What is a mortgage?
A mortgage is a large loan taken out, usually on a house, with the house as security. The mortgage company (bank, building society or other) will pay the seller of the house the difference between what the buyer has in available cash and the asking price.
For first-time buyers this can be the whole cost of the house (called a 100% mortgage) and for those more advanced in the market-place, the mortgage might be only a small fraction of the agreed price of the house.
As the housing market continues to grow and people’s houses become worth more than they initially paid for them, the wish to create more ready cash (to do home improvements, buy a car, go on a special holiday) can be accommodated by re-mortgaging the property. This means adding to the original mortgage on the basis that the security on the property has increased in value. Of course, the mortgagee (the person responsible for the mortgage payments) must be able to pay the new, increased, monthly payments and the lender sets specific guidelines as to what proportion of the monthly income the payments will be.
One major influence on most mortgages is the Bank of England’s rate. This institution is not a bank in the way that we know them – it does not provide banking services for the public. It controls the price at which money is available. In the early 1990’s the rate was up in the high teens and many mortgages were much more expensive than the early years of the 21st centaury, when the rate was about 4% -5 %.
Who can have a mortgage?
Most people with a good credit history and a regular income will be able to obtain a mortgage from a bank or a building society. Those with any of the following may find difficulty in persuading banks or building societies to lend to them:
- Poor credit history
- Outstanding county court judgements
- Fraud convictions
- Defaulted on payments previously agreed
Who provides mortgages?
Most banks and building societies will provide mortgage services, as well as many other institutions including options for high risk individuals who would otherwise find it difficult to obtain one. We are focusing though on the banks and building societies, the providers of traditional banking services.
What sorts of mortgage are available?
There are numerous types of mortgage available and the following list details the main ones:
- Off-Set Mortgages – A type of mortgage where the monies from savings and current account credit balances are set against the mortgage total and mortgage interest is paid on the net balance. No interest is paid to the customer on the credit balances in their accounts. The mortgage, savings and current accounts remain separate.
- All-in-one Accounts – Where the current account, savings account and mortgage are all rolled up into one account. As it is all-in-one account, there are no credit balances, there are merely fluctuating levels of borrowing.
- Discounted Variable Rate Mortgages – Where rates are lower at the start of the mortgage and increase after a “holiday” period of, typically, one, two or three years.
- Fixed-Rate Mortgages – When repayments are set at a certain rate for a pre-agreed period. Usually, the longer the period, the higher the set rate. This is useful for those who need to know exactly what is going to go out of their account each month. It is, usually, not the cheapest option.
- Some banks or building societies will provide a fixed or discounted rate mortgage at advantageous rates for those who already hold existing or specific accounts with them.
- 100% Mortgages – Where the buyer does not have to find a deposit of any sort – the mortgage will cover the entire cost of the house.
- Cash Advance – A version of the above is where there is a cash advance in addition to the 100% cost of the house so that any building works or other fees can be covered.
- Remortgaging – When the mortgage is transferred to another provider.
- Extra Borrowing – When the increased value of a house can give the homeowner extra leverage with the mortgage amount, so they use this as additional security with which to increase their borrowings.
- Buy-to-Let Mortgages – Obtained on properties which are for renting out only and are less expensive than a typical business rate mortgage.
- Agricultural Mortgages – Obtained for the purpose of buying agricultural property or to renovate agricultural buildings.
- Other specialist mortgages are available from various providers.
There are so many types of mortgage that for some, it might be worthwhile to try using a mortgage broker. They often do not charge a fee because they will get commission from the company who gets the business. Usually they are helpful and perceptive and can point the way to a better deal than can be obtained otherwise.