What is a mortgage?

What is a mortgage?

author: HaylexCox

By HaylexCox

Thinking of buying a property? Then you need to know what a mortgage is.


Thinking of buying a property? Then you need to know what a mortgage is.

A mortgage is a loan you take out to buy a home. Sounds straightforward? Well in a lot of ways, it is – but there are a lot of different mortgage products from which to choose.

To find the one that best suits your needs, it’s important you get to grips with the different types of mortgage out there. Let’s take a look.

Repayment, interest-only or guarantor?

First things first, you need to decide whether you take out a repayment or interest-only mortgage – although in recent years, there’s been less choice about this.

With a repayment mortgage, some of your monthly mortgage payment goes towards paying the interest on your mortgage, and the rest clears some of the actual loan. This means that by the time you reach the end of your mortgage (assuming you’ve made all your payments in full), you will own the property outright.

Meanwhile, with an interest-only mortgage, your payments go only towards paying the interest on your mortgage. When you get to the end of your mortgage term, you’ll still owe the full amount that you borrowed. You can then either sell the property or remortgage to clear the balance on your original mortgage.

Another option is a guarantor mortgage. This may be suitable if you have a very limited credit history, perhaps because you’ve never borrowed before. Your parents may offer to act as guarantors on your mortgage, which means that if you’re no longer able to make your repayments, they will have to take over. This provides an extra safety net to lenders.

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Mortgage term

Once you’ve chosen what type of mortgage you’d like, you can think about the term for which you’d like to take it out. This is the total length of time for which you’ll make repayments.

Mortgage terms often last around 25 years. You can choose a term that’s longer than this – the longer you’re making payments for, the more affordable those payments should be. Having said that, by making payments for longer, you’re likely to end up paying more interest in total.

Another important question to ask yourself is how old you’ll be when your term ends. If the term you choose lasts well into your retirement, you may struggle to afford your repayments on a reduced income. Plus, a lender may be reluctant for you to choose this term.

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Fixed, tracker or SVR?

Once you’ve chosen the mortgage product and term you want, you can look at the types of deal available. We’ve broken down these options for you below, but you can learn more by clicking on the links:

Fixed-rate – Your payments and interest rate will be fixed for an agreed period on this mortgage. No matter whether interest rates go up or down, your repayments will remain the same.

Tracker – The interest you pay on this mortgage will track the Bank of England’s base rate. If the base rate goes up, so will your monthly repayments – and if it falls, so will what you pay.

SVRLike a tracker mortgage, your payments can go up and down with the base rate. The difference is that it’s up to your lender whether they reflect the actions of the base rate in your repayments. An SVR can be quite a bit more expensive than the other two mortgages, and it’s usually what you’ll automatically switch to once your fixed or tracker deal ends.

So there you have it – all the basic things you need to know about mortgages. To learn more about working out how much you can afford to borrow with your mortgage, click here, and to learn about applying for a mortgage, click here.

 

 

Disclaimer: All information and links are correct at the time of publishing.

author: HaylexCox

By HaylexCox

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