What is the Simple Definition of Mortgage?

Lots of people think that buying a home is a really big deal when it comes to money. But if you don't have a lot of cash saved up, you'll probably need something called a mortgage to help you buy a house. So, what is a mortgage?

In this insight, I am going to explain the simple definition of a mortgage in the most simple to understand terms. 

Key Takeaways

• A mortgage is a loan used to buy a property, secured by the property itself. If you don't make payments, the lender can take and sell the property to recover their money. You agree to make monthly payments to the lender for about 30 years until the loan is fully paid off. The amount you can borrow depends on your income, credit score, and the value of the property.
• There are different types of mortgages. Some have a fixed interest rate for a while, some change with the base rate, some give you a discount for a period, and some let you pay only the interest at first.
• Your payment includes the interest (the cost of borrowing) and some of the loan amount. As you keep paying, you owe less, and more money goes towards paying off the loan. It's important to find a mortgage with a low interest rate.

What is the Simple Definition of Mortgage?

A mortgage is a loan used to buy a property, secured by the property itself. If you don't make payments, the lender can sell the property to recover their money. You make monthly payments to the lender until the loan is fully paid off. The amount you can borrow depends on your income, credit score, and the value of the property.

Banks, building societies, and specialist lenders offer mortgages. They have different terms, like interest rates, repayment options, and fees. It's important to compare deals to find the best one.

Different Types of Mortgages

There are several different types of mortgages available, each with its own benefits and drawbacks. The most common types of mortgages include:

Fixed-Rate Mortgages

With a fixed-rate mortgage, the interest rate remains the same for the entire term of the loan, typically between two and ten years. This means that your monthly mortgage payments will remain the same, making it easier to budget and plan your finances. However, fixed-rate mortgages tend to have higher interest rates than other types of mortgages.

Tracker Mortgages

Tracker mortgages are linked to the Bank of England's base interest rate, which means that your interest rate will change in line with any changes to the base rate. This can be an advantage if interest rates fall, as your mortgage payments will decrease. However, if interest rates rise, your mortgage payments will increase.

Discounted Mortgages

Discounted mortgages offer a discount on the lender's standard variable rate (SVR) for a set period, typically between two and five years. This means that your monthly mortgage payments will be lower than if you were on the SVR. However, once the discount period ends, your payments will increase, and you'll be paying the lender's SVR.

Interest-Only Mortgages

With an interest-only mortgage, you only pay the interest on the loan each month, and the mortgage balance remains the same. This can be a useful option if you're struggling to afford the higher monthly payments of a repayment mortgage. However, you'll need to have a plan in place to repay the loan at the end of the term, such as through investments or the sale of the property. 

How Mortgages Work

When you take out a mortgage, you'll need to make regular payments to the lender to repay the loan over the agreed period. Each payment will consist of two parts – the interest and the capital. The interest is the cost of borrowing the money, while the capital is the amount that you borrowed.

For example, if you take out a £200,000 mortgage with an interest rate of 3%, your monthly payment would be £950. Of this, £500 would go towards paying off the interest, while the remaining £450 would go towards repaying the capital.

As you make your mortgage payments, the amount of capital that you owe will decrease, and the amount of interest that you pay will also decrease. This means that over time, more of your monthly payment will go towards repaying the capital, and less will go towards paying the interest.

The Role of Interest Rates in Mortgages

Interest rates play a crucial role in mortgages, as they determine the cost of borrowing the money. The interest rate that you'll be offered will depend on several factors, including:

• The lender's base rate
• The loan-to-value (LTV) ratio – the amount you're borrowing compared to the value of the property
• Your credit score
• Your income and outgoings

A higher interest rate will mean that your monthly payments will be higher, and you'll end up paying more over the term of the loan. It's therefore essential to try and secure the lowest possible interest rate when taking out a mortgage.

Mortgage Payments and Amortisation

Mortgage payments are typically made on a monthly basis, and the amount that you'll need to pay will depend on several factors, including the amount that you borrowed, the interest rate, and the term of the loan.

Amortisation refers to the process of repaying the loan over time, and it's a crucial aspect of mortgages. Most mortgages are set up on a repayment basis, which means that each monthly payment goes towards both the interest and the capital. As you make your payments, the amount of capital that you owe will decrease, and the amount of interest that you pay will also decrease.

Mortgage vs Rent: Pros and Cons

When it comes to deciding whether to rent or buy a property, there are several pros and cons to consider:

Qualifying for a Mortgage

To qualify for a mortgage, you'll need to meet certain criteria, including:

• A good credit score – lenders will want to see that you have a history of responsible borrowing and that you're unlikely to default on the loan.
• A stable income – lenders will want to see that you have a regular income and that you can afford the monthly payments.
• A deposit – most lenders will require a deposit of at least 5% of the property's value, although some may ask for a higher amount.
• It's important to remember that each lender will have their own criteria, and you may need to shop around to find a mortgage deal that's right for you.

Tips for Getting the Best Mortgage Deal

If you're looking to take out a mortgage, there are several tips that you can follow to ensure that you're getting the best possible deal. These include:

• Shop around – compare different mortgage deals to find the one that's right for you.
• Improve your credit score – take steps to improve your credit score before applying for a mortgage, as this will increase your chances of being approved and getting a lower interest rate.
• Save for a larger deposit – the more you can put down as a deposit, the lower your monthly payments will be.
• Consider using a mortgage adviser – an adviser can help you find the best possible mortgage deal for your circumstances.

Conclusion

In conclusion, a mortgage is a loan that is used to buy a property. The loan is secured against the property itself, which means that if you fail to make your mortgage payments, the lender has the right to take the property and sell it to recover their money. There are several different types of mortgages available, each with its own benefits and drawbacks. When taking out a mortgage, it's important to shop around and compare different deals to ensure that you're getting the best possible offer. Now you know what the simple definition of a mortgage is, you can increase your chances of getting your own mortgage and dream house.