repayments should a change in your situation occur.

What if you have bad credit?

Bad credit is not necessarily going to stop you from getting a mortgage. There are many firms that specialise in bad credit mortgages and remortgages.

The cost for lending with bad credit are often more expensive. This represents the greater risk factor in lending to someone with bad credit.

There are ways to repair your credit.

If you want to know more about your credit then take a look at www.Experian.co.uk 

This information and mortgage calculator is for guidance only and should not be considered to be an offer.