What Is A Mortgage?
A High Price to pay
A house is probably the most expensive thing you will ever buy. Today, the average property in the UK costs approximately £195,000. Taking out a loan to cover this kind of sum is not something that should be done without a great deal of thought and consideration.
Mortgaged to the hilt
For the past few years the Bank of England base rate has been quite low. This is the basic rate from which all financial institutions in the country decide how much they are going to charge customers for borrowing money.
On a mortgage where the period of borrowing is over a long term, typically twenty five years, the interest rate can fluctuate from month to month in line with the Bank of England rate changes. The rate you will be charged for your mortgage will always be a percentage point or so above the rate set by the Bank of England.
The current typical interest rate for a mortgage is around 6%, although this will vary hugely depending on each lender and your own personal circumstances. In the past, such as in the early 1990’s the interest rate went as high as 15% and with the average mortgage sitting at approximately £125,000 just a small change in interest rates can make a big difference to a household’s monthly expenditure.
Repossession
The key thing to realise about a mortgage is that you are borrowing money to buy the house and that house is collateral against you defaulting (not paying) your debt each month. If you find yourself in difficulty with the repayments and unable to repay the loan, the lender can take you to court and repossess the house in order to repay the money owed to them.
If you do ever find that you get into trouble repaying your mortgage, perhaps because of redundancy or long-term illness, always contact the lender and tell them about your problem. Try to negotiate temporary payment terms that you can afford which keep them happy. After all, no lender really wants to repossess your property; they would far rather have your regular monthly premium.
Two types
There are a host of names that provide mortgages, but whatever the lender calls them there are fundamentally only two main types: either repayment or interest only. A third type, the current account mortgage, is a relative newcomer that we will ignore here.
Repayment or interest only
A repayment mortgage pays back some of the interest and some of the capital, (the amount you borrowed), each month.
An ‘interest only’ mortgage doesn’t pay back any of the capital, just the interest. With this kind of mortgage you need to take out an additional plan, such as an endowment, so that you can accrue the amount of the loan over the same period of time and use the capital from the endowment policy when it matures to pay off the mortgage.
An endowment plan is a life assurance plan so if you were to die during the term of the mortgage then the loan would be paid off. Many lenders insist that you take out some form of life cover or insurance cover to protect the repayments that you make each month in case you become ill or die. This applies equally to repayment mortgages as it does interest only mortgages and their cost should be factored in to your monthly budget when deciding how much you can borrow.
Fashion
Interest only mortgages have gone out of fashion in the last eight to ten years because the stock market hasn’t performed as well as it did for the preceding decades and so there are now endowment policies maturing that simply wont pay out enough to cover the full amount of the loan.
You need to take advice from a qualified financial advisor on which type of mortgage is best for you.
- Different Types Of Mortgages
Rather like a full house in poker there seems to be a wide selection of mortgages on the market, but aren’t many of them the same kind of product? - Paying Off Your Mortgage Early
Twenty five years is the average period of a mortgage… Twenty five years is a long time! The dream of many people is to pay off their mortgage early. Can it be done?
