Everything you wanted to know
A mortgage loan, which is a law French term meaning 'dead pledge', is a loan that can be obtained by home buyers and builders to secure a property from financial institutions (such as banks). Because mortgage loans can be obtained through many different financial institutions, features of the mortgage may vary depending on where the mortgage is obtained. For example, the maturity, size, interest rate and the method of paying off the mortgage loan can vary.
Although in general property law, mortgage is not technically a loan for home buyers and builders but instead a mortgage is an encumbrance on the right to a property. However, mortgage has become the generic term for a loan intended for home buyers and builders.
Mortgages have an interest rate, as do all types of loan. These interest rates are scheduled to amortise in what is the accepted period of time, which in the case of mortgages and other loans is 30 years. Amortisation is the act of paying back the loan in a series of equal instalments according to the levels of interest applied to the loan / mortgage loan which reflects the risk of the mortgage lender.
The basic components of a mortgage loan (although it varies according to country) are:
Mortgage lending is regulated by the government. The government can regulate mortgage lending either indirectly or directly or through state intervention. Indirectly is when the government regulates the participants of the financial markets. Directly is when the government regulates mortgage lending through legal requirements, amongst other methods. State intervention is the act of the government directly lending by banks or sponsorship.
The first available method of repayment for mortgage loans is the repayment mortgage. In the case of a repayment mortgage the borrower pays off a small part of his/her mortgage to the lender every month to reduce the amount the borrower owes, and to pay the lender the interest rate. However, in the first few years of repaying a repayment mortgage will be mainly interest.
The second available method is the interest-only mortgage. In this case the monthly payments the borrower makes towards the lender only pays the interest charges on the mortgage loan. The interest-only mortgage is accepted to be the more expensive method. The interest-only mortgage is also the riskier method because if the borrower cannot repay the loan at the end of the term it is possible for the lender to repossess the borrower's home.
A borrower can keep the interest rate on their mortgage fixed for a set period with the fixed rate mortgage.
The fixed rate mortgage makes budgeting for your mortgage substantially easier, which is a good deal for first time buyers and any borrowers on a smaller budget.
Furthermore, despite changes in interest rate, you as the borrower will always have the security of knowing the exact amount you are expected to pay back to the lender.
This type of mortgage allows you as the borrower to offset your savings against your mortgage. What this means is you will be charged less interest depending on how much money you have in your savings. This gives you the opportunity of pay off your mortgage at an earlier period.
There are many benefits for choosing a flexible offset mortgage. For starters, you will have more freedom on how and when you make repayments. You can choose to overpay or underpay which will effect the amount of interest.
Furthermore, the Flexible Offset Mortgage is longterm. This means that as a borrower you will not have to keep looking for new mortgage deals every few years.
A Tracker Mortgage is a good choice for borrowers who would like an interest rate for their mortgage that adheres to the Base Rate of the Bank of England.
This means for the borrower that the monthly interest rates for your mortgage will go up or down in accordance to the changes in the base rate. Unfortunately this means, if the base rate does rise, you will be asked to make bigger payments.
When a borrower cannot keep up with payments, the lender may repossess the property as the lender will still have right of ownership. All this can be done without invoking court proceedings. When the property has been repossessed, the property may be sold on a 3rd party seller or a financial institution.
The mortgage industry in the UK were traditionally dominated by the building societies sector. The hold of building societies over the mortgage industry crumbled during the 70s and its greatest decline happened between 1977 and 1987 where shares in the mortgage market collapsed from 96% to 66% while shares in the mortgage industry from banks and other institutions rose drastically from 3% to 36% due to a variety of causes such as increased managerial efficiency, extensive branch networking, advanced technology, better marketing expertise, superior organisational capabilities and more capacity to tap international sources for cheaper sources of funds for lending.
However, the rapid decline in the shares of building societies in the mortgage industry dramatically reversed in the early 1990s when building societies took over 75% of the new mortgage company at the expense of specialised mortgage loan corporations.
There are currently over 200 institutions in the United Kingdom that are providing mortgages to home buyers and builders.
Mortgages are a major industry in the US.
The mortgage industry is managed by several programs created by the Federal government. These government sponsored entities include the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. These programs are expected to foster mortgage lending and to encourage home ownership.
The programs offer guarantees on the mortgage payments of confirming loans. These loans are "securitized".
"Securitization" is when entities pool together contractual debts (mortgages, for example) so they can be sold to investors as bonds, pass-through securities or "Collateralized" mortgage obligation (CMOs).
It is believed that the "securitization" of mortgage debts may have had a role in the lead-up to the financial crisis, through the high leverages of US financial institutions.
It has been discovered that the mortgage system has been in usage for a very long time. The earliest evidence of mortgages is in the 12th Century.
However, it was a particularly primitive usage of the system and it was known as a "dead pledge". There was no such idea as the interest rate. The buyer would pay the seller the set rate and the seller accepted the payment and it would be expected that the land would produce the required amount of money.
If this was not the case, the seller still had complete control over the land and could easily take the land back and resell it, and could even refuse payments. This led to people abusing the old mortgage system.
A mortgage was never known as a "loan", as we know it today, but as security for a debt. The borrower transferred ownership of a property to the lender: a caution in case the borrower could not afford to pay back the debt.