What is a mortgage?

WHAT IS A MORTGAGE?

A mortgage is a loan secured on the promise to sell a property if need be.  It comes from the roots ‘mort’, meaning death, and ‘gage’, meaning pledge or promise.  The idea is that the promise ends, or ‘dies’, either when the loan is paid off (good result), or when the bank forces the sale of the property (bad news).

WHO OFFERS THEM?

Mortgages are offered by banks and specialist lenders.  You can apply directly to a bank, or apply through a broker if you have complex needs or require extra guidance.  Brokers sometimes charge a flat fee, and sometimes get commission from the lender.

WHAT FACTORS AFFECT THE GRANTING OF A MORTGAGE?

Like most loans, a mortgage usually involves regular monthly payments.  Since banks want to know you can afford the repayments, the main factor affecting the granting of a mortgage is annual income.  Lenders tend to offer mortgages of about five times income.  Usually at least 5% equity in the property is required, often represented by paying a cash deposit on a property to make sure that the loan is not 100%.  The more equity there is, the lower the interest rate, as the bank is taking less risk.

TYPES OF MORTGAGE

There are two types of mortgage, interest-only and repayment.  With an interest-only mortgage, you only pay the interest on the loan, and you don’t repay the loan itself until the end.  With this arrangement, you need a plan as to how you will repay the loan at the end.  With a repayment mortgage, your regular repayments include repayment of the loan as well as interest, meaning that by the end of the mortgage term, the loan is repaid in full.  Because the loan is repaid too, the monthly repayments are higher.

PROS AND CONS

The advantage of using a mortgage to buy a home is that not many people have the money saved up, so it is a way of receiving a large advance to buy the home.  The disadvantage of a mortgage is the monthly payment to the bank, and the fact that the bank has the right to make you sell your home if you do not keep up with repayments.

The advantage of an interest-only mortgage is lower monthly repayments.  The disadvantage is that amount borrowed suddenly needs to be paid back at the end.  The advantage of a repayment mortgage is that, by the end of the mortgage term, the property is fully paid for.  The disadvantage is that repayments are much more expensive.

SUMMARY

In summary, a mortgage is a good way of gaining ownership of a property sooner than would be possible with cash alone.  But you need evidence of a good source of regular income, and you need to give the bank the right to sell the property if you fail to keep up with your payments.