A mortgage is a loan taken out to buy a property or land. The mortgage lender is normally a bank or a building society and repayments are made monthly.
There are 2 ways to repay a mortgage:
A repayment mortgage means that the payment you make each month pays both the interest and something towards the capital (the original amount borrowed).
An interest only mortgage means you only ever repay the interest that is being charged. With this type of mortgage you need to make sure that you’ve got enough money to repay the capital (the original amount borrowed) at the end of the term. This is often done through investments such as an ISA or endowment policy (although endowments are less popular now).
Some people choose to set up their mortgage on a part repayment basis, part interest only basis.
In previous years, lots of people thought that rising house prices would help them to repay their mortgage loan. But because of the recent drop in house prices, this has proved to be a risky strategy.
It’s important to have a plan in place to repay any part of a mortgage that’s taken out on an interest only basis.
Type of interest
Whether you've got an interest only or a repayment mortgage you’ll be charged interest on the amount of money you borrow. This interest is charged at either a fixed or variable rate.
If you have a variable rate of interest on your mortgage, the monthly payments will fluctuate as the interest rate changes.
A fixed rate means that you’ll be charged the same amount of interest, regardless of changes to the interest rate, over a certain amount of time. You normally get fixed rate deals that last between 2 to 5 years.
The interest rate you get offered will depend on your personal situation, your credit rating and the amount of money you want to borrow.
I need some advice
If you’re struggling to pay your mortgage we’ll be able to help you. We have a specialist mortgage team who can help review your situation and give you tailored advice to get your situation back on track. To speak to them call our free Helpline on 0800 138 1111.