Mortgage Loans

What is a mortgage?

The "mortgage loan" is an extremely common means of homebuyers raining finance to purchase a house the mortgage lender will advance the home buyer funds to enable the property to be purchased and will retain the title deeds as security until such time as the loan is fully paid back.

A "mortgage" (from the french mort meaning death and gage meaning pledge) is the legal instrument which enables this mortgage loan to be made enabling the consumer to buy property with the deeds being held as collateral against the loan. As with any loan, the lender will seek to make money from providing the mortgage loan facility through the charging of interest on the amount borrowed and fees for arrangement, valuation, early settlement etc.

Types of mortgage loans

There are principally two types of interest charges on a mortgage loan; adjustable rate mortgages and fixed rate mortgages.

An adjustable rate mortgage will probably have a short fixed interest rate component after which the rate of interest chargeable on the loan will vary in line with a predetermined index, the bank base rate for example.

A fixed rate mortgage will have its interest rate set at the beginning and this will prevail for the duration of the mortgage (or the fixed rate guaranteed when the mortgage was granted if less than the total term).

The benefit of a fixed rate mortgage then is the security which comes from knowing exactly what your monthly mortgage payments will be. An adjustable rate mortgage on the other hand will fluctuate, and the rate could fall as well as rise so you may benefit when interest rates are low though you might find it difficult to meet your payments should rates rise significantly.

How long does a mortgage loan typically last?

The most common term of a mortgage loan in the UK remains 25 years though it is now possible to get a mortgage for 30 years or longer, and of course shorter terms are available. A shorter term will likely result in higher monthly mortgage payments, but you will pay less in total as interest on the loan will accrue for less time.

Longer term mortgages will give lower monthly payments, but the total amount you pay over the whole term will be greater. While longer term mortgages are available, it is probably not advisable to take out a mortgage loan which will run until past the time you expect to retire, unless you are confident you can afford the payments in your retirement.

There are many variations on the basic mortgage loans including interest only mortgages, endowment mortgages, offset mortgages, self-certification mortgages and products tailored for particular market segments such as first time buyers.

Who issues mortgage loans?

In the UK the most common mortgage lenders are the high street banks and building societies. Specialised mortgage lenders target particular niches and can often help in situations where the borrower does not fit the standard lending criteria applied by the big lenders.