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Introduction to mortgages

Few people have enough money to buy their home outright, so if you want to buy a house or flat you'll probably need a mortgage. This page explains what a mortgage is and introduces the main points you'll need to think about before getting a mortgage.

What is a mortgage?

A mortgage is a loan from a bank or building society to buy a house or flat. The loan is 'secured' on the property by means of a legal document signed by you, called a 'standard security'. This means that if you don't keep up the repayments or you break other terms in the mortgage agreement, the lender can repossess the property and evict you. A 'second mortgage' or secured loan taken out for other purposes (such as major repairs) carries a similar risk.

How much can I afford to borrow?

The amount you can borrow is calculated by looking at your income. Banks or building societies will only lend up to 90 to 95 per cent of the property's value, with most more likely to lend around 70 per cent. It's now unlikely that you'll find a lender offering mortgages for 100 per cent of the value.

If you're buying with one or more other people, you can apply for a joint mortgage. How much you can borrow will depend on your combined income.

When you are working out how much you can afford to borrow you will need to consider:

  • how much the bank or building society will be prepared to lend you
  • how much deposit you will need
  • how much your monthly repayments might be.

If your mortgage starts with a low fixed rate, bear in mind that when that fixed rate ends, your repayments may go up quite a lot. 

As well as your deposit, there will be other costs involved, such as legal fees and stamp duty, survey fees, insurance and moving costs. Some properties, especially newer build flats, may also have a management and maintenance fee payable on moving in.

How long will I have to pay the mortgage back?

Most mortgages are paid back over a set period, known as the 'term'. In most cases this is 25 years. If you can afford higher monthly repayments, you could agree to pay back your mortgage in less than 25 years. The less time that you have the mortgage for, the less interest you will have to pay. Some lenders may insist on a shorter term in some situations, for example if you are going to retire soon. Or they may agree a loan for longer than 25 years, provided this would not take you past retirement age.

How is the loan paid off?

Over the term of the mortgage, you pay off the amount you borrowed to buy the property, plus interest on the loan. With an interest rate of about five per cent, for example, if you borrow £80,000 you will probably end up paying about £150,000 in total over the whole term of the loan.

With many different types on offer, choosing a mortgage can be difficult. It is important to compare deals and work out which repayment options and interest options are the most appropriate for you.

What if I have problems paying my mortgage?

If you don't keep up with your mortgage payments, this will result in mortgage arrears. If you are in this situation it is important that you get advice and act quickly to resolve the problem or you could face losing your home.

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The important points

  • A mortgage is a loan from a bank or building society to buy a house or flat, which is secured by a 'standard security', which is a legal document signed by the owner.
  • Lenders work out how much they will lend you based on your income and the property's value.
  • Mortgages are paid back over a set period known as the 'term' and usually this is 25 years, though you will pay less interest if you agree a shorter term.

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