A mortgage is a special kind of loan, typically
taken out to buy a home. It can be for any
length of time agreed between the borrower
and the lender. The loan is usually based on:
• how much the borrower can afford
the value of the property.
The main lenders are banks, building societies
and specialist mortgage lenders. Mortgages
can be arranged directly with lenders or
through mortgage intermediaries, who are
able to provide advice to borrowers on the best
mortgage for their needs.
A mortgage is secured against the borrower’s
home. This means that if the borrower has
difficulties making the payments and gets into
arrears the lender can, as a last resort, sell the
home to recover its money.
Borrowers have two main options concerning
the method of repaying the loan:
• a repayment mortgage;
• an interest-only mortgage.
If you take out a repayment mortgage (also
called a “capital and interest” mortgage) your
monthly repayments gradually pay off the
amount owed to the lender as well as paying
the interest on the loan. During the early years
of the loan most of the monthly repayment is
interest and it is only in the later years that the
amount of the loan is significantly reduced.
Provided the borrower makes all of the agreed
payments, the loan will be paid off by the end
of the mortgage term.
If you have an interest-only mortgage your
monthly payments only cover the interest on
the loan. They don’t pay off any of the capital.
The borrower needs to arrange a “repayment
vehicle” such as an investment or savings plan
to provide the funds needed to repay the loan
at the end of the mortgage term.
Interest rate options
The interest charged on the loan is usually
based on the Bank of England “base rate” and
the monthly repayments will fluctuate up and
down in relation to the prevailing interest rate.
As an alternative to a variable interest rate, a
borrower could arrange a fixed, discounte