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3 May 2008
What is a Mortgage?
Mortgages should be straightforward - you borrow money to buy a house and pay interest on the loan. But after a few enquiries, you soon realise that it's not so simple after all. 
A mortgage is the first charge registered against your property title at the Land Registry for Title Deeds and Plans for UK and Ireland . The mortgage lender therefore enjoys the maximum security for his loan and is able to lend at the lowest possible interest rate. Arranging a new mortgage - called a remortgage - allows a homeowner to obtain a better deal and raise money. Calculate your monthly mortgage payments with our calculator.
Switching to a mortgage with a lower interest rate allows borrowers to dramatically reduce their monthly outgoings, as well as providing the opportunity to release value stored in their homes.
Be careful whom you borrow from - remember you are putting your home at risk.
Paying back the capital
You can either pay a little at a time as you go (repayment mortgage) or pay it all off at the end (Interest only or endowment mortgages).
Repayment mortgages - Each monthly payment pays off a little of the underlying debt, as well as interest on the loan. At the end of the term the mortgage is cleared.
This is widely considered to be the most easy to understand and least risky mortgage type. But remember if you do not keep up with repayments the lender can repossess the property.
Interest only mortgages - With this type of mortgage, you pay-off the interest on the loan but not the capital. At the end of the mortgage term you are expected to repay the capital, how you fund this is your business.
Interest only mortgages have grown in popularity in recent years amongst buy-to-let investors and first-time buyers in particular because, put simply, they are cheaper than a repayment mortgage.
However, some experts are concerned that many people taking out an interest only mortgage are not giving enough thought as to how they will repay the capital.
Remortgaging can save you money
The UK mortgage market is a very competitive environment, with every lender trying to gain a larger share of the market place by offering discounted interest rates and incentive deals to attract new customers. Although these deals are often aimed at first time buyers or people moving home, there are also good mortgage deals available for homeowners who want to remortgage.
By shopping around for the best deal, you could save thousands of pounds each year even if you have to pay an early settlement charge to move your mportgage.
Paying the interest
You have to pay interest on any debt, and mortgages are no different. They differ only in the range of options offered.
Variable rates - This means you pay the going rate on your loan. The mortgage rate changes every time interest rates change or, as in most cases, the overall effect of any interest rate changes is calculated once a year and payments are altered accordingly. Whatever kind of mortgage you start with, it is likely to change to variable rates at some point.
Fixed rates - The interest rate is fixed for the period agreed - often two to five years. These are ideal for budgeting or if you think rates might increase. You do not benefit if rates fall, and will face penalties if you try to quit.
Very low rates may tempt you, but they can be used to trap you into paying over the odds at a future date. Check how long you will have to stay with the lender before you can switch without penalty.
Capped rates - These are fixed, but if rates fall you pay the lower rate. Such deals can be a good for budgeting.
Cash back deals - This is when lenders offer money back if you take out a particular product. However, nothing comes free in life and cashback mortgages may be weighed down with hefty penalty charges if you later want to switch lender.
Discounted rates - Under this type of mortgage the borrower is offered a discount off the lender's variable rate. The rate paid will fluctuate in line with changes in the variable rate. The discount applies over a set term.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
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