What is a mortgage?

First Time Buyers Guide:  #1

What is a mortgage?

A mortgage is a loan taken out to purchase a property. Most banks and building societies offer mortgages, as well as specialist mortgage lending companies. You can get a mortgage direct from a lender or you can use a mortgage broker. The Financial Services Authority (FSA) regulates the way most mortgages are sold which means lenders must follow FSA rules and standards.

Mortgages have two characteristics which are not applied to other forms of loan.

Firstly a mortgage has a long repayment period. Mortgages are designed to be paid back with interest over a long period of time, typically 25 years. This means that while interest is applied gradually, the very long mortgage repayment period means a lot of interest will be added which will need to be paid back.

Secondly, unlike a bank loan or a credit card debt, a mortgage is 'secured' against a borrowers home. This means that in return for lending the money, the bank uses the property as security for the mortgage. If a home-owner gets into difficulty and cannot meet their monthly repayments, the lender has the right to repossess the home and sell it to recoup the money borrowed. If a lender repossesses a home and the amount received from the sale of the property does not cover the amount owed, the borrower is liable for any shortfall.

Mortgages features such as the size and maturity of the loan, the interest rate and the method of repayment vary considerably. Any mortgage product and its features are chosen by a borrower based entirely on their own their individual circumstances and requirements.

Next - #2 Factors when choosing a mortgage