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What is a mortgage?

A mortgage is a loan taken out to buy a property or land. The creditor is normally a bank or a building society and repayments to the mortgage loan are made monthly.

There are two ways to repay your mortgage:

Repayment mortgage

A repayment mortgage means you will make a payment each month which pays both the interest and something towards repaying the capital (the original amount borrowed).

Interest only mortgage

An interest only mortgage means you will only ever repay the interest throughout the mortgage loan term. The borrower has to ensure they have sufficient money to repay the capital (the original amount borrowed) at the end of the term. This is often achieved through investments such as an ISA or endowment policy (although endowments are less popular now).

Some people choose to set up their mortgage with part on a repayment basis and part on ‘interest only’.

Many people assumed rising house prices would help them to repay their mortgage loan. However, with the recent drop in house prices, this has proved to be a risky strategy. It is important to have a plan in place to repay any part of a mortgage that has been taken out on an ‘interest only’ basis.

Type of interest

You will be charged interest on the amount of money you borrow. This interest is charged at either a fixed or variable rate. If you have a variable rate of interest on your mortgage the monthly payments will fluctuate as the interest rate changes.

The interest rate available to you will depend on your personal situation, your credit rating and the amount of money you want to borrow.

I need some advice – who can I talk to?

If you are struggling to pay your mortgage we will be able to help you. We have a specialist mortgage team who can help review your situation and advise on the best course of action. Call our free Helpline on 0800 138 1111.

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FAQs

What is a mortgage shortfall?

A mortgage shortfall occurs when a house is sold and there is not enough money from the sale to pay back the mortgage and any secured loans. For example, if you have a mortgage of £100,000 and sell your house for £95,000 you will have a mortgage shortfall of £5,000. This will become an unsecured loan. Your lender will expect you to come to an arrangement to pay this back.

How do I remortgage?

If you are worried about your mortgage payments you may be able to remortgage. This could lower your interest rate and your payments. You could speak to your current lender or contact an independent mortgage broker. The mortgage deal you can get will depend on how much equity there is in your property and your credit rating.

What is equity?

Equity is the difference between the value of your house and the value of your mortgage and any secured loans. To work out the amount of equity in your property you will need to know how much your house is worth and how much you have to pay back on any debts secured against it. For example, if your house is worth £100,000 and you have a mortgage of £50,000 and a secured loan of £10,000 you will have £40,000 in equity.

What is negative equity?

If your house goes down in value so it is worth less than your outstanding mortgage you will be in negative equity. If you sold the house you would not be able to pay the whole mortgage back and would have a mortgage shortfall.