Mortgages
Overview
A mortgage is just a type of loan used to purchase property, the property serving as security, if the required repayments are missed for a long enough period the lender has the right to repossess the home and sell it in order to recover the money they've lent.
It is usually the largest debt that most people ever take out and often amounts to hundreds of thousands of pounds, with the loan term stretching over 25 to 35 years.
Since the loan is secured by a valuable asset, mortgage interest rates are generally lower than the rates you would pay on a credit card or a personal loan, the lender is taking a smaller risk, and part of that security is reflected in the lower rate.
Types of mortgages
Mortgages deal with two different things: they determine what happens to the rate and explain how the capital is paid off. With regard to the rate, it is possible to have it fixed for two, five or even ten years so that the payments remain unchanged no matter what the Bank of England does, or to go for a variable rate, in which case it tracks either the lender's own rate or the base rate directly, currently fixed deals last for about 4.5 to 5.5% over a typical two-year period.
As for the method of repayment, the majority of people choose a standard repayment mortgage, under which each payment reduces both the interest and the capital until the loan is completely paid off.
After 2008, interest-only mortgages, in which you only pay the interest and have to find another way to clear the capital later, became much less popular, and lenders now ask a lot more rigorous questions before agreeing to such a mortgage.
Loan-to-value
Loan-to-value, or LTV, shows the percentage of a property's price that your mortgage actually covers. For example, if you are buying a house that costs £200,000 and make a deposit of £20,000, you will have to borrow the other £180,000, and this will result in a 90% LTV mortgage.
The pattern is simple: the higher amount you pay upfront, the lower your LTV will be, and lenders usually offer you a better interest rate in such cases. This is because a larger deposit gives them a greater buffer should house prices fall. The difference is also considerable; when you compare a 95% LTV mortgage with a 75% LTV mortgage, the gap in the interest rates can be as close to a full percentage point.
In the past, lenders would carry out an affordability check in which they looked at your income, your debts and your expenses, and also checked whether or not your repayments would still be affordable if interest rates rose. And if you pay off the mortgage early or move to a different deal before the fixed or discounted period has ended, you will generally have to pay an early repayment charge, as this compensates the lender for the interest which it is now missing out on.
Regulation
The rules in question were set up by the Financial Conduct Authority with regard to the advertising, assessment and administration of mortgages.
The current approach is mainly based on the Mortgage Market Review, which was launched in April 2014 after the financial crisis, since it had become clear that some lenders had been giving mortgages on self-certified income with only a slight amount of checking.
The Mortgage Market Review mandated that lenders should properly verify borrowers' income and perform affordability stress tests, and this basic standard of discipline remains the foundation of responsible mortgage lending at this time. Mortgages are not handled in isolation; rather, they are directly connected to the banks that issue the majority of these loans and to the real estate market which they are in fact financing.