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# Mortgage and Budgeting

## What is a mortgage?

A simple definition of mortgage payments is the repayment of any loan, which you may take to buy a home. Usually mortgages last for 25 years. The average loan amount for a first-time buyer is £137,000, and the average amount borrowed for a remortgage is £144,500.

### Types of mortgages

Based on their payment arrangement, there are different types of mortgages. Repayment mortgages and interest-only mortgages are the two main types.

Repayment mortgages: In these types of mortgage payments, your monthly payment includes both the principal as well as interest. So if you have a loan of £190,000 at 1.5pc for 15 years, you will be paying £1,186.61 each month. This amount will include some portion of the principal as well as interest. Once the loan term ends, you would have fully repaid the loan.

Interest-only mortgages: As the name suggests, in these types of mortgages your monthly payment comprises only of interest. While the monthly liability is lower than the repayment mortgages, you will be expected to repay a large amount when the loan ends. Interest-only mortgages are risky unless backed with a prudent savings strategy. Also in the long term, you will end up repaying a lot higher than the original cost of the property.

### How do mortgage payments affect the household budget?

In 2013, the average household paid £666 per month in mortgages. In London, this average was £1,031 per month. As you can see, mortgage payments form an essential element of the household budgets. While going for a mortgage decision, you should take your repayment capacity into consideration. Higher mortgage payments mean less money for savings as well as other household expenses.

### Key questions you need to ask before taking a mortgage

1. What is my borrowing capacity?
2. Which lender is offering me the best mortgage rate?
3. Which mortgage type is best suited for me?
4. How will I repay the mortgage?
5. What if I cannot repay the loan?
6. Is the lender providing me with an option to make lump sum payments?
7. Do I have to pay a penalty if I redeem the mortgage earlier?
8. Am I getting insurance along with this mortgage?
9. Are there any additional charges?
10. Are there any hidden clauses?

Use our household budget calculator to see how mortgage payments affect your household budget.

#### Do you know?

As per the Council of Mortgage Lenders (February 2014), the UK has almost 11.2 million mortgages with a combined debt of more than £1.2 trillion.