What is a Mortgage?

• A mortgage is nothing more than a long term loan that is secured against the value of your home
• 'Secured' means that if you are unable to repay the loan (in part or full), the mortgage company can sell the property in order to recoup its investment
• Although a mortgage is a loan it is often more complex because there are many different ways that the payment of the interest and repayment of the principal can work
• The LearnMoney guide will look at the different types of mortgages, how they work and their associated advantages and disadvantages

A mortgage for most people is not only the biggest financial decision of their lives but is also a personal decision due to everyone's different circumstances. For example, a young couple who are first time buyer will have many more mortgage options available to them than a semi retired couple in their 50's. This is the first important point to note because it is your age, family status, job and other variables that should point you towards the preferred type of mortgage from the great variety available today.

The following are some Mortgage basics.

1. The Amount of Monthly Payments You Can Afford

This is obviously the single most important question. Everyone's financial status is different, but for the majority of people how much they can afford on a monthly basis relates directly to their monthly take home pay.

Some people earn extra money each year from a yearly bonus but mortgage companies usually refuse to take these into account as they're never actually guaranteed to be paid. But bonuses can still be used by the mortgage holder to perhaps help with either future monthly payments or to pay back part of the principal.

• The simplest way to decide what you can afford to pay on a monthly basis is to work out what your monthly income is after tax and then subtract all your outgoings
• Take into account two important factors

1. All or part of your monthly outgoings may increase (perhaps you're planning for another child etc)
2. Mortgage payments are calculated off Base Rates (the official Bank of England interest rate) which fluctuate over time, sometimes dramatically

If base rates are at present 4% and they rise to 6.5% over the next few years then you must factor in an increase to your monthly mortgage payments. It is imperative to do your homework on this topic even if you feel that your financial situation or the UK economy in general is likely to remain very stable.