What is a mortgage?
A mortgage in it's most simple of terms is a pledge by a lender - normally a building society or bank - of a property to be used as security on a loan. Normally the mortgage will cover a fixed fee which will be the cost of purchasing a property, however some mortgage providers will lend more than the property worth allowing the borrower to receive a cash sum back; this is commonly known as cashback. In nearly all cases the borrower will also be expected to pay the lender interest over the term of the loan.
The term "mortgage" derives from the Old French term "dead pledge" which means that the pledge ends when the obligation is fulfilled or - in the worse case - the property is taken by the lender via foreclosure.
Mortgage by legal charge
This is the only type of legal mortgage available at the current time in the UK, there was previously and older type of mortgage known as "mortgage by demise" but this type of mortgage was abolished in the Land Registration Act 2002. In Scotland this type of mortgage is also know as "standard security".
A mortgage by legal charge means that the borrower remains the legal owner of the property in question throughout the mortgage loan period. However, the lender retains sufficient rights over the property to be able to enforce foreclosure and repossess the property if the borrower defaults on their mortgage payments.
Mortgage loan types
The UK mortgage market is one of the most competitive – and innovative - in the world with no interference by the state. This non-interference has allowed lenders to produce a wide array of mortgage products, making sure there is always something suitable for a potential borrower. There are a number of different mortgage loan types, however these are the main types that can be found in the UK today:
- Fixed Rate Mortgage
- Variable Rate Mortgage
- Tracker Rate Mortgage
- Capped Rate Mortgage
- Discount Rate Mortgage
- Cashback Mortgage
- Offset Mortgage
While these are the main types they are often found mixed together to make a particular mortgage product more appealing to a specific group of potential borrowers. For example a cashback mortgage is ideal for a first-time buyer who also wants to buy furniture for their new home as they will receive a lump sum that is part of the mortgage loan total. Lenders will normal derive their rates from the money markets with most interest rates linked to the underlying Bank of England base rate.
If a borrower pays off their mortgage loan early a lot of lenders will apply what is known as an "early repayment charge". These charges are normally associated with mortgage products that have an initial incentive which is below the cost of borrowing.
To find out more about the different types of mortgage loans in-depth please click on one of the mortgage types in the list above.