What is a Mortgage

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A mortgage is a loan to buy a property, but it has two special characteristics:

  • It takes a long time to repay
  • The loan is ‘secured’ on your home.

It’s designed to be paid back with interest over a long period, typically 25 years. That means while interest is applied slowly over time, you still pay a lot of it. Unlike a bank loan or a credit card debt, a mortgage is what’s called ‘secured’. That means in return for lending you money, the bank uses the property as security for the mortgage. While ‘security’ may sound good, it’s the lender not you that gets the security, as it means if you get into problems and can’t repay, it has the right to repossess your home and sell it to recoup the money borrowed.

Types of Mortgages;

There are two main types of mortgages;

  • Repayment
  • Interest Only

Repayment Mortgage

A repayment mortgage consists of paying of the mortgage in a given time as the monthly payments are built up of capital repayments and interest. This means the borrower at the end of the mortgage term – i.e. 25years does not owe the lender any money.

Interest Only

With an interest-only mortgage, your monthly payment does not chip away at your actual debt – it just covers the cost of borrowing the money. After 25 years of paying the interest on a £100,000 loan, you would still owe £100,000. With this type of mortgage, each mortgage payment is only used to pay off interest. At the same time, the borrower takes out an alternative ‘repayment vehicle’ (method of paying off the mortgage) such as an ISA, pension plan or endowment policy.

The most important fact about an interest only mortgage is that the monthly repayments do not repay any of the outstanding capital balance. As a consequence it is important that the payments are maintained into the repayment vehicle; otherwise it will not be possible to pay off the mortgage at the end of the term.

So why not speak to one of our friendly expert advisers who can explore your options with you?

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