A mortgage is a loan you take out to buy property, if you did not have enough money to buy the house in full at the time of purchase. The lender (usually a bank or building society) holds the deeds of the house as a guarantee of payment until you have repaid the loan in full with interest, and you live in the house as if you fully owned it.
Mortgages are usually long-term loans – 20 or 25 years. They often have much lower rates than a traditional loan you can get from many lenders.
There are different types of mortgages; one common one is “repayment” which simply means you pay a fixed amount each month, some of which pays off the loan amount, and some of which pays the interest on the amount you still haven’t paid off.
For example, if you borrow a £100,000 mortgage for 20 years at an interest rate of 3%, each month you will pay £555 back; at the start, £250 of this is paying interest on the borrowed £100,000, and £305 is paying off of the £100,000. Next month you owe £99,695 (£100,000 – £305).
After 10 years of paying, you still pay £555 a month but only £144 of this is interest (because you now only owe £57,024), and £411 pays off of the amount you borrowed that is still outstanding, so you actually pay more off the borrowed amount – and thus less interest – the further into the loan you are.
The more you pay off, the less the interest amount you have to pay as part of the monthly payment.
Tools
Read more
- What is a mortgage? @ Direct.Gov
Excerpt: You can get a mortgage direct from the lender (banks, building societies and specialist mortgage lenders), or you can use a mortgage broker. You can buy based on ‘information’ only or get advice and recommendation on a mortgage that suits your particular needs. The two main ways to repay your mortgage are ‘repayment’ and ‘interest only’. With a repayment mortgage you make monthly repayments for an agreed period (the ‘term’) until you’ve paid back the loan and the interest.
image: Swear Jar Full by Scott Maxworthy under Creative Commons license
