Mortgage

Mortgage, the transaction in which property is given as security for a (usually long-term) loan. It is possible to have more than one mortgage on a property. In practice, the mortgager (property owner) who wants a second mortgage will need to satisfy the potential mortgagee (lender) that the property is worth more than the amount that will be outstanding under both the first mortgage plus the second mortgage.

The traditional mortgage is of the repayment type, where the capital and interest are repaid by regular, fixed payments (but are usually subject to changes in interest rates) over a period of, for example, 20 or 25 years. During the early years of the mortgage, the capital amount owed on the mortgage decreases relatively slowly as the bulk of the monthly payment consists of interest. The closer to the end of the mortgage period, the greater the reduction of the capital amount to be repaid. The main alternative to a repayment mortgage is an endowment mortgage. Under this, the monthly payments cover only interest but the mortgager also takes out an endowment assurance that runs parallel to the mortgage and is designed to produce a sum sufficient to repay the capital sum at the end of the mortgage term. It usually does, and it may produce even more than the capital outstanding; however, there is no guarantee that it will.

Tax relief may be given on interest payments on house purchase mortgages to encourage home ownership, or for other political reasons. Mortgage loans may be at a fixed or a variable interest rate. Fixed rates are becoming more rare, though they are sometimes offered for, for instance, the first couple of years of the mortgage term. Variable rates make mortgages vulnerable to fluctuations in interest rates as even small changes in the mortgage rate can have a big effect on the outgoings of those with large mortgages. When rates rise steeply, one likely result is an increase in the number of mortgages who cannot afford to make their monthly payments under the mortgage agreement and who fall into arrears. If this happens, in time, unless the agreement is renegotiated, the mortgagee may choose to exercise its right to take possession of the property, with a view to selling it and recovering all monies outstanding under the mortgage agreement; any amount the sale raises above that which is owed to the mortgagee belongs to the mortgager. However, a high number of possession actions is one factor that contributes to a slump in the property market, which may mean that the sale price will not even cover the outstanding amount.

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