Lesson 5 Mortgages in plain English

Module 2 | Learning aim: Understand the loan and the responsibility that comes with it.

A mortgage is borrowing secured against the property. With a repayment mortgage, payments cover interest and reduce the amount borrowed over the agreed term. With interest only borrowing, regular payments do not repay the capital; a separate repayment plan is needed. Do not assume a low payment means the loan is being cleared. [S9]

The mortgage term is the overall repayment period. The product deal might last only part of that term. For example, a 25 year mortgage with a two year fixed rate does not finish after two years. At that point the rate arrangements change unless you arrange another deal.

A longer repayment term can lower the monthly amount while increasing total interest if other assumptions stay the same. Ask your adviser to show both the monthly payment and the longer term cost. Consider your likely income later in life as well as the payment today.

Write down what you do not understand before accepting an offer. You should know what is owed, how it is repaid and what happens when the deal ends. Your home may be repossessed if you do not keep up repayments. That responsibility deserves a clear explanation rather than a rushed signature.

Powwow Tip

A mortgage should make sense to you before you commit to it.

Your next step

Explain the difference between the mortgage term and the fixed rate period in your own words.

Knowledge check: Does interest only borrowing repay the capital through regular payments?

Source references: S9,S8. Original teaching examples and Powwow Tips are Property Powwow guidance. See the source register for current guidance links.