Mortgages - The Building Blocks

A mortgage is basically a long-term loan borrowed over a period of time throughout which you are charged interest by the lender. The difference between a mortgage and a standard loan is that a mortgage is secured against a property. This means the mortgage lender is entitled to repossess the property if the mortgage cannot be repaid as per the agreed terms.

The time period in which the mortgage is repaid is known as the "mortgage term". This is usually a fixed period of time, however, flexible mortgages are available which allow you to repay the loan earlier or later than initially agreed. With this added flexibility it is also possible to take breaks from payments, change the amount being repaid or borrow back some of the loan.

A mortgage is usually taken out for a large proportion of the property value and then the borrower uses a lump sum deposit to pay the remainder. However, it is possible to borrow the full value of the property, this is known as "100% mortgage". This is useful for first time buyers who may be finding it hard to save for a deposit.

As with standard loans the mortgage lender charges a rate of interest, this can differ from mortgage to mortgage. Fixed rates, as they suggest, are fixed for an agreed period of time, usually two to five years. Variable rates change in line with the standard Bank of England interest rates. Capped rates have a fixed upper limit, however, if the Bank of England interest rates fall your interest rate falls in line with these rates.

It is possible to take out a mortgage and only pay back the interest for the term of the mortgage, paying the capital at the end of the term. This is known as an "interest only mortgage" and is useful if you want to invest your money elsewhere. Alternatively mortgage lenders offer "interest only" mortgages for a fixed period of time at the beginning of a mortgage term to encourage first time or low-income buyers.

The range of mortgages available to you can be bewildering so it is a good idea to contact a mortgage specialist who can explain your options in more detail. As a quick guide you should decided between repayment and interest only and then consider the interest rate options, mortgage term and monthly repayments, subsequently finding a solution which suits your individual needs.

This article is meant as a guide, always seek professional advice for you own particular situation.