Buying a house can be a bit of a minefield. Particularly when it comes to the plethora of financial and legal terms you come across as you navigate your way through the process.
Whether you’re making sense of a loan-to-value ratio, or trying to understand the difference between fixed and variable rate mortgages, it can sometimes feel like learning a new language.
First charge mortgages are no exception, and can appear confusing if you’ve not heard the phrase before.
Well, while they might sound complex at first, they’re surprisingly simple. And we’re here to help make sense of it all in our guide to first charge mortgages.
What is a first charge mortgage?
A first charge mortgage is the typical, standard mortgage used when purchasing a home. It’s as simple as that.
If you were looking to purchase a property and applied for a mortgage to help cover the costs, this would be considered a first charge mortgage.
So, if first charge mortgages are so simple in practice, why are they so often misunderstood? This is often down to the “first charge” part of the term, which can give the impression that it is a separate type of mortgage.
What does the “first charge” part mean?
When using a mortgage to cover the costs of a property purchase, the lender takes a legal ‘charge’ against the property.
Since this would be the first such legal charge attached to the property, it’s referred to as a first charge mortgage.
That’s really all there is to it—a typical mortgage is officially considered a first charge mortgage as it is the first legal charge being taken by the lender against the property.
How does a first charge mortgage work?
As we’ve already discussed, a first charge mortgage is just another word for a standard mortgage, so it works in the same way any other basic mortgage would.
Here’s a quick summary of how mortgages work:
- Mortgages are loans that have been specially designed to help people to buy a home.
- To apply for a mortgage, you put down a cash deposit using your money, which will usually be a percentage of the total value of the property.
- The mortgage then covers the remaining value of the property so, for example, if you wanted to buy a property for £200,000 and had £50,000 saved in cash, you would pay this as a deposit and then have a mortgage for the remaining £150,000.
- Mortgages are offered by mortgage providers, like banks and building societies.
- When you take out a mortgage, you then repay the debt each month for an agreed period of time, known as a term, which will usually run for a number of years.
- Interest is applied to the mortgage amount, with the amount of interest depending on a few factors like the mortgage rate, the amount you borrowed and the length of time you repay it over.
- Paying off your mortgage quicker results in less interest overall.
- The amount you pay towards your mortgage each month will be influenced by:
- The type of mortgage you have taken out;
- The amount you have borrowed;
- The mortgage term (how long you borrow for);
- The agreed interest rate.
What types of first charge mortgages are available?
There are a number of mortgage types available, each suitable to a variety of needs.
With a repayment mortgage you repay some of the amount you borrowed, also known as the capital, along with some interest each month. They are currently one of the more common types of mortgage in use in the UK.
An interest-only mortgage requires you to pay the interest each month—you do not need to pay any of the original capital until the end of the loan term. With the exception of buy-to-let properties, it’s less common for interest-only mortgages to be offered following the 2008 financial crisis.
With a fixed rate mortgage, you will always pay the same amount of interest each month until the end of the introductory fixed rate period, which is usually from 2 to 5 years. Once a fixed rate period ends, the mortgage will be transferred to the provider’s standard variable rate (SVR).
Variable rate mortgages
A variable rate mortgage can rise and fall with the wider market, meaning that your monthly payments will change depending on the current state of the housing market, inflation, and other economic factors.
A tracker mortgage applies interest rates that track a “base” rate, such as the Bank of England. It is similar to a variable rate mortgage, in that it offers you an interest rate that can go down or up, while typically being lower than a standard variable rate (SVR) mortgage. If rates are low, or likely to fall in the near future, a tracker mortgage could save you money. If rates rise though, you’ll pay more each month for your mortgage.
Discount rate mortgages
A discount rate mortgage has interest rates that are set at an amount below the lender’s standard variable rate (SVR) for either a set period, or, in some cases, for the full term of your mortgage.
What is a first charge loan?
A first charge loan and a first charge mortgage are the same thing.
A mortgage is a form of loan designed to help with purchasing a property. Therefore, a first charge mortgage is a form of loan and can sometimes be referred to as a first charge loan.
What’s the difference between a first and second charge mortgage?
Both first and second charge mortgages are loans that are secured against a property. Their main difference comes down to what they are used for.
While a first charge mortgage is a loan taken out for the purpose of buying a property, a second charge mortgage is essentially a second loan secured against your home, which can be used for any financial needs.
Second charge mortgages are more commonly referred to as secured loans, or homeowner loans.
If you do secure finance against your home, it may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.