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Wednesday, 3 October 2012

What is a mortgage?

A mortgage is a loan you take out to buy property. Most banks and building societies offer mortgages, as well as specialist mortgage lending companies. If you change lenders but don't move home it's referred to as a 'remortgage'. The Financial Services Authority (FSA) regulates the way most mortgages are sold, but not second-charge and most buy-to-let mortgages. This means firms must follow certain rules and standards when dealing with you.

Choosing a mortgage - where to start

You can get a mortgage direct from the lender (banks, building societies and specialist mortgage lenders), or you can use a mortgage broker. You can buy based on 'information' only or get advice and recommendation on a mortgage that suits your particular needs.

Repayment methods

The two main ways to repay your mortgage are 'repayment' and 'interest only'. With a repayment mortgage you make monthly repayments for an agreed period (the 'term') until you've paid back the loan and the interest.

With an interest only mortgage you make monthly repayments for an agreed period but these will only cover the interest on your loan (endowment mortgages work in this way). You'll normally also have to pay into another savings or investment plan that'll hopefully pay off the loan at the end of the term.

Flexible features

Some mortgages offer you options to vary your monthly payments, or to combine your mortgage account with savings and other income - these are called flexible, current account and 'offset' mortgages.

Interest rates

You'll also find a range of interest rates to choose from. For example, 'variable' and 'tracker' rates change in line with Bank of England rates, 'fixed' rates are fixed for a set number of years, and 'capped' rates have a variable interest rate with a ceiling so your payments won't go above a set amount.

Insurance

A lender may require you to take out life insurance to pay off your mortgage should you die, known as Mortgage Protection Life cover. You can also get insurance to protect your income or just your mortgage payments if you become ill or disabled, or lose your job, known as Mortgage Payment Protection Insurance (MPPI).

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