Mortgages: More Than Just a dead pledge

Most people in the UK are familiar with the word mortgage; but how many know exactly what the word means and how mortgages work?

The word mortgage is derived from the French language and literally means “dead pledge”. It was based on the fact that early mortgages were settled upon death, at which point the obligation to the lender ended — either because it was fulfilled or the property was repossessed.

These days, throughout much of the western world a mortgage is the main financial mechanism used to buy a home. A modern residential mortgage entails the pledge of property as security to a lender in exchange for a loan to buy the property. By taking out a mortgage the cost of buying a home can be spread over a number of years, and a lender provides the funds to purchase a house, which the mortgagor would not otherwise possess.

In the UK approximately seven in ten people own their homes, most using a mortgage at some point to get onto the property ladder. By comparison, in Germany that figure is just over four in ten, and in Denmark, which was recently voted as the ‘happiest place on earth’ only half of the population own their homes.

There are many different types of UK mortgages, and those available in the market place at any given time vary according to prevalent economic conditions. For example, during 2006 mortgages offering 100% or more of the property value were widely available throughout the UK. However, following the onset of the credit crunch during 2007 such products were gradually withdrawn and by mid-way through 2008 were not available from any reputable high street lender.

However, whatever the state of the mortgage market, the most common UK mortgage is the Standard Variable Rate (SVR). The interest rate on this type of mortgage varies dependent upon the Bank of England Base Rate and the policies of the lender. Other types of mortgage products include fixed rate and discounted mortgages. Such products normally involve a pre-agreed number of years during which the interest rate is either fixed at a particular rate, or discounted against the SVR. But, once that period expires, typically between two to five years, the interest rate payable on the loan reverts to the SVR.

Other types of mortgage products are also available such as tracker mortgages, but generally the types of mortgages offered by lenders depends upon the state of mortgage market at the time. Because the availability of mortgage products varies from month to month anyone considering taking out a mortgage to buy a property would be well advised to seek professional advice before committing to a particular product and lender.
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This article has been written for information and interest purposes only. The information contained within this article is the opinion of the author only, and should not be construed as advice or used to make financial decisions. Expert financial advice should always be sought and any links contained within this article are included for information purposes only.