A mortgage is a loan of capital from a Lender used to buy your home. Like most loans, the lender expects to receive interest on the amount lent and eventually the original capital has to be repaid. The reason it is called a mortgage is that your property is assigned - by means of a mortgage deed - as security for the loan. If for any reason you default on the payments, then the lender is legally entitled to force the sale of your your property to recover the amount owing.
What type of mortgages are there?
There are many confusing descriptions of mortgages - endowment, ISA and Pension - but the underlying explanation is quite simple. The lender will provide you with a capital loan with two alternative methods of payment:-
Capital and Interest (repayment)
As well as interest payments being made, the capital loan is gradually paid off year by year, throughout the term of the mortgage (usually 25 years) so at the end of the term the loan is repaid.
Interest Only (Endowment / Pension / ISA)
Only interest payments are made throughout the term of the loan, with the capital loan remaining payable at the end of the term. To pay this amount an investment plan is taken out at the same time as the mortgage (e.g. an endowment plan or another suitable savings plan) and you pay into the investment plan at the same time as making interest payments on the mortgage. At the end of the term the value of your investment should repay the loan and leave a surplus, which belongs to you.
How do interest rates differ?
Interest rates can change in various ways:-
The rate is guaranteed not to change for a specified period, after which it can revert to the lender's normal variable rate or you may have the option to transfer to a new fixed rate.
A form of variable rate where the rate stated is guaranteed not to rise within a set period. It may fall during the capped period and can be expected to revert to the lender's normal rate of interest at the end of the capped period. Variable Base Rate The traditional type of interest rate in the UK, which fluctuates from time to time depending on the Government's economic policy. Discount Rate This is a discount on the lender's normal variable base rate, lasting for a guaranteed period of time. It will vary in that period if the base rate varies and will revert to the base rate at the end of the period. Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it
If you would like more information on mortgages including discharging a mortgage, contact Anderson Bain. Call us on 01224 456 789 or click here.