Mortgages and secured loans
This page tells you what a mortgage is and about other types of secured loan. It explains what a credit broker does and how much they can charge for their services.
A mortgage is a loan taken out with a bank or building society to buy a house or other property. The mortgage is usually for a long period, typically up to 25 years, and you pay it back by monthly instalments. When you sign the mortgage agreement you agree to give the property as security. This means if you don’t keep up with the repayments, the lender has the right to take back and sell the property. But they can't do this without first going to court.
There are two main types of mortgage:
- repayment mortgage, where your regular repayment goes towards the amount you borrowed (the capital) and the interest so that the whole loan is paid off by the end of the mortgage
- interest only mortgage, where your regular repayment goes towards the interest only. At the end of the mortgage you repay the capital in a lump sum. Usually this will be from savings or an insurance policy you took out at the same time as the mortgage. For example, an endowment or pension.
The cost of the mortgage depends on the interest rate. There are lots of different types of interest rates such as fixed rate or variable rate. It's worth taking some time to compare types and decide what suits you best - you can use the mortgage comparison tool on the Money Advice Service website.
You can get additional loans secured on your home for things like home improvements. This may be called a second mortgage, second charge or further charge. They all mean the same thing.
All secured loans give the lender similar rights to repossess your home if you don’t keep up repayments. If a house is repossessed, the money from the sale will be shared out among the secured lenders in the order that the loans were given.
If you take out a secured loan you’re likely to be charged legal, administration, valuation and other fees so shop around for the best deal before making a decision.
For more about comparing deals, see Getting the best credit deal.
If you are taking out an additional secured loan on your property or are approaching a new lender, you may be affected by the closure of the historical land register, known as the Register of Sasines. The Register of Sasines is being replaced by the modern Land Register. You should ask your solicitor to check whether the title deeds to your property are registered on the Register of Sasines, and need to be transferred to the Land Register. This will incur a fee and plans may need to be drawn-up. You can find more information on the Registers of Scotland (RoS) website at www.ros.gov.uk.
Islamic mortgages (Home purchase plans)
In an Islamic mortgage, also called a home purchase plan, you don't pay interest. Instead, the lender makes a charge for lending you the money to buy your property. The charge can be recovered in different ways, for example, by charging you rent. You can get more information about Islamic mortgages from the Money Advice Service website.
Checking you can afford a mortgage
Lenders must make sure you only take out a mortgage you can afford. This means that they'll ask you for lots of information and proof of your income, outgoings and spending habits.
Lenders will check to see if you can meet the initial mortgage repayments and other household costs. They will also consider how you would manage if interest rates were to go up in the future, or if there was a change in your income because, for example, you wanted to start a family or retire.
More information on what a lender will do to check if you can afford a mortgage is available from the Financial Conduct Authority's website.
Equity release is a way of raising money from the value of your home without having to move out. The loan is repaid later, usually after you die or move permanently to a care home. In some schemes, you take out a mortgage on your home but make no repayments. The mortgage and interest is repaid when the property is eventually sold. In other schemes you sell all or part of your home to the lender who allows you to stay in the property as a tenant.
The equity release scheme can pay you a cash lump sum or a regular income. When you no longer need it, the property is sold and the company gets back its share of the proceeds.
Equity release schemes are aimed at older and retired people who own their homes and have paid off their mortgage.
If you are thinking about raising money through an equity release scheme, take advice from an independent financial adviser first. Make sure that the financial adviser is regulated by the Financial Conduct Authority (FCA).
You can find more information about equity release schemes on the Money Advice Service website.
A credit broker is someone who arranges loans and charges you for this service. If you use a broker to arrange a mortgage and the broker is authorised by the Financial Conduct Authority (FCA), there is no limit to what they can charge you for their services.
To find out if a broker is authorised you can check the Financial Service Register on the FCA website.
The Money Advice Service website has lots of useful information about borrowing and managing your money.