What is a Mortgage?

A mortgage is a long-term loan taken out to buy property or

land. You repay the loan plus interest over a period of
anything up to 35 years.
A mortgage is the biggest, most expensive financial product
most people ever take out, so its important to understand the
terms and pick the right mortgage for you. Also, since a
mortgage is secured against the property, if you dont keep
up with your mortgage repayments your lender can repossess
your home.
Get the wrong one and even if you dont lose your property
you could end up paying tens of thousands of pounds more
than you need to in interest and fees

MORTGAGE INSURANCE
Mortgage insurance is an insurance policy designed to protect the
mortgagee (lender) from any default by the mortgagor (borrower). It
is used commonly in loans with a loan-to-value ratio over 80%, and
employed in the event of foreclosure and repossession.

This policy is typically paid for by the borrower as a component to

final nominal (note) rate, or in one lump sum up front, or as a separate
and itemized component of monthly mortgage payment. In the last
case, mortgage insurance can be dropped when the lender informs the
borrower, or its subsequent assigns, that the property has appreciated,
the loan has been paid down, or any combination of both to relegate
the loan-to-value under 80%.

In the event of repossession, banks, investors, etc. must resort to

selling the property to recoup their original investment (the money
lent), and are able to dispose of hard assets (such as real estate) more
quickly by reductions in price. Therefore, the mortgage insurance acts
as a hedge should the repossessing authority recover less than full and
fair market value for any hard as

IMPACT ON DEMONETISATION

The easing of property prices following the

demonetisation of Rs 500 and Rs 1,000 notes will prove
beneficial for lenders and housing finance companies (HFCs)
as the average size of home loan is likely to increase. This is
because the share of cash component in property deals will
drastically come down, while the value will rise
proportionally.
HFCs and banks expect a drop in demand for housing loans in
the short-term. However, as the situation becomes clearer,
property prices would come down pushing up demand, they
say.
With industrial sector demand for credit remaining weak for
more than three years, banks have trained their attention in
growing a retail loan book especially housing credit.
This being a secure asset class with low delinquencies, bank
lending for buying houses has grown a steady rate of 18 per
cent (year-on-year) for the past two years.
The outstanding housing finance portfolio of banks grew to
Rs 8,05,800 crore in September 2016 from Rs 6,82,900 crore
a year ago, according to Reserve Bank of India data.
CRISIL in its sector analysis said loan against property (LAP) as
asset class would witness pressure. Delinquencies in this
segment were already on the rise, and the likely fall in resale
prices of property and elongation of time to liquidate a
property, would add to the woes of financiers in this
segment.
Edelweiss Securities in a report said in the short-term, there
would be pressure on asset quality for both banks and non-
banking financial

Different Types of Mortgage

Fixed rate

With a fixed rate mortgage, your interest rate is set for a

period of time, usually two, three, five or ten years. This
means that your monthly payments will always be the same
during that period, even if the Bank of England base rate goes
up or down.
These mortgages are best suited to people who are prepared to
pay slightly more for the security of knowing exactly what
theyll pay each month.

Variable rate
With a variable rate mortgage, your interest rate can go up or
down each month, depending on external factors. There are
two main types:
Tracker
These have an interest rate that tracks either the Bank of
England base rate or your lenders own standard interest rate.
If you choose a mortgage that tracks the base rate, your
interest rate, and the amount you repay each month, will
change if the Bank of England changes the base rate. For
example, a tracker mortgage might be 1% above base rate. If
the base rate is 0.5%, youll pay 1.5%. So, if the base rate
rises to 2%, youll pay 2.5%.
If your mortgage tracks your lenders standard rate known
as the standard variable rate or SVR what you pay is based
purely on your lenders whim. In general, SVRs go up and
down in line with the base rate and the lender is allowed to
change the rate whenever it sees fit.

Discount
This is a variable rate mortgage that tracks the lenders SVR,
but several percentage points lower. For example, the discount
might be 1% off the SVR. So if the lenders SVR is 3%,
youll pay 2%.
A variable rate mortgage may suit you if you want to pay less
now and are prepared to risk the chance of your monthly
repayments rising if the interest rate you are tracking moves
upwards. Read more in our dedicated guides to tracker and
discount mortgages.
Offset
An offset mortgagelets you link your savings account, and
sometimes your current account as well, to your mortgage so
you only pay interest on the difference. For instance, if you
have a mortgage of 100,000 and savings of 20,000 and
1,000 in your current account, you would only pay interest
on 79,000 of your mortgage if you linked it to these
accounts.
Offset mortgages are ideal for anyone with a large amount of
savings
The good thing about offset mortgages is that while you
benefit from lower interest charges (as you would if you paid
off large chunks of your mortgage), you can also access your
savings whenever you like, giving you the best of both
worlds.
Offset mortgages can be an ideal option for anyone with a
large amount of savings, or self-employed workers who build
up money to pay their tax bill each year. If thats you, then an
offset mortgage will probably save you more money in unpaid
interest on your mortgage than you could earn with a
traditional savings account.

Buy-to-Let

Buy-to-Let(BTL) mortgages are specifically designed for

landlords who want to buy a property to rent out to tenants.
They are more expensive than ordinary residential mortgages
because banks see rental property as higher risk, but if you are
going to rent out a property using a mortgage you have to
have a BTL mortgage.
BTL mortgages are virtually identical to normal mortgages,
for example you can choose between a variable or a fixed-
rate interest rate. But, how much you can borrow will
depend on the potential rental income of the property rather
than your personal income. Also, BTL mortgages generally
require a larger deposit than other types of mortgageWhere
to get a Mortgage
Banks, building societies and specialised mortgage lenders all
sell mortgages. But dont just wander into your local bank
and start filling out application forms. To get the best deal
you should use a comparison website. Our mortgage
toolsearches over 5,000 mortgages in seconds.

What you need to get a Mortgage

A Deposit
You need to save a deposit to get a mortgage, and the bigger
the better. If you save a 10% deposit, your mortgage will be
90% of the propertys value. This is known as the loan-to-
value (LTV).
In general the lower the LTV, the better the interest rate youll
be eligible for.

A Good Credit History

A lender will check your credit history when you apply for a
mortgage. They will want to see how youve handled
borrowing money in the past and if you pay bills on time. The
better your credit history the lower the interest rate you will
be offered on your mortgage.

Proof of Affordability
Mortgage lenders will check if you can afford your mortgage.
To do this they look at your income and outgoings. If youre
employed they will want to see your payslips, and if youre
self-employed theyll want to see your accounts for several
years. Then they will look at your other financial
commitments and decide how much they will lend to you.

A Potential Home
Your mortgage lender may well give you a mortgage in
principle before you have chosen your dream home. But they
wont release the funds until theyve carried out a valuation of
the property you want to buy. This is so they can make sure it
is worth what you intend to pay for it, so they can be sure
theyd get their money back if they had to end up repossessing
your home.

Repaying your Mortgage

When you take out a mortgage youll agree a term with the
mortgage lender. This is how many years it will take to pay it
back. 25 years is the standard mortgage term but most lenders
allow terms of up to 35 years. If you can pay the loan off
quicker, you can agree a shorter term.
Your mortgage lender will tell you the monthly payments you
need to make to repay the mortgage by the end of the term,
but you can get an idea of what youll pay with this calculator.
Mortgage repayments have two parts:
Capital This is the money you borrowed.
Interest This is your payment to the lender.
There are two ways you can repay a mortgage:
1. Repayment This means you pay off some of the
capital and some of the interest each month. So that, at
the end of the term, youll own your property outright.
2. Interest-only - This means you just pay off the interest
each month so your repayments will be smaller. But, the
big drawback here is that at the end of the term youll
still owe the capital you borrowed. For this reason
mortgage lenders will insist you have a plan in place
such as an investment to repay the capital.Interest-only
is also more expensive in the long-run as you are paying
interest on the full loan for the entire length of the
mortgage. In contrast, with a repayment mortgage the
amount of interest you are paying slowly falls as you
repay the capital.
If you fall behind on your monthly mortgage payments, this is
known as arrears. If you dont pay off your arrears when
requested by your mortgage lender, it may eventually
repossess your home.