What is a mortgage?
Before exploring the different types of mortgage deal available it is probably wise to set out, in broad terms, what is, exactly, a mortgage?
In simple terms, a mortgage is a loan. The difference between a
mortgage loan and a simple loan is that a mortgage requires the
borrower to put up some form of security, either domestic or
business property, to secure the loan. In other words, the lender is
given an interest over the borrower's property, which he can seek to
enforce, by the sale of the property, if the borrower defaults in
payment of the mortgage instalments. This process involves the
borrower making an application to a court for an order of
possession. If the court makes an order for possession the borrower
will lose his house and the lender can sell it to seek to recoup the
outstanding balance of the loan. In that sense, a mortgage is the
type of loan that you must be certain that you can pay. If not, the
result can be the loss of your home or your business premises or, in
certain circumstances, both of them. It should be added that, if, after selling the house for the best price that can be obtained on the open market, the capital raised is insufficient to discharge the outstanding balance on the mortgage, the lender, even though he has lost his property, remains liable for the amount still outstanding.
It can take many years for the borrower to free himself from the debt and to regain a favourable credit rating if his home is repossessed but his indebtedness remains after the property is sold.
Types of mortgage?
Having established what a mortgage is and what the consequences of default in repayment can be, we will now look at the types of mortgage available. In simple terms, there are two types of mortgage. The ordinary repayment mortgage and the interest only mortgage. Under these two headings that are certain variations, particularly with regard to the interest rate chargeable. The important thing to remember is that, whatever type ofmortgage you take out, you will be required to pay interest periodically (normally monthly) and at the end of the mortgage term you will be required to repay the outstanding capital. How this happens will depend entirely upon which type of mortgage arrangement you have taken out.
Ordinary Repayment Mortgages
This is the traditional type of mortgage, which has been in existence for a substantial period of time. In simple terms, when you take out an ordinary repayment mortgage you enter into an agreement that, over the term of the mortgage, you will pay a monthly amount to the borrower. That amount of money will consist of an amount representing interest on the mortgage at the agreed interest rate and an amount that reduces the capital outstanding on the mortgage. When the mortgage is relatively new the interest element will be by far the greater.
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