What is a Mortgage?

ByAndrew Mirams

They’re not as scary as they sound!

It’s a death pledge!

At least that’s the idea at the words’ foundation. But it’s not nearly as grim as you might imagine. The word is derived from a French term, used by English lawyers in the Middle Ages. The first half denotes death (think mortal), and the second part is denoting a commitment or pledge (think engagement). It was used to refer to the moment that a pledge ended (died) when either the repayment obligation was fulfilled (which is a good thing) or the property was taken through foreclosure (which is a terrible thing that we make every effort to ensure never happens!). Of course, definitions evolve over time.

So what is a mortgage?

For those living in the 21st century, a mortgage loan describes the facility that a borrower can establish with a financial institution to fund a real estate purchase.

What’s the difference between a mortgage and a loan?

Rather than a simple loan that is not secured to any of the borrower’s assets, a mortgage loan is secured on a specific property of the borrower. This means that the lender is legally allowed to take possession and subsequently sell the property to pay off the loan in the event that the borrower has defaulted on it. This repossession is often referred to as foreclosure. In foreclosure the lender’s rights over the secured property generally take priority over the borrower’s other creditors.

Parts of a mortgage loan

A mortgage loan is made up of several components: the collateral you use to secure the loan, your principal and interest payments, and insurance if necessary.

Collateral

When you agree to a mortgage, you’re signing a legal contract promising to repay the loan plus interest and other costs. The real estate purchased using the mortgage loan is used as collateral for that loan which means that if you don’t repay the debt, the lender has the right to take back the property and sell it to cover the debt (foreclosure).

Principal

The principal is the sum of money you borrowed to buy the real estate.

Interest

Interest is what the lender charges to use that money borrowed, usually expressed as a percentage called the interest rate.

Downpayment

Typically, lenders require borrowers to make some sort of down payment (often equal to 20 percent of the property purchase price) to allow them to get a mortgage loan for the balance of the purchase price. If borrowers are not able to fund this downpayment to the value required then most lenders will insist that mortgage insurance is established to cover the mortgage loan in the event of default.

Mortgage Insurance

What is mortgage insurance? It’s designed to protect the lender in the event that the borrower defaults on their home loan. Lenders invariably insist that mortgage insurance is typically taken out if the borrower provides less than 20% of the loan value by way of a deposit on the property purchase. In fact, in this case, the insurance is a pre-requisite of the loan being approved.

Amortisation

Amortisation describes the process whereby you reduce the debt owed by paying both the principal and interest portions of your loan over time. In the early years your monthly payments largely go toward paying off the interest component of the loan whilst, in later years, the repayments reduce more of the principal as a proportion.

Loan Amortisation Schedule

Our Loan repayment calculator helps you estimate the principal and interest components of the payment schedule through the life of the loan (without taking onto account changes to interest rates et al).

Issues to consider – are you ready for the responsibility?

Your mortgage will most likely be one of the most significant financial undertakings of your life. It’s a major commitment, and you should ask yourself a number of questions when preparing to create a facility:

1.Can you comfortably make the monthly mortgage payments, especially in the event that interest rates change?

2.Are you confident that your financial status (job, health, family situation et al) will not adversely impact your financial responsibilities over time?

3.Can you manage any resultant changes to your lifestyle if required?

4.Are you aware of the legal impacts of being unable to continue to finance the facility?

Types of Mortgages – which one is right for me?

As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time, typically 25 or 30 years. Features of mortgage loans such as the size of the loan, the terms for maturity, the interest rates used and the repayment methods can vary considerably.

Intuitive Finance has access to over 500 financial products from more than 30 lenders covering a myriad of requirements. Whether you want to upgrade the family home or are a sophisticated investor looking to build your property portfolio, we are perfectly placed to help guide you through the available options. We listen to your needs, undertake a comprehensive review of your current financial position and then provide a clear, detailed and comprehensive investment strategy for you to put in place.

The most common mortgage loans include:

Basic variable loans typically offer lower interest rates and fewer features than the standard variable loans. You often have the option to pay for any additional feature required. Interest rates and repayments will vary throughout the loan term.

Under a Fixed rate loan, the interest rate is fixed for a specified period, usually between one and five years. This loan gives you the certainty of knowing exactly what your monthly repayments will be and peace of mind knowing the repayments won’t rise. However you won’t benefit if rates go down during the fixed term.

Combining the security of a fixed rate home loan and the benefits of a variable loan, the Split Loan option allows you the freedom to choose how much money you assign to each loan type. Common split loan ratios are 50:50, 70:30 or 60:40 over a two-way fixed and variable rate.

Standard variable loans are Australia’s most popular type of home loan. The interest rate varies throughout the loan term. These loans generally offer excellent flexibility, low fees and often offer great features such as an offset facility, redraw facility, no limits on additional repayments and in most cases, no early pay-out penalties.

Mortgage application – the process of applying for a mortgage

Use our handy finance guide to both help you identify properties to purchase and assist with your finance application!  Link here

The guide includes detail covering the critical steps in purchasing property, a handy checklist to help you compare properties, a to-do list to help make the moving process easier and a budget planner (to assist you in identifying your income and expenses and enable you to establish a plan to manage your finances) as well as a document checklist for when the time comes to make your finance application.

Conclusion:

No matter what type of borrower you are – a 1st home buyer, a property upgrader, a first time or experienced property investor, self-employed or an expat living overseas, the experienced team at Intuitive Finance are perfectly placed to help you create wealth-building strategies that work. Take advantage of our wealth of experience and contacts to adjust, amend or commence your wealth creation strategy today.

The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.

Discuss your specific needs & formulate the right strategy for you. Get in touch to organise your complimentary 60min session today!

Andrew Mirams
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