A mortgage is borrowing money using property as a security, a type of secured loan in other words. Primarily, the purpose in borrowing the money is to purchase a property.
A mortgage is really another word for a property loan – a loan that allows you to borrow a large amount of money in order to buy a home or property which is secured on the value of that property, and which you pay back over an agreed period of time.
The term ‘secured’ means that if you default on payments and can’t keep up with the payments schedule as agreed, the lender has the right to sell your property in order to recover their money.
A mortgage can be broken down into four main parts:
- Capital – This is the amount of money that you borrow to buy the house.
- Interest – This is the charge for borrowing money. Worked out as a percentage of the capital.
- Term – This is the fixed period of time that the money is borrowed over.
- Repayments – These are the regular payments you make throughout the term of the mortgage.
The mortgage is created by a legal charge on the property and, significantly, does not involve the transfer of land. The charge confirms that the property has been pledged to the lender as security for the mortgage loan.
Mortgages are usually repaid over 25 years, but depending on your situation and earnings it can be arranged over either a longer or shorter period of time. The amount you borrow is called the ‘capital’, and you will also have to pay back the interest charged to you by the lender.
The title deeds are held by the lender but when the purchase monies are paid over to the vendor, usually through a solicitor, the mortgagor becomes the owner of the property. The legal charge is supported by a loan agreement between the two parties which sets out the terms of the loan, the responsibilities and undertakings.
You have two options – repay the capital and the interest together – this is a ‘repayment’ mortgage, or repay the interest only, and organise another investment to cover the capital at the end of the term. This is known as an ‘interest only’ mortgage.
When looking at how much money a lender is willing to let you borrow, there are two factors that they will want to consider.
First of all, they will want to know how much you earn. Usually you will only be able to borrow around three times your salary.
If you are looking to purchase a joint mortgage with a partner or friend, then the income multiplier may be worked out differently. Some lenders will offer two-and-a-half times the joint salaries, or three times the higher salary, and one times the lower salary, whichever is higher.
Most lenders will also take into account the amount that you are looking to borrow, and the total value of the property. Although some lenders will allow you to borrow the full value of the property, most will only lend a certain percentage, say 95%.
When applying for a mortgage, there are certain points that you will need to consider before you sign on the dotted line.
First of all you need to consider how much you can afford. You should complete a budget, and work out how much money you have coming in, and how much money you spend each month. This should then give you an idea to how much you can afford to pay a lender each month for your mortgage.
You should also consider whether your income would allow you to afford the property you are after.
You also need to think about how long you will need to borrow the money for. A mortgage is a major financial commitment and will require that you can keep up the repayments for the full term.
If you repay your mortgage before the end of the designated term you may well be charged a penalty. Penalties are particularly common in the first few years of a loan or if you are taking advantage of a fixed rate or a discounted rate and can be very significant in size. Sometimes it is possible to serve notice to avoid these penalties.
Furthermore, some lenders will charge interest until the end of the month in which redemption occurs so it may pay you to time the redemption of your mortgage to avoid this charge. Some lenders also make additional charges such as vacating fees, deed release fees or other administration charges.
All of these costs should be highlighted in the mortgage offer or in the standard Terms and Conditions provided with that offer. Before committing to your mortgage, please check the redemption penalties which will be mentioned in the mortgage offer.
Getting a mortgage can be very complicated. If you are unsure about which mortgage to go for, then you should seek some financial advice.
About the author
John Mussi is the founder of Direct Online Loans who help UK homeowners find the best available loans via the www.directonlineloans.co.uk website.