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A mortgage is a common method method of using property, most notably real estate, as security for the raising of capital in the form of a loan, either to buy the property against which the loan it is secured, or to buy some other property.

The term mortgage  - mort (Latin - mortus = death) and gage (Latin - gage = pledge or challenge) so death pledge, or pledge on penalty of death, to repay the loan.  Thankfully, today we don't take things to such lengths. Nevertheless, failure to keep up mortgage payments can have some quite serious financial consequences for the individual.

Arranging a mortgage is now a widely recognised method by which individuals or businesses purchase residential or commercial property without the immediate need to pay all the capital amount. Very few people have the cash required to purchase a property outright, and indeed there would be few real estate property owners if this were necessary. Fortunately there exist many financial institutions willing act as lenders and provide mortgage facilities to suitable applicants. The lender provides the capital sum needed to purchase the property, less the deposit amount required from the borrower, in return for regular monthly payments over a period of time (the mortgage term) usually over something like 25 years.

There are two basic types of mortgage: (1) The Repayment Mortgage and (2) the Interest Only Mortgage.

The Repayment mortgage (sometimes called a capital and interest loan) is where your monthly mortgage re-payments will pay off the interest charged on the load, plus an extra amount each month to pay off the capital sum. The mortgage calculation very cleverly works out exactly how much the interest is and how much additional payment is needed each month to reduce the capital sum borrow to zero by the end of the mortgage term.

The Interest-only mortgage on the other hand, does not pay anything off the capital sum. As its name implies, it pays only the interest each month, leaving the capital amount outstanding. This type of mortgage is sometimes used by first-time buyers who don't have the financial resources to pay off any capital in the early years of purchase, or by property investors who wish to maximise the the capital (equity in their properties) to speed their property portfolio's growth potential.

With an Interest only mortgage It is the borrower's responsibility to ensure that they have enough money to pay-off the outstanding capital balance either before or at the end of the mortgage term. Failure to do this could result in the lender claiming full title to the property.

Information here is general only & believed to be correct, though we cannot guarantee it, nor do we accept any liability if you act or fail to act on this information. Always seek professional advice before making decisions. Investments can go down in value as well as up over  time.