Mortgage

What is a mortgage?

In Old French legal terms, a Mortgage literally translates as ‘death pledge’, referring to the death of the loan itself. It was first used to describe a loan that can only be ended by paying off the debt or having the property itself foreclosed. More recently, it has become commonly understood to be the type of secured loan taken out on a property, though the initial principles still stand.

When you are loaned money to buy a property, you sign a mortgage agreement which conveys the property to the lender, but giving you the right to occupy it provided you keep up with repayments. Once you have repaid the loan, the lender then releases the mortgage which effectively conveys it back to you. If you don’t keep up repayments, the lender takes possession back – known as re-possession.

Different mortgage types

There are several types of mortgages including residential, commercial and buy-to-let mortgages. A residential mortgage is the most common type you will come across, used by individuals that want to purchase a property solely for the purpose of living in.

A Commercial mortgage refers to a property purchased for business purposes such as for opening a shop or office.

Buy to let mortgages are designed for people who purchase properties solely for the purpose of renting them out.

The way you repay your mortgage can also vary. Firstly there are repayment and interest only mortgages. A repayment mortgage means you pay off both the outstanding amount and the interest charged each month whereas interest only allows you to just pay off the interest and have to make arrangements to settle the remaining amount at the end of the term.

Mortgage interest rates

Like any other loan, when you take out a mortgage you will pay an agreed interest rate on the amount borrowed. This is usually based on the bank’s base rate ; for example if this is 4% and you pay 2% over the base rate your interest rate will be 6%. This will then fluctuate as the base rate changes so if the base rate change to 5% your interest charges will be 7%. This is known as a tracker mortgage.

Alternatively, your mortgage could be on a fixed rate, where the interest rate is agreed for a set time at a set amount. Another common form is a Variable rate mortgage, which allows the lender to fluctuate the interest rate at their discretion for a set period of time; typically 1 to 5 years.


Q: What credit score do I need to get a mortgage?

A: There is no set score that will guarantee to secure you a mortgage as every mortgage lender will have different criteria when they assess your credit file.

Mortgage checks are stricter than many other types of credit check, so for the best chance of getting accepted for a mortgage, it’s important to make sure all the information on your credit report is up to date and that there are no severe negative markers.

You can try checkmyfile FREE for 30 days and then for just £14.99 a month, which you can cancel online at anytime. You'll get complete access to the UK's most detailed credit report, with information from 4 Credit Reference Agencies, not just 1.

Q: How does having a mortgage affect my credit file?

A:If you have a mortgage and keep up with all the repayments this can be a great way to build up your credit history. As most mortgages last for at least 20 years, it means you will have a steady means of payment history on your file for the duration of the mortgage.

If you miss payments or default on your mortgage however it can harm your overall credit rating, potentially making it harder to get credit in the future.

Q: How is my file affected if I miss mortgage payments?

A: If you miss one payment, most mortgage providers will give a little leeway to pay provided it doesn’t become a habit. However, this is not guaranteed and it is entirely at their discretion. If you find yourself in several months of arrears, this will be more severe and lenders are likely to report this to Credit Reference Agencies.

Q: What happens to your credit score when a mortgage is paid off?

A: You’re unlikely to see any major changes to your credit score (positive or negative) as soon as you’ve fully paid off your mortgage. However, once your account has been closed for six years, you might notice a dip in your overall rating if your credit file has been inactive since then.

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