Mortgages and secured loans

 

Mortgages and secured loans

This page tells you what a mortgage is and other types of secured loans. It explains what a credit broker does and how much they can charge for their services.

A mortgage is a loan taken by a bank or building society to buy a home or other property. Mortgages are usually for a longer period, usually up to 25 years, and you repay them by monthly installments. When you sign a mortgage agreement you agree to give the property as security. This means that if you do not continue to repay, the lender has the right to take back and sell the property. But they can't do this without going to court first.

See Mortgage Problems in England and Wales to learn more about what to do if you have trouble paying your mortgage. In Scotland, look at mortgage problems

Types of mortgages

There are two main types of mortgages: Repayment Mortgages, where your regular payments go toward the amount you borrowed (capital) and interest so that the entire loan is repaid by the end of the mortgage.

Interest only mortgage, where your regular payment is only towards interest. At the end of the mortgage you pay the capital together. This will usually be from a savings or insurance policy that you have taken out with the mortgage. For example, endowment or pension.

The price of a mortgage depends on the interest rate. There are many different types of interest rates such as fixed rates or variable rates. It is worth taking some time to compare types and decide what is best for you - you can use the Mortgage Comparison Tool on the Money Advice Service website.

Secured loan

You can get an extra loan on your home for things like home improvement. This can be called a second mortgage, a second charge or a higher charge. They all mean the same thing.

All secured loans give the lender equal rights to repossess your home if you do not continue to pay. If the house is repossessed, the proceeds from the sale will be distributed among the secured lenders in the order in which the loan was made.

If you take out a secured loan you are likely to be charged legal, administrative, appraisal and other fees so shop for the best deals before making a decision.

For more on comparing deals, see Getting the Best Credit Deal.

Islamic Mortgages (Home Buying Plans)

In an Islamic mortgage, also called a home purchase plan, you do not pay interest. Instead, lenders charge you money to buy your property. Charges can be charged differently, for example, by charging you rent. You can find more information about Islamic mortgages from the Money Advice Service website.

Checking if you can afford a mortgage

Lenders must make sure you only take out a mortgage that you can afford. This means they will ask you for a lot of information and evidence of your income, outgoing and spending habits.

Lenders will check to see if you can meet the initial mortgage payments and other household expenses. They will also consider how you will manage if interest rates rise in the future, or if there is a change in your income because, for example, you want to start a family or retire.

More information on what the lender will do to check if you can afford the mortgage is available from the Financial Conduct Authority's website.

Equity release schemes

An equity release is a way to raise money without running out of value for your home. The loan is repaid later, usually after you die or move to a care home on a permanent basis. In some plans, you take out a mortgage on your home but make no payment. Mortgages and interest are paid when the property is finally sold. In other plans you sell the whole or part of your home to a lender that allows you to live on the property as a tenant.

An equity release scheme can pay you cash or regular income. When you no longer need it, the property is sold and the company gets its share of the proceeds back.

Equity release schemes are for the elderly and retirees who own their home and have paid off their mortgage.

If you are considering raising money through an equity release scheme, consult an independent financial advisor first. Ensure that the financial advisor is regulated by the Financial Conduct Authority (FCA).

You can find more information about equity release schemes on the Money Advice Service website.

Credit brokers

A credit broker is a person who arranges a loan and charges you for this service. If you use a broker to manage a mortgage and the broker is authorized by the Financial Conduct Authority (FCA), there is no limit to what they can charge you for their services.