What is a mortgage? (General Comments)

Member Name: yaffle

Product:	General Comments
Date:	16/09/03 (93 review reads)
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Advantages: Enables you to buy a house!

Disadvantages: You need to pay the money back

If you're looking to put in an offer on a house, then you'll need a mortgage. You arrange a mortgage with a provider. The Estate Agent can help you with this (they get commission for it, so they're very keen on helping!), or you can do some research (through magazines such as Which Mortgage? or on the net) to find out what mortgage suits you best, then talk directly to the bank/building society offering it to see if they'll approve you.

Different banks and building societies will each have slightly different mortgage products. They will have different interest rates, will be willing to lend different amounts to the same person (e.g. one bank will only give a £60,000 mortgage to a person on £20,000 p.a. whereas another might happily lend £80,000). They will have different repayment periods (e.g. pay back the mortgage after/over 20 years, or 25, or 30). They may also have different "incentives", such as giving you some cash when you take out the mortgage, which can be helpful to pay stamp duty or solicitor's fees, or have a discounted interest rate for the first year or two.

There are a huge variety out there. Think about what you might want. Typical types of mortgage are:
1. Discounted. This mortgage will have a lower interest rate for a short period, so that the first few mortgage payments are cheaper. This period can last for a few years in some cases. After this period, the interest rate reverts to normal and the monthly payments go back up again.
2. Variable. Here the interest rate on the amount that you've borrowed varies in line with changes in the actual interest rate. Sometimes this is linked to the Bank of England's interest rate changes (often called "Tracker" mortgages as they track the base rate), sometimes it's more at the discretion of the bank when and how much it changes (and they tend to take advantage, by not reducing it entirely in line with base rate changes).
3. Ca
pped. Here the interest rate will change from time to time, but will not exceed a certain maximum interest rate.
4. Cashback. This is normally a variable mortgage, but the borrower gets a cash lump sum when they take out the mortgage.

The "incentive" type of mortgage, such as cashback and discounted mortgages, will come with a "lock-in" period where you can't remortgage with another bank for a fixed period without paying a release fee. Otherwise you could take out a cashback mortgage, get a free cash lump sum, then move straight to another mortgage provider!

These are just the varieties in interest rates and incentives. There are also more fundamental differences which affect how you repay the amount you've borrowed. There are three main types of mortgage in this respect.

1. Repayment - under a repayment mortgage, every mortgage payment you make goes to pay off the amount you've borrowed. Very straightforward.
2. Endowment - less popular at the moment because the stock market's not been performing too well. Here, every payment you make goes to buy stocks and shares or similar products, and the idea is that at the end of your mortgage period these stocks and shares will have accumulated in value to the point where they can be sold, and the amount raised pays off your mortgage. Obviously a bit of a gamble - if the market's down then you might not have enough to pay off your mortgage, but if the market's up you might be left with extra cash!
3. Set-off - here, all your bank accounts are linked with your mortgage account, and you can choose to forego interest on your savings account and current account, in return for which your interest rate on your mortgage is reduced. These are usually used in conjuction with repayment mortgages.

As you can see, it's a pretty complex area because so many different products are available. Read up about it in a suitable mortgage magazine, or
on the web. If you feel confident enough to make your own decision then, fine, but otherwise you could always go to an independent financial adviser or the estate agent. Don't forget that, if you fall behind with your mortgage payments then you may lose your house, so don't borrow more than you can afford! Always remember that, if the interest rates go up in future, so will your monthly repayments, so although you might be able to afford a big mortgage now, don't overstretch yourself.

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