Mortgages: A Beginners Guide


by Arthur Venables - Date: 2007-01-28 - Word Count: 405 Share This!

A mortgage is borrowing money using property as security. Primarily the purpose in borrowing the money is to purchase a property. However there are situations where additional capital may be raised on property already owned by way of a second mortgage or re-mortgage. In a mortgage there are two parties, the borrower and the lender. The mortgage is created by a legal charge on the property and does not involve the transfer of land. The charge confirms that the property has been pledged to the lender as security for the mortgage loan. The title deeds are held by the lender but when the purchase monies are paid over to the seller, usually through a solicitor or a conveyancing company, the borrower becomes the owner of the property. The legal charge is supported by a loan agreement between the two parties. This sets out the terms of the loan, the responsibilities and undertakings.

A second mortgage may be created where there is equity in the property over and above the amount owed to the first lender. In times of property value inflation there can be a situation where the current market value of the property has increased from the time it was purchased but the amount borrowed has remained the same ( interest only mortgage) or even reduced (repayment mortgage). The difference between the amount owed on the mortgage and the current market value is known as equity. Unfortunately, in times of falling property values there can be a situation where the amount owed on a mortgage is greater than the market value. This is known as negative equity.

The owner may borrow against the equity under a second mortgage and loan agreement with a completely different lender, often a finance company. Second mortgages are popular for home improvements such as house extensions and double glazing. In this type of mortgage the second lender notifies the first lender of the transaction but the title deeds remain with the original lender. In the event of the borrower being unable to meet his commitments and keep up repayments, the first lender has first call on the security of the property. It follows that the second lender sees his involvement as being at higher risk and the higher interest rates charged reflect this.

In theory it is possible to have a second, third, or subsequent mortgages, provided there is sufficient equity but in practice it is uncommon to have more than two charges.


Related Tags: property, loan, mortgage, lender, property values

Arthur Venables has worked as an independant mortgage adviser and in 2002 he was the author of 'Mortgagegen', a layman's guide to finding the right mortgage. Visit his sites http://www.debt-consolidation-loans-uk.com and http://www.debtconsolidationloans.org.uk

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