Introduction to Mortgages
A mortgage is the cheapest type of credit you are ever going to be offered. The interest is usually only 1 or 2% above base rate - and in some 'introductory offers' may actually be below it for the first two or three years.
The reason the interest rate is lower than for other forms of credit is that the loan is secured on the property on which the loan is given. This means that if you get behind with the payments, the bank or building society that lent you the money can throw you out of the house and sell it to raise the money you owe them. They may give you back anything left over from selling the house after they have taken the money owing, plus interest, plus `charges'. But they usually ensure that their `charges and expenses' are so high that they can keep the lot.
So the lender has very little risk in lending you money secured on a house. People can do a 'moonlighter' to avoid their other debts, but they can't take the house with them!
Because you are borrowing on a mortgage over a long period - often 25 years or more - the interest you pay will add up to a great deal of money. If you borrow £150,000 at an APR of 5.2% for 25 years you will repay a total of £268,335 over the 25 years. £118,335 of that will be interest payments.
In exchange for the interest payments, you have the benefit of the use of the house before you have paid for it. So you can look at that £118,335 as a form of rent paid for the right to occupy the house, while the capital repayments of £150,000 are what you pay to actually buy it.
With interest rates as low as they are in the early years of the twenty-first century, the amount of interest you pay will often be quite a bit less than the rent you would pay as an unfurnished tenant in a similar property.
