Mortgages Defined

What is a mortgage?

A mortgage is a loan secured on a property, most commonly spoken about when it's referring to someone's home. A mortgage is a loan from the bank or a building society, in order to either buy a property or borrow against a property that's already owned. A mortgage is taken out over a set time and payments are normally made monthly for a set amount.

What's the difference between a mortgage and a loan?

The difference between a mortgage and a loan is a mortgage is secured on a property, whereas a credit card bill or a personal loan is generally an unsecured loan. If you don't pay your mortgage, the bank or building society that lent you the money can repossess that home.

Isn't a mortgage just another debt?

A mortgage is different to other debts in that a mortgage is taken out over a longer period of time and is used to either buy a house or borrow against a house or different property. The difference between a mortgage and another debt is that if you do not repay that mortgage then you will have that property seized off you by the person who lent you money.

How do mortgages work?

Mortgages work by a person borrowing a certain amount of money against a property's value from a bank. If I want to buy a house that's worth £150,000, I might borrow £125,000 from a bank. I agree to pay back that money over a set period of time and, in order to pay back that money, I make regular monthly payments to the bank. The interest rate is generally set at the start, but can vary from then on.

What is a mortgage term?

A mortgage term is how long you take out a mortgage for. So, if I want to buy a house, I might agree to pay back that money over 25 years, then that's the mortgage term. Typically, most mortgages are around 20 to 25 years, but they can shorter and they can be much longer.

What are mortgage rates?

Mortgage rates are the interest rate at which you borrow money from the bank. Most mortgages can come with either a fixed rate, a discount rate, or a standard variable rate. If it's a fixed rate mortgage, you will pay a certain amount for a certain amount of time. If it's a variable rate mortgage, then your mortgage rate will go up and down over time, dependent upon interest rates. If it's a discount mortgage rate, then you will pay a set amount below a rate that varies.

How are mortgage rates set?

Mortgage rates are set on a number of different things. Firstly, there's the rate at which the bank can borrow money in order to lend money to the people who want to take out a mortgage. This depends on the Bank of England bank rate, which sets a headline rate interest figure, and also swap rates, which is the money at which banks can borrow money from other banks. Interest rates for mortgages will also vary depending upon how much a bank wants to attract people's custom. The lower the mortgage rate, the more customers they'll get.

Where can I get a mortgage from?

You can get a mortgage from a bank or a building society. A bank is a private company that is set out to make money. A building society, which are often referred to as mutuals, is owned by its members. If you want to take out a mortgage, you can walk into the bank or the building society, or search online for one. There's no need to go to your bank or building society to take out a mortgage.

Is it better to get a mortgage from a bank or a building society?

There's no right or wrong answer as to whether you should take a mortgage from a bank or a building society. Banks are companies that pay out profits to their shareholders, whereas building societies are mutual, so they're owned by their members, and are meant to return the profits they make, through better savings and better mortgage rates. However, if a bank offers you a better mortgage, then there's no reason not to take it.

What is the most that I can borrow?

The amount that a bank or a building society will lend you depends upon your earnings. Most banks and building societies traditionally used to lend people around three times their earnings. They've changed this, and they lend on an affordability measure, which means that many will lend you as much money as they think you can pay back each month. Some of them will lend you five or six times your salary.

What is the most that I should borrow?

You should borrow as much money as you can afford to pay back. That's not to say that you should borrow to that limit, but you should always make sure that you can meet the monthly payments on your mortgage. If you can't make the monthly payments on your mortgage, you might find that you lose your house.

What are APRs?

An APR is an annual percentage rate, which is an interest rate figure that is meant to give you the overall cost of a loan. So your APR may be different to your initial interest rate, if for example, you have a fixed rate mortgage. However, it should take into account the cost of paying off that loan over the whole term along with fees and other charges.

How important are APRs?

An APR is a handy figure that will tell you the cost of a loan over its whole period. However, if you take out a two-year fixed-rate mortgage and you don't have any early repayment charges after that period, then you may as well take out another two-year fixed-rate mortgage at the end of that time, which means that you will probably never end up paying the APR. While APRs are useful, they're not the be-all and end-all.

What is a property chain?

A property chain is made up of the people involved in the buying and selling of properties. For example, if I'm buying a house and selling my house, then the person I'm buying from and the person I'm selling to form a chain with me. In turn, if they're buying and selling too, the people they are buying from and selling to form a longer chain. The shorter a chain, the less chance there is of something going wrong.

What common mistakes do people make when getting a mortgage?

The most common mistakes that people make when they're getting a mortgage are to either borrow too much money and so can't afford to repay, or be seduced by a deal that looks good but isn't. For example, they see a mortgage with a very low rate and they think, "Wow that's great - I'll take one of those!" However, it turns out that there are fees, charges or higher rates down the line that won't be so good for them. The other mistake people make when taking out a mortgage is to take out a mortgage with too long a fixed term, so if they need to leave they might have to pay expensive early repayment charges.

If I move house will my mortgage come with me?

If you move house, your mortgage can come with you, but only if you have a mortgage that is deemed to be portable by your mortgage lender. That means that when you decide to sell your property and move to another one you can take the existing debt with you. However, if you need to borrow more money, you may have to take that out in the form of either a re-mortgage or a second mortgage.

Do mortgages work in the same way throughout the UK?

Mortgages generally work in the same way throughout the UK, however there are slight differences between England and Wales and Scotland, for example. In Scotland, once you make an offer and it's accepted, that is considered as binding. So, in Scotland, people will get their survey done and get their mortgage offer sorted before they make a cast iron offer.

I want to buy a home abroad. Where can I get a mortgage from?

You can either take out a mortgage on your existing property in this country, which is repayable in pounds, take out a mortgage on the property in a foreign country in this country, which is again repayable in pounds, or you can borrow in the foreign currency. The advantage of taking out a mortgage in this country is that if you earn money in Britain, then your repayments will be made in pounds and you won't have to worry about exchange rates. The advantages of taking out a mortgage in some other countries can be that there are tax benefits.