what is a mortgage?

Posted by Belle on June 12th, 2019

What is a mortgage?

In short, a mortgage is a loan which can only be used to raise capital for buying a property or land. The majority of mortgages are 25 years long, however they can run for smaller or longer periods of time. The loan is taken out against the property, meaning that if you cannot meet your repayments, the lender, which is usually a bank, can repossess the property in order for them to gain their money back by selling it.

The most common type of mortgage is known as a repayment mortgage in which a proportion of the loan and its interest are paid back every month up until it is paid off. If you keep up with all of your monthly payments, you should be guaranteed that you will have paid back all of the loan at the end of the 25 years or whatever period was previously arranged. To begin, most of the monthly payments will be contributing to the interest more than the borrowed loan whereas over time this shifts to become the opposite.

Another less common option is an interest only mortgage in which each month you only repay the interest for the amount of capital you have borrowed. At the end of the mortgage term you then pay back the loan in a lump sum. These are not as widely offered as they used to be, with only a limited number of lenders offering them nowadays.

Within these main categories of mortgages there are a number of specific mortgage types including fixed rate mortgages, discount mortgages and more. Typically, fixed rate mortgages have higher interest rates due to the fact you are benefiting from the security of the fixed interest rate, meaning you know how much you are going to be paying. Whereas if you do not have a fixed rate, you take the risk of times which may have a low interest and other months which could be very high.

Which type of mortgage is best for you and your property will depend on a variety of factors. When deciding your mortgage, it is important to consider: how much money you have to pay for your deposit, what type of home you are taking a mortgage for, how long you want your mortgage term to be, and how much you can afford to pay back each month.

If you are struggling to decide on which mortgage provider to use, you can use a mortgage broker to help you. They can look at all of the deals available, in addition to offers which are only available via brokers, and compare to find one most suitable for your needs.