What is a Mortgage and How Is It Used?
When buying a home in Australia, only 1 in 20 people will be in a position to purchase the property outright. Those that aren’t may need to approach banks and lenders in the hopes of borrowing money for them and repaying what they receive over time. These types of lending options are typically called home loans or mortgages.
What is a mortgage and how is it used?
In the simplest terms, a mortgage is a type of dedicated loan intended to provide home buyers with an amount of cash to cover the outstanding cost of their home. In this case the word ‘outstanding’ refers to the percentage of the property that needs to be paid for, after the initial deposit has been provided by the buyer.
The deposit will act to reassure a bank in most cases – although many lenders will accept as little as 5% of the total cost of the home if the potential borrower can demonstrate their reliability when it comes to repayments. In cases where a home hasn’t yet been built, the deposit will instead go towards the total cost of the home loan; with the bank typically providing the rest.
This cash can be put towards the construction costs, or it can be used to purchase the home. When transacting, both the deposit and the cash sum from the bank will be combined to provide a final amount. And this is what a mortgage is intended for – to provide the outstanding amount of cash to help a property buyer to purchase their home outright and then pay off what they’ve borrowed to the bank.
Lenders don’t do this out of the goodness of their hearts; in fact not only will a borrower need to repay what they received from their chosen bank – they will also be responsible for covering the cost of additional interest rates. These rates are small percentages that are added onto the total monthly (or weekly/ fortnightly) costs associated with the agreed repayments. This is how banks receive a return on their investment.
A mortgage works by allowing a borrower to apply to receive a certain amount of cash from a bank, before pursuing a property purchase whereby this cash will be used to cover the costs. A mortgage is used to ensure that these costs are met in their entirety, allowing the buyer to completely own their home – as long as they continue to meet their repayments and uphold their part of the borrowing agreement.Alex Wade