About Mortgages Mortgages

What is a mortgage?

A mortgage is a financial loan that you will take out in order to purchase a property, land or both. The loan is classed as a "secured loan" and is secured against the property itself. We have more information on "secured loans" elsewhere in our site but briefly what this means is that the loan will be secured against the property and should you fail to keep up with your repayments, the lender can repossess your home. Normally a mortgage will run for 25 years but this term can be longer or shorter should that be required.

How do you take out a mortgage?

There are a number of ways to get a mortgage, namely through a building society, a bank or a specialist mortgage lender. A specialist mortgage lender may be a company that specialises in mortgages for the self employed or contractors. In this case the individual may need the help of that specialist lender to be accepted for a mortgage.

For any of the aforementioned lenders they will do a large number of checks to make sure that you can afford the mortgage. With the recent and ongoing financial crisis lenders have come under increased scrutiny to make sure that they partake in responsible lending. This is obviously a good thing but can make it harder for first time buyers to get on the property ladder. The lender will also require checks and surveys of the property you are purchasing to make sure that it is worth the amount of money they are lending you.

How much of a deposit will you need?

All mortgage lenders will require you to put down a deposit nowadays. In order to get competitive interest rates on your actual mortgage value, the better your deposit, the better interest rates you will get. So how does this work?

Here is a working example:

Say you want to purchase a property to the value of £250,000, if you had £25,000 to put down as a deposit that would mean your deposit would be 10% of the purchase price and the mortgage loan-to-value would be 90%.

How do mortgage repayments work?

When you apply for and take out a mortgage you will need to agree on how you want to pay it back. In order to make this decision it is important to understand that a mortgage will consist of two parts:

The Capital - this is the money which you actually borrow from the lender.
The Interest - this is the charge made to you by the lender until the loan is completed. This is obviously the main way lenders will make their money.

Now that you understand this point you will understand that you can opt to repay your mortgage as capital plus interest, interest only or a combination of the both of them. It is important to note that with an interest only mortage you will have to demonstrate to the lender that you can repay the capital at the end of the loan term.

Working out what you can afford

It is really important to be honest with yourself and the lender about your monthly outgoings which will determine what you can and cannot afford. There is no point in over extending yourself and not being able to repay your mortgage payments. Should you fail to keep up with your repayments, the lender can repossess your home which is the last thing you want!

Where to get a mortgage?

Once you have thought through all the important decisions and you are finally ready to apply for a mortgage you can do so through a building society, a bank or a specialist mortgage lender. A specialist mortgage lender may be a company that specialises in mortgages for the self employed or contractors. In this case the individual may need the help of that specialist lender to be accepted for a mortgage.

If you are a first time buyer you may want to consult with a financial advisor or mortgage broker who will help you compare different mortgages available to you.