Where Does It Go? - UK Money Blog £

A debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses wishing to make large value purchases of real estate without paying the entire value of the purchase up front.

Mortgages and other forms of secured lending are typically offered to UK residents if they own or want to buy property, although it can be secured against other things such as boats.

Since the loan is secured, it offers a lower risk to the lending companies since they have legal right to possess the object you have secured it upon to recover their debt.

As such, secured lending is at a lower rate than unsecured lending such as credit cards.

Caution must always be used however, since you are in danger of losing your house via bayliffs if you cannot pay back the debt.

Mortgages typically come with three different ways to calculate interest -

• Standard Variable Rate (SVR) - This typically keeps in line with the Bank of England Base Rate although in the recent “credit crunch” this trend hasn’t necessarily followed, with banks keeping their rates high even if the Bank of England lowered its rates. SVR acts as the default rate for most mortgages, often reverting to this rate once special deals covered below are fulfilled
• Fixed Rate - These are rates guaranteed to be fixed at a certain rate for a set period of time. This could mean you are better off if the market is looking like the interest rates will rise, but means you could lose out if the interest rates plummet. It can be useful if you are looking to budget since you know your payments will be the same each month. You are often tied into these deals with a redemption penalty, a fee if you wish to leave the mortgage earlier than the terms state. It is know for this redemption penalty to extend past the actual length of the fixed rate period, so you must stay on a SVR for a time before moving to a cheaper deal.
• Base Rate Tracker - This rate is similar to the SVR, but is guaranteed to mirror the Bank of England rate. It is typically set to 1-2% above the Bank of England base rate. Since banks borrow money from the Bank of England, this ensures they are making some money from the mortgage but keeps you in benefit of any cuts the Bank of England makes immediately, and not have to wait for your lender to lower rates. A bank lending out mortgages could potentially make a lot of profits by delaying a copycat rate cut by just a day’s worth of interest.

Mortgages are typically taken over 25 years, although recently 30+ year mortgages have been becoming more common, with spiraling house prices making mortgages more and more expensive.

Up until recently, it was estimated that a borrower could borrow up to 2.5 x his yearly income on a mortgages. Over a typically 25 year term this meant he would be paying back roughly double the money he was borrowing. Just before the credit crunch banks were offering 5 x salary mortgages.

LTV

LTV stands for Loan To Value, and is a way of working out how much equity you have in your house. Equity means how much of the house is yours and not owed to the bank. For example, a £100,000 house with a £25,000 would have a 25% LTV: that is to say the bank owns a quarter of the house. As you pay this off the LTV decreases until you pay off the entire mortgage.

Typically banks can lend up to 90% LTV, although again in recent times before the credit crunch 100% and 110% mortgages were on the market, actually meaning you owed more than your house was worth. In this case, when someone has a £100,000 house but owes £110,000 mortgage, he is known to be in negative equity.

When house prices fall, more and more people find themselves in negative equity. This can mean even if the bank repossess the house, they could still owe the bank money. In many cases this leads to bankruptcy, where your debts are written off. This means you cannot borrow money before being reinstated, typically 6 years.