A mortgage is a loan made by a bank or building society to enable you to buy a house or other type of property. The length of the mortgage will usually be anything up to 25 years for a standard repayment mortgage. The shorter the term, the more you will repay each month, but you will obviously pay off the mortgage more quickly. Interest-only mortgages can usually be anything up to 40 years. When you sign the mortgage agreement, you are agreeing to give the property as security for the loan.

The amount you borrow is referred to as the capital sum. The lender then charges you interest on the amount you have borrowed.

When it comes to monthly repayments, these can be interest and capital, referred to as a repayment mortgage, or just interest, referred to as an interest-only mortgage. In addition, some lenders offer mortgages on a part-repayment and part interest-only basis.

Repayment mortgages

Each month, you pay back part of the mortgage capital and the monthly interest. At the outset, most of your monthly payment will be interest; later on, more of your monthly payment will be repaying the capital. At the end of your mortgage term, you will have paid off the entire loan plus the interest.

Interest-only mortgages

Here, each month you only pay the interest outstanding on the loan, meaning that the capital sum remains the same throughout the term of the mortgage. These mortgages are not as widely available as they once were. Lenders will now only lend money in this way if the borrower can clearly demonstrate how they propose to repay the capital sum at the end of the mortgage term.

Part-repayment, part interest-only mortgages

As the name suggests, this type of mortgage is a combination of a repayment and an interest-only mortgage as outlined above. With this type of mortgage, as with an interest-only mortgage, at the end of the mortgage term, some of the mortgage capital will still be owed and you will need to have a plan in place to repay it.

What happens if I can’t pay?

Lenders secure your mortgage against your property through a legal charge, so if you fall behind with payments and no other solution can be found, then the lender can repossess your home.

If you get into arrears or find it a strain to keep up with your monthly payments, you should seek advice as soon as possible. Your advisor may be able to find you a mortgage deal that is more affordable, perhaps with a lower interest rate or one that can be repaid over a longer period of time.

Buying to let

Rising property values and a booming lettings market has meant that many lenders have developed mortgage deals tailored to the needs of would-be landlords. For investors seeking rental yield or capital growth, property has proved a good investment at a time when returns on other types of asset have been comparatively low.

Market changes

From 21 March 2016, the categorisation of buy-to-let mortgages changed under the Mortgage Credit Directive.
They are now categorised as either consumer or business buy-to-let mortgages. This change may affect the products offered by individual lenders. So, if you’re thinking of becoming a landlord, talk to your adviser about the various buy-to-let mortgage deals currently available.

From April 2016, there has been a new stamp duty charge on the purchase of additional properties such as buy-to-lets and second homes; these buyers will pay an extra 3% in stamp duty.

Currently, those with buy-to-let mortgages can deduct all finance costs (such as mortgage interest, interest on loans taken out to furnish the property, and fees) in arriving at their rental income. From April 2017, this will no longer apply. They will instead receive a basic rate reduction from their income tax liability for their finance costs, with the relief tapered down to the 20% tax band by 2020.

In addition, from April 2017, the 10% wear-and-tear allowance will go. Landlords will from then on only be able to deduct costs they have actually incurred.

For higher rate tax payers, the group most affected by the changes in tax treatment, there are ways they can reduce the impact, such as setting up a company and putting their buy-to-let properties into it.