My First Property

What Is A Mortgage?

It may sound ridiculously simple as a question, but what actually is a mortgage?

The definition of a mortgage according to www.oxforddictionaries.com is: A legal agreement by which a bank... lends money at interest in exchange for taking title of the debtor's property, with the condition that the conveyance of title becomes void upon payment of the debt.

So, the simple answer is that a mortgage is just a type of loan product. And it functions similarly to other loans in that it has the several key features of a loan:

- You borrow money (often from the bank). This is the mortgage sum.
- You have to pay that money back over a fixed period of time.
- You have to pay interest on that mortgage, so that you pay back more than you borrow.
- The conditions on that interest and over how long a period you pay it back differ from bank to bank, and depending on the particular mortgage product you take out and the individual agreement you come to with your lender of choice.

Note, too, that the lender has some security: if you are unable to pay back the mortgage then, ultimately, they can force the sale of the house to realise the value and mitigate the risk they took in lending such a large sum of money upfront.

This is the process called repossession that you might have heard of - it is the ultimate worry for anyone who takes out a mortgage - as it is the process whereby the lender takes legal ownership of your house and can therefore sell it to get their money back should you clearly be unable to keep up your repayments, which are invariably monthly. This leads to an important qualifier to our statement above about the mortgage being a loan product: it is indeed, but to be more accurate, it is a SECURED LOAN. 'Secured' here refers to the fact it is secured against the property itself.

In the UK, the typical length of a mortgage is 25 years. Usually the longer the period of the mortgage you take out, the more you ultimately end up paying back. There are various different types of mortgage - most commonly interest-only and repayment mortgages, as explained in other articles on this site, but not the focus here which is to explain simply what a mortgage actually is.

In order to get yourself a mortgage, you need to convince the bank or building society that you will be able to pay back what they lend you. It is in nobody's interest for the loan to go bad. Typically you will sit down with a mortgage adviser at your bank or building society, and go through a long series of questions they use to find out the health of your finances, and based on this, they will tell you how much money they will offer you as a mortgage. Clearly, the household income is key to their decision as to how much they can lend you. There are general guidelines most banks follow as to what multiple of your salary they will be prepared to lend you.

Note that, in addition to going directly to a bank or building society, another route is to go via an IFA, or independent financial adviser, who can help you compare different mortgages on the market and even some that may not be offered directly to customers.

A mortgage is probably the biggest single debt that anyone takes on, so you should do as much research as you possibly can before taking a mortgage out to ensure you get the best deal, and also consider remortgaging down the line to ensure that you stay at as competitive a rate as possible. There is more about this process elsewhere here at My First Property.

Last update: 08 May 2015

More first-time house buying articles:

  1. What is a mortgage in principle?
  2. How Does Interest on a Mortgage Work?
  3. Paying a Deposit when Buying at Auction
  4. Fees Associated With House Buying
  5. After Your Offer Is Accepted


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