A mortgage is a loan taken out to buy a property. Most run for 25 years but can be longer or shorter. The loan is secured against the value of the property until the loan is paid off. If you stop repaying the loan, the lender can repossess the property and sell it to get their money back.
There are two basic types of mortgage:
Repayment mortgage:
This is a mortgage in which the capital borrowed is repaid gradually over the period of the loan. The capital is paid in monthly instalments together with an amount of interest. The amount of capital which is repaid gradually increases over the years while the amount of interest goes down.
Interest only mortgage:
With this type of mortgage, you pay interest on the loan in monthly instalments to the lender. Instead of repaying the loan each month, you pay into a long-term investment or savings plan which should grow enough to clear the loan at the end of the mortgage term. However, if it doesn’t grow as planned, you will have a shortfall and you will need to think about ways of making this up.
During the boom years, many borrowers took out interest-only mortgages without setting up savings accounts to work alongside their loans.
Instead, they relied on the growth in value of their properties. As property prices stagnated, or even fell, this created numerous issues, so lenders have recently moved away from interest-only mortgages.
