Introduction to Mortgages

If you ask any group of adults why they go to work each day, the chances are at least half of them will include 'paying the mortgage' in their answer.

Mortgages are a fact of life for many people in the UK - in England alone, around 70% of households own their home. Most of these will have used a mortgage to buy their home and many will still be paying it off.

But what is a mortgage?

A mortgage is a type of home loan that allows your mortgage lender to take back your home and sell it if you do not keep up with your repayments.

The word mortgage itself is the name given to a contract in which you agree to give up your interest (stake) in something if you do not meet your obligations.

How Mortgages Work

When you buy a home, you arrange for a mortgage to be provided to cover some or all of the purchase price - with you providing a deposit to cover the rest.

Historically, UK mortgages have been for 25 years, but longer mortgage terms are becoming increasingly popular as property prices rise. It's now possible to get mortgages for up to 40 years!

On the day of the sale, your mortgage lender will transfer the money to the person whose home you are buying - allowing you to move in and take possession immediately.

You don't ever get to see the money yourself - because it has been lent specifically for the purchase of your home, your mortgage lender has to make sure this is how it is used.

Types of Mortgage

When you take out a mortgage, the amount of money you borrow is called the capital sum. This must be completely repaid for the mortgage to end.

As you are borrowing so much money for so long, your mortgage lender will also charge you an additional amount as well - known as interest. This is usually a small percentage of the amount you have borrowed.

There are two main types of mortgage:

Capital repayment
Interest only

Capital Repayment Mortgages

If you choose a capital repayment mortgage, then your monthly repayment will be made up of two parts - interest and capital.

Once you reach the end of the mortgage term, you will have paid back all of the capital sum and the interest you owe - meaning that your home becomes yours, immediately.

Interest-Only Mortgages

If you choose an interest-only mortgage, your monthly repayments will be made up of interest only. This means that for the same size of mortgage, your monthly repayments will be lower than with a repayment mortgage.

The downside is that choosing an interest-only mortgage means that you do not pay back any of the capital sum each month. At the end of the mortgage term, you will still owe the same amount you borrowed, perhaps 25 years before.