Introduction to mortgages

A mortgage is simply a long-term loan secured on a property. The ‘secured’ part means that if you do not make your mortgage payments, the mortgage lender has the right to repossess the property and sell it to repay the money you borrowed.

How do I repay a mortgage?

You have two options; a repayment mortgage or an interest only mortgage.

With a repayment mortgage you repay both the capital and the interest together in fixed instalments over an agreed period of time. Provided you keep up your repayments, your entire mortgage will be repaid at the end of the term.

With an interest-only mortgage, you pay the interest due but none of the amount you have borrowed. While your repayments will be less than an equivalent-sized repayment mortgage, at the end of the term you still owe the original amount that you borrowed. The remaining capital will be repaid under the conditions outlined by the mortgage lender. You should be aware that very few lenders now offer interest-only mortgages.

What deposit do I need?

Generally, you’ll need a minimum of 5% of the purchase price of the property you want to buy. In which case you would take out a 95% mortgage. If you are able to provide a larger deposit, lenders often see this as less of a risk and may offer you a more competitive interest rate.

How will my interest rate be set?

You will need to make a decision on which type of interest rate is going to work best for you. Mortgage interest rates fall into two main categories; fixed-rate and variable rate, although there are a number of variations within each of these categories.

A fixed rate mortgage is set for a particular period of time and the interest you are charged will stay the same throughout the deal.

With a variable rate mortgage, your interest rate can change at any time. This means your payments could rise or fall as interest rates fluctuate.

Protecting your property

Whilst buildings and contents insurance may sound straightforward, it is important to remember that the cost of replacing everything that you own could be financially crippling.

It is also important to make sure that you aren’t under-insured, especially if you own a high value home, as this could mean higher value repairs in the event of damage.