Short guide to mortgages

Mortgages are a way of life for many people buying a home in the UK. The British in particular seem to have a particular tendency towards buying a home at the earliest opportunity, and funding this usually means going to the bank for a loan. In this sense a mortgage is essentially a generic title for a loan used to buy a house. But the market can be quite confusing to somebody who has not explored it before, and all the different products available can be baffling.

To get a mortgage you will normally need to provide a deposit, ie a certain slice of the value of the house you want to buy. So say someone is buying a house worth £100,000, and they are applying for a loan following a 10 per cent deposit, they will need to put up £10,000 to begin with. Some providers have been known to offer 100 per cent mortgages, ie the entire total of the home value, but these tend to be relatively rare, and can even disappear from the market completely during difficult credit times.

With any home loan, the bank reserves the right to repossess the property from you if you cannot keep up with their mortgage repayments. However, this is usually a last resort after a bank has tried other methods of reasoning with you, and it will normally only be attempted when it is quite clear you are never going to be have to pay the money back. However, it is extremely important to keep up with repayments as repossession is a stressful and life changing event. Therefore it is important to get a mortgage you can deal with.

Most mortgages are repayment-based, involving paying back the total amount in instalments plus interest. There are sometimes a limited number of products available which involve only paying back the interest, meaning someone must put aside capital to eventually pay for the house.

Many variations of mortgage products relate to the interest rate. For example, a variable rate mortgage allows someone to pay back the money with an interest rate which goes up and down according to the base rate set by the Bank of England every month. In contrast, a fixed rate mortgage involves an interest rate which stays the same for a set number of years, perhaps two to five, before the rate then changes and goes on to a variable one. Fixed rate deals have proved popular with people who are buying a home for the first time and are getting used to the burden.

There are also capped rates, which involve an interest rate which is flexible but never rises above a certain percentage or ‘cap’. While banks are all too happy to offer somebody a mortgage with an attractive initial interest rate, it is perhaps worth paying close attention to how mortgages will be worked out after this period ends because home loans are typically large and lengthy commitments.

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