Q What is a mortgage?

A A mortgage is a secured loan on your property/home. By "secured loan", I mean the lender has an interest in the property to the value of the amount borrowed. So, if you do not repay this loan, the lender can apply to take possession of the property (more commonly known as repossession) and sell it to pay off the amount you owe.

Q How does a mortgage work?

A There are two types of mortgage. Interest Only (I/O) or Capital and Repayment (known as repayment). Interest only mortgages are loans where you only ever repay the interest, so you never actually own the property.

In effect, you are "renting" your property off your lender. They are traditionally cheaper than repayment mortgages, but are now harder to obtain in the current climate. Pre credit crunch, lenders were happy to lend on an I/O basis if you told them you would sell the property or you would inherit a lump sum to be able to clear the debt.

Now you have to prove you have a suitable repayment plan in place, such as an ISA. before the lenders will lend.

Repayment mortgages are where you chip away at the loan every time you make a payment and reduce the amount owing on your mortgage. They are traditionally more expensive, but at the end of the mortgage term you will own the property.

During the early years of a repayment mortgage, you are only repaying the interest, and very little of the capital (loan). As you work through the term, the tables turn and you start to reduce the capital more quickly.

Q What is negative equity?

A Being in negative equity — where your property is worth less than the loan — is clearly a bad situation to be in. But it only becomes a problem if you have to move. If you are struggling, the first thing to do is talk to your lender. You might also want to think about switching to an interest only mortgage for a short while, to reduce payments.

Q What is loan to value, or LTV?

A LTV is the difference between the value of your property and the amount of loan outstanding against it. For example, if you owned a property worth £150,000, and had a loan of £120,000, your 'LTV' would be 80 per cent. This means that 80 per cent of the available equity in property is mortgaged.

Q Why are mortgages currently so difficult to secure?

A The nature of the market at the moment is that lenders are far more cautious in terms of who they lend to.

They are not keen to lend to anyone who has missed payments on credit cards or loans because they are considered more of a risk. A lot of lenders have reduced their loan to value ratios. Where a couple of years ago, 95 per cent and 100 per cent LTV loans were available, now lenders prefer 80 per cent LTV or less. The latest Government proposals asking lenders to raise loan to values will hopefully be made available within the next three to six months once confidence starts to return in the economy.

Q What is a tracker rate?

A A tracker rate is a rate that "tracks" the Bank of England base rate. It can be a few basis points (part of one per cent) above the base rate or a few basis points below the base rate, depending upon the deal. It will rise and fall in line with the base rate, which is currently 1.5 per cent; the lowest it's been for three centuries. While SVR and tracker rates are great in the current economic climate, be mindful of the fact that although the base rate will remain low for the next six to 12 months, once they do start to rise they will probably rise quite rapidly.

Q What is a discounted rate?

A A discounted rate is when the lender offers a discount off their standard variable rate. For example, the lenders standard variable rate could be 5.5 per cent, and they offer you a reduction on 1.1 per cent, making your interest rate 4.4 per cent. This would be classed as a discounted product.

Q How does a fixed rate mortgage work?

A In essence, you are fixing your monthly payments for a certain time period. Fixed rates are the more expensive option, because you are paying for peace of mind and the comfort of knowing your mortgage payment will not increase during the time frame you have agreed with the lender. They are great if you are on a tight budget and need the certainty of knowing your payments will not shoot up unexpectedly. On the downside, you may have to pay a hefty penalty (ERC) if you want to break out of them before the end of the term.

So, if you take out a fixed rate for five years and decide to sell or remortgage in year three, in most cases you will pay a penalty.

Q What are the hidden costs of taking out a mortgage?

A Remember all the administration costs. There is the cost of the mortgage application, (which most lenders will allow you to add to the mortgage) survey fees, conveyancing fees and the broker fees (expect your broker to charge a fee for arranging your mortgage. If they don't you may not be getting the best service. But be aware that under FSA guidelines, brokers cannot charge a fee of more than two per cent of the total mortgage).

Q What to do if you are struggling to pay your mortgage?

A Talk to your lender straight away. Don't leave it until you start missing payments. The majority of lenders are sympathetic and will work with you to find a suitable way forward. Many will agree to a reduced payment for three months to allow you to get finances sorted out. Be very careful, though, if your lender offers to send out a field officer to do a financial health check. Most charge for this service, and it is usually in the region of £100-plus.

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