Mortgages. Symbol of the middle class, older than steam power, and harder to get than ever. You might be asking yourself, what exactly is a mortgage? How is it different from a normal loan? How do they work? And why exactly is it so hard to get one?
This blogpost is here to explain just that.
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What exactly are mortgages?
A mortgage is a loan secured against a piece of land. You must pay back according to the terms you agree with the lender. Failure to keep up with payments means that the lender can seize the land and sell it off.
Mortgages are different from other loans in that mortgages are specifically tied to the property being purchased, which is a fixed living space rather than something movable, like a car.
Mortgages are also secured against something physical. This is in contrast to unsecured loans. Lenders approve student loans on the assumption that an education will enable the borrower to pay the loan back.
In addition, a normal loan can be open-ended. Mortgages always have a fixed term, meaning they have a date by which you must pay them off.
Some people will tell you that mortgages, as a concept, date back to the Middle Ages. The word comes from a French term, “mort gage”, meaning “death pledge”. This name is because of the nature of a mortgage to ‘die’ when you pay off the debt, or you fail to meet the terms of the promise you make to the lender.
Modern mortgages, however, started in the 18th century, with the founding of the first building societies and the rise of the middle class. Working people who were reasonably well-off could borrow money to own a plot of land. This used to be something only very rich and powerful people could do. (This idea survives in the form of landlords – landlords used to be actual lords!)
The idea, however, has always stayed the same. You must make regular payments to your lender, without interruption, until you pay off the mortgage.
These days, building societies only make up about two-thirds of all mortgage lenders. Banks have got in on the action, and most first-time buyers will use mortgage brokers to find the best deal for them.
How do mortgages work?
How a mortgage works varies by the type of mortgage you’re looking to take out. In general, though, mortgages work much the same way as any loan. You borrow the money you need from the lender, and then you pay back that money in instalments over a period of time agreed at the time of borrowing, plus accrued interest.
There are many types of mortgage and ways for borrowers to pay back what they owe. Working with a broker can help borrowers find the best type of mortgage for their circumstances.
Lenders approve mortgages based on the risk the borrower presents to their business. The lender wants assurance that borrowers can pay back the money they borrow.
When you take out a mortgage, the lender will ask you to pay a deposit. The higher a deposit you can pay, the lower risk you present to the lender.
Lenders calculate this by using something called the loan-to-value ratio. The loan-to-value ratio is the amount you are borrowing divided by the appraised value of the house.
Average mortgage deposits vary based on factors tied to the value of the property, such as location. A house in rural Powys in East Wales will on average require a deposit of about £22,000. On the other hand, a house in Barnet in North London will on average require a deposit of around £120,000. That’s more than five times that amount. (Which?)
Why is it so hard to get a mortgage?
There are many reasons for this. Mortgages have always been tricky to get, but they’ve become harder to get in recent years.
In the 2000s, the United States subprime mortgage crisis was one of the events that led to the “credit crunch” and recession of 2008. As a result, lenders are still very unwilling and hesitant to lend to anyone that they can’t be absolutely sure is able to repay.
This is because even if your lender repossesses your house, in the event of a lending-caused housing bubble, like the one in the United States in 2005-2006, they may not be able to sell it off at its original market value. This means lenders lose money and they start to go bust.
In addition, another financial crisis means less people employed. This lowers the chances of repayments even further, causing a big negative feedback loop. So lenders would rather lend to people who they are very sure will be able to repay after stress-testing.
You may be wondering, then, why even people with steady income and good credit scores still find it an uphill struggle. Being such a high-risk loan for all involved, lenders approve mortgages based on rigorous credit checking that relies on a number of factors that goes beyond a simple credit score.
Credibble’s credit-check tool helps potential borrowers to see the deciding factors in whether or not they’ll be approved for a mortgage. You need to have an established track record of being able to pay back any credit you take out as well as an ability to support yourself and keep making payments if you lose your job.
The key point is being able to prove to lenders that you’re trustworthy.
- Mortgages are a type of loan secured against a property.
- They work by being paid back in regular instalments, with the stipulation that if you miss a payment, you lose your claim to ownership of the property.
- They are hard to get because financial institutions have to be sure they will make back the money they lend out.
- Signing up for a credit repair service like Credibble can help borrowers to lower their risk, thereby increasing their chances of being approved for a mortgage.