What is a mortgage?

For most people, a mortgage is the single biggest loan and financial investment they will take out in their lifetime, and allows them to purchase their own house over a number of years.

Houses are expensive – far too expensive for the vast majority of people to buy with the money in their bank accounts – and so mortgages help those who can’t afford property outright.

An average buyer will save a percentage of the house price as a deposit (currently around 10-25% is required) and will then turn to a bank or lending institution for a loan for the rest, which they will pay back over a number of years (typically between 25 and 35 years)

The loan will be paid back with interest on a monthly basis, after which point you will own the house outright.

Interest rates on mortgages can vary greatly, depending on a large number of factors. Banks give better interest rates to people who have a large deposit, as they see this as less of a risky investment as they can reclaim the house and sell it if you fail to keep up your repayments.

The current state of the economy and subsequent Bank of England base rate can also affect interest rates. At the time of writing the base rate is just 0.5%, but five years ago was as high as 6%. Some mortgages track the base rate, so if the Bank of England base rate increases, so does your mortgage interest rate and subsequently your monthly payments.
Many customers will rearrange their mortgage at the end of each deal, so they may fix their mortgages interest rate for five years and then switch to a tracker mortgage for a period before fixing it again.

Fixed rate mortgages are useful for people who want to know exactly how much money will be coming out of their bank account for a set period of time.

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