Mortgage is made up of these

What is a Mortgage?
According to Webster’s Dictionary a mortgage is: “The pledging of property to a creditor as security for the payment of a debt.” This simply means that if there is a mortgage on your house then you have a legal contract that says if you don’t pay the loan back, as well as the interest, then the lender can take over your house. The lender holds title to your house until the debt is completely paid off and if you cannot make the mortgage payments, then the lender has the authority to sell your house in order to get their money back.

The Deposit (or Down Payment)
The deposit or down payment is the lump sum you pay up front which reduces the amount of money you will have to borrow. You can put as much money down as you want, or sometimes the lender will allow you to pay only a small amount. The more money you put down, the less you will have to finance and therefore the lower your monthly payment.

The Mortgage Payment
The mortgage payment is made up of:

  • Principal: This is the total amount of money you borrowed from the lender so it is therefore the amount being financed.

  • Interest: This is the amount of money the lender charges you for the use of the loan. It is usually a percentage of the total amount you borrow.

  • Insurance: Sometimes part of the deal is that you have to pay insurance that will cover the loan in case you cannot pay it back.

Types of Mortgages
There are various types of mortgages you can choose from. The type of mortgage you choose will depend on the amount you need, the length of time you need it for, and your own financial situation. For example, you may find that you need a mortgage that is for a longer term because you can only pay small amounts monthly.

There are 4 basic types of mortgages:

  1. Table Mortgage:
    This is the most common form. It involves the repayment of Principal, as well as interest, by way of a regular fixed payment, which is either on a monthly or quarterly basis. The repayments don’t alter over the life of the mortgage and the amount that is payable is constant. This type of mortgage means that you are paying mainly interest in the beginning, but by the end of the term you are mostly repaying Principal.

  2. Interest Only:
    People who don’t have a lot of money to make the monthly payment will choose interest only as an alternative to the normal table mortgage. It simply means you are paying only the interest every month. The Principal won't be repaid at all during the term, but is usually due in full, in one lump sum, at the end of the term.

  3. Revolving Credit facility:
    This is really a large overdraft, secured over your house. It allows you to redraw money up to the maximum mortgage level agreed on when you took out the mortgage. The lender will put a credit limit on the facility to make sure you don’t run into problems and that you reduce the debt over time. These types of mortgage loans are becoming more popular because they allow people to buy lifestyle investments and put them on their mortgage at a lower interest rate, while allowing their Principal amount to be repaid at leisure.

  4. Reducing Mortgage:
    This simply means that on each payment you make you repay the same amount of the Principal off. It reduces the interest rate charged each time, so every payment is less than the previous one.