A Guide to Mortgages

by Mark Johnston

A mortgage is a loan borrowed to buy a property. Then the money is paid back over a fixed period of time, as well as accrued interest. Most banks and building societies offer mortgages, as well as specialist mortgage lending companies.

In a hugely competitive market, building societies and banks are continually updating and extending their range of mortgages.

Mortgages should be straight forward, but after a few enquires borrowers can soon realise that it is not so simple after all.

With hundreds of mortgage deals on the market it can be hard to know where to start, however it is important to understand how mortgages are regulated, sold and the different types there are.

As of October 2004 the Financial Services Authority (FSA) was responsible for the regulation of mortgage sales. The Financial Service Authority (FSA) is the UK’s financial regulator, which was set up by the Government to regulate financial services and protect consumer’s rights.

The Financial Service Authority’s (FSA) standards require firms to be competent, financially sound and to treat their customers fairly.

When choosing a mortgage the most important points for a borrower to consider are how they intend to pay back the capital borrowed and also how to pay back the interest on it.

The best mortgage for each borrower will depend on their own individual circumstances. A borrower can either pay a little off the mortgage at a time as they go or pay off the mortgage off in full at the end of its term.

With a repayment mortgage, the monthly repayments consist of repaying the capital amount borrowed along with the accrued interest. Therefore the outstanding amount decreases with time.

The advantage of this type of mortgage is that the borrower has the knowledge that the total amount of debt has been repaid in full. Also with this type of mortgage is that overpayments can be made.

The disadvantage of a repayment mortgage is that generally in the first year of the mortgage the majority of the monthly payments are interest rather than capital.

This type of mortgage is often seen as the ‘safer’ option, this is as long as the payments are kept up, paid in full and on time, of course.

An interest only mortgage means that each monthly mortgage payment is only used to pay off the interest.

As a consequence it is important that borrowers take out an alternative method of paying the mortgage, such as an ISA, endowment policy or pension plan.

These types of mortgages have grown in popularity in recent years, especially amongst first time buyers as they are a cheaper option than a repayment.

Many experts however are concerned that people who take out an interest only mortgage do not give enough thought in to how they will repay the capital at the end of the term.

Borrowers should bear in mind that problems can arise if their ISA or endowment policy does not perform well enough to allow the borrower to be able to repay the mortgage.

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