In Focus

In Focus Mortgages

What is a mortgage?

A mortgage is like any other kind of loan - you borrow money, and you pay it back with interest over a period of time. But it has one key difference: it's secured against your home. So if for any reason you can't repay it, the lender can sell your home to recover their money.

How mortgages work

You take out a loan based on how much you can afford and the value of the property, for a length of time agreed between you and the lender.
You are charged interest on the loan, usually based on the Bank of England base rate, which is reviewed monthly.
You pay the mortgage back in one of two ways, repayment or interest-only
You can choose different deals for your interest rate, such as fixed or discounted
If you've had financial problems in the past and are finding it difficult to get a mortgage, the Council of Mortgage Lenders (CML) have a leaflet that may help.

Types of mortgage:

You can choose to pay your mortgage back in the following ways:

• repayment;
• interest-only; or
• a combination of the two.

You'll need to decide which is best for you.

Repayment Mortgages:

Every month, your payments to the lender go towards reducing the amount you owe as well as paying the interest they charge. So each month you're paying off a small part of your mortgage.

The pros: It's a simple, clear approach - you can see your loan getting smaller.

The cons: In the early years your payments will be mainly interest, so if you want to repay the mortgage or move house in the early years, you'll find that the amount you owe won't have gone down by very much.

Interest-only Mortgages:

As the name suggests, your monthly payment only pays the interest charges on your loan - you're not actually reducing the loan itself. This is why it's very important you arrange some other way to repay the loan at the end of the term; for example, through an investment or savings plan.

If you choose this option you will need to check that your investment or savings plan grows accordingly, so that at the end of the term you'll have enough money to pay off the loan. If it doesn't grow as planned, you will have a shortfall and you'll need to think about ways of making this up.

The pros: Because you're only paying off the interest, and not the loan itself, your monthly payments will be lower.

The cons: That debt is not going to go away. Throughout the life of the mortgage, you'll need to check your investment or savings plan is on track to repay your loan at the end of the term. If you can't repay it at the end of the term you could lose your home.
Jargon Buster

Advice
A recommendation about the most suitable mortgage for you made by an adviser who is regulated by the FSA.

Annual statement
A statement from your mortgage lender, sent every year, showing among other things what you've paid and what you still owe.

Approval in principle
A certificate which some lenders will give you that shows the amount they will probably be prepared to lend you. This is not a guarantee, but can be helpful when signing up with estate agents.

APR
Annual Percentage Rate. This shows the overall cost of a loan, taking into account the term, interest rate and other costs.

Authorised firm
A firm that has permission from the FSA to carry out regulated activities.

Buy-to-let mortgage
A loan you take out to buy a property which you intend to rent to tenants.

Capital
The amount you borrow to help buy your home.

Capped mortgage
A mortgage that has a maximum limit on the interest rate you'll have to pay during a special deal period.

Cashback mortgage
A mortgage that comes with a cash sum (often a percentage of the amount you're borrowing).

Collared mortgage
A mortgage with a minimum interest rate you'll pay during a deal period.

Deposit
The amount of money that you're putting into buying a home (not including the mortgage money you're borrowing).

Discounted mortgage
This has a discounted variable rate of interest for a set period, after which the rate will increase.

Early repayment charge
A charge you may have to pay if you break off a mortgage deal - by paying it back early and/or moving to another lender.

Fixed rate
An interest rate that is fixed (i.e. it doesn't move up or down) for a set period of time.

FSA
The Financial Services Authority - the UK's financial services regulator.

Income multiples
The factor by which your earnings are multiplied to find out how much you can borrow.

Interest
The charge made by lenders when you borrow their money.

Interest rate
The figure that determines how much interest you pay. Usually linked to the Bank of England's rates and can move up or down.

Interest-only mortgage
A mortgage where you only pay the interest charges of the loan each month. This means you are not reducing the loan amount (or capital) itself, and this will need to be repaid in some other way.

Keyfacts documents
Standard documents that all authorised lenders and brokers must give you to explain their services and details about the mortgage you're interested in.

Loan-to-value
The percentage of money you want to borrow compared to the cost of the property.

Mortgage
A loan which is secured against your property.

Mortgage Adviser
A mortgage adviser helps you understand the various mortgage types and deals available to them. A mortgage adviser may recommend a mortgage for you or they may provide you with information to enable you to make your own choice.

Remortgaging
The process of changing your mortgage for a different one, without moving home.

Repayment mortgage
A mortgage that pays off both the home loan and the interest at the same time. Make all the payments and the mortgage will be fully repaid.

Stamp duty
A tax which home buyers must pay on properties above a government set figure.

Standard variable rate mortgage
A loan at the lender's normal mortgage rate - i.e. without any discounts or deals.

Secured
A mortgage is a secured loan on your home; this means that if you fail to repay it, your lender may be able to sell your home to get its money back.

Survey
A report on the condition of the property you are planning to buy.

Tracker mortgage
A mortgage with an interest rate that is usually linked to a particular rate that is set independently from the lender and moves up or down with it.

Term
The length of your mortgage.

Valuation
A brief inspection, for the benefit of your lender, of the home you hope to buy. This is to make sure they are not lending more than the property is worth and that the property is suitable security for the mortgage, but this will not tell you if it is a good or bad buy. For your own peace of mind, you may want your own survey.

YOUR HOME COULD BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY DEBT SECURED ON IT