What is a Mortgage?

Mortgage.

This is a word that many of you have probably heard, but most won't know what it is.

Put simply, a mortgage is loan from a bank or building society, usually of a large sum of money, that is used to buy a house.

Mortgages are loans
used to buy a house.

The loan is paid back over a long period of time-normally 25 years. The bank then charges interest monthly on the loan, as a charge for lending the money.

Because the loan is usually large, and paid back with interest over a lot of years, the amount you pay back is often at least twice what was borrowed in the first place!

Because of the large sums of money involved, banks like to know that their loans are safe, and they will get their money back. To guarantee this, they place a charge on the house, called a security. This simply means, that if you don't pay the loan back to the bank, they can sell the house and get their money back that way.

A mortgage is the most common way of owning a house in the UK, as not many people have enough spare cash to be able to buy a house outright.

Banks work out how much they are prepared to lend, based on many different factors.

One of the main ways is by using an income multiplier. This is where they look at how much money you earn, multiply it by 4 and that's how much they will lend you to buy a house.

For example, if you earn £30,000 a year, the bank may lend you 4 times that amount (£120,000).

You will also need to pay some money towards the house, at the time you buy it. This is called a deposit. These start from 5% of the purchase price, and if you take the example above 5% of £120,000 is £6000.

So, as you can see, mortgages are often quite large, and can be very expensive, but still remain the most popular way of owning your own home.