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The Basics

Why a mortgage?

A mortgage isn't anything special. It's just an ordinary loan with ",000" bunged on the end. What makes it different is that you'll probably be paying it off for a large percentage of your life. Scary? Oh yes, but it does have it's benifits.

Consider this; if you don't own your house you will be paying rent for the rest of your life. As time goes on, inflation means you will be paying more and more rent. Compare that with a mortgage. Over the 25 years you'll have it for, the payments will remain the same. OK, that's not true. For reasons that will become clear, you will probably find yourself paying more some times and less others. However, mortgage payments do not rise in line with inflation like rent does, so it's reasonably safe to say that if you are paying 800 pounds a month for a mortgage now, in 25 years time you will still be paying around 800 pounds.

But in 20 years time, what will 800 pounds be actually worth? It'll probably be the cost of a good night out, a kebab and taxi home. In fact, you don't even have to wait 20 years. Our mortgage payments are slightly less than the equivalent rent for our house, just 6 years since we started the mortgage, although we were lucky enough to buy before house prices went totally insane. However, the point remains - at some point a mortgage will cost you less than renting, and then you are laughing.

And when you have finished paying for your mortgage, you will not have to pay any money to anyone. Nice. The money that you would be spending on rent can now be spent on whatever dreadful consumer crap is prevalent in the year 2030.

Where does the money come from?

So you you are all fired up by the above and want to borrow money from your bank. How do they get hold of the 100K you want to borrow? As well as lending money, they also have a store of money that people are saving. That money goes into the loans that they give out. They will, say, give you 4% interest on your savings whilst lending that money out as mortgages for 6%, pocketing the 2% difference.

Which is fine as long as people are saving as much as they are borrowing, but what happens if the bank finds itself giving out more money than it's taking in? The answer is that they borrow the money from the Bank of England. In fact, to be on the safe side, when they loan you money they assume that they will have to borrow it from the B of E. That loan isn't free. The Bank of England charges a "base rate" (currently 4.75% at the time of writing) to the banks and the banks, not wanting to lose money, make sure that the cost is passed on to you. You can be sure that if the B of E puts up the base rate by 0.25%, that 0.25% increase will be passed on to you (if your mortgage is of a certain type) in your next mortgage payment.

As soon as you get a mortgage, that boring bit at the end of the news where they go on about base rates will suddenly become very interesting.

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