Introduction to Mortgages

Introduction to Mortgages

Unless you are in a position to pay cash for a house, then you will almost certainly need a mortgage to make your home-buying dreams come true. Put simply, a mortgage is just another name for a loan that is used to purchase property, including land.


A mortgage is a special type of loan known as a secured loan or first charge loan. This means that although a lender will lend you the money to buy your own property, they retain a legal interest in your property so long as the mortgage is outstanding.


  • This legal interest has two major consequences to you as the borrower.

    Firstly, if you decide to sell your property, the lender will get paid back whatever is outstanding on the mortgage at the point of sale first (“first charge”).

    Here’s a simple way of looking at this.

  • Original Situation at point of purchase:

    Purchase price

    £200,000

    Made up of: -

    Your own cash deposit

    £50,000

    Mortgage

    £150,000

    Situation at point of sale:

    Selling price

    £250 000

    Outstanding Mortgage (Assuming you have repaid £25 000) through your agreed repayment plan)

    £125,000

    Resulting in: -

    Money returned to lender

    £125,000

    Money returned to you

    £125,000

  • As you can see in this example, the property value has gone up by £50,000 since you bought it, and you have repaid £25,000 to the lender over the time that you have owned the property and have had the mortgage in place. You now have £125,000 to use as you wish, but it is most likely, though not certain, that you will use it toward buying another property.


    But what if the value of your property falls? Here’s the same example, but showing a £50,000 loss in value.

  • Original Situation at point of purchase:

    Purchase price

    £200,000

    Made up of: -

    Your own cash deposit

    £50,000

    Mortgage

    £150,000

    Situation at point of sale:

    Selling price

    £150 000

    Outstanding Mortgage (Assuming you have repaid £25 000) through your agreed repayment plan)

    £125,000

    Resulting in: -

    Money returned to lender

    £125,000

    Money returned to you

    £25,000

  • There is no law, rule, or guarantee that the value of your property will always go up, although historically the trend has always been upwards with some notable shorter-term falls. It is possible, and has happened, that the amount owed to the lender can be more than the value of the property.

    The second major consequence of the loan being a secured loan, concerns the repayments you make to the lender. If you fail to keep up the repayments as agreed, then the lender can ultimately force the sale of the property and recover what is owed to them.

    The lender has a legal charge over your property as long as you have a mortgage with them. One of the main conditions of the mortgage is that you pay the amount required each month in full and on time.

    Failing to do this can, eventually, lead to the lender forcing the sale of the property without your consent and recovering the full amount of the mortgage owed to them.

    Before we get too terrified about this, there is a process that needs to be followed and many ways that a way forward can be agreed upon before we get to that drastic conclusion. As long as you are open and honest about your situation, most lenders will do their best to help you overcome any financial difficulty you may experience. Mortgages for residential property can be for term as short as five years and while technically there is not a maximum length for a mortgage term, I doubt you will find any with a given term of longer than 40 years. Most mortgages tend to be for 25 years.

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