What is a mortgage?

A mortgage is a type of loan usually provided by a Bank or Building Society specifically for buying a property.  The Bank or Building Society will use the house as a form of security against the loan (collateral).  This is also known as a ‘secured loan’.  It means if you are unable to keep up the agreed repayments, the Bank or Building Society can repossess your home and sell it to claim back their loss.

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Length of mortgage term

The most common mortgage term is 25 years.  This of course depends on your age and how much you can afford to pay each month.  You can apply at different times to reduce or extend the term of your mortgage.  However, by extending the term you will add more interest over the lifetime of the loan.  If you make the term shorter, you will likely increase your monthly payments.  In any case, most terms will need to end before your anticipated retirement age.

Interest rates

Variable

If you choose to have a variable rate mortgage your payments will change each time the rate changes. If the rate increases your payments will go up. If the rate decreases your payments will go down. Variable rates can be popular when rates are decreasing and not likely to increase, There are different types of variable rate as follows:

Standard Variable Rate – This will be set by the lender as their default rate but can be changed by them at any time.

Discount – This is a discount from the lenders variable rate (For example -2%) for a period of time. More commonly 1/2/3 years, before returning to the lenders standard variable rate

Tracker – This will follow the Bank of England base rate and usually has an extra margin added (for example Bank of England base rate +2%)

Fixed

With a fixed rate, the interest you pay and the repayments you make will remain the same for term of the mortgage product, usually 2, 3 or 5 years depending how long you wish to fix your repayments.  At the end of the fixed rate term it is common for the interest rate to revert to the lenders standard variable rate. Fixed rates are very popular in a volatile market and for clients who want to budget, as they know their payments are guaranteed during the fixed rate period.

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