Why take out a mortgage?

It is safe to say that there are many reasons why someone could take out a mortgage. Here’s a quick list of the main ones:

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Before moving on, let’s look at what happens when someone decides to take out a second mortgage on a property. The mortgage from the first lender remains in place and takes priority over the mortgage from the second lender if the property ever had to be sold to repay the loans. Can you think of any risks the second lender may have if this was to happen? And what they may do to try to reduce this risk?

Another way of raising money from an already mortgaged property is to increase the size of the mortgage you already have.

Examples of why you might raise more money this way are:

• Paying off other debt. This may be a good idea if the interest rate you are paying is higher than the interest rate on the mortgage. Therefore, it may be better to consolidate all the debt onto one mortgage and end up paying less on a monthly basis. This is known as debt consolidation.
• To fund other purchases, such as the deposit for an additional property, new car etc. Again, if the interest rate on the mortgage is lower than other forms of debt then this could be a good way to raise the money you need.
• To pay for renovations on the current property eg to build an extension or make other home improvements.

Remember though, that if you can’t keep up the payments, the lender has the right to sell the property, which could leave you homeless.

Just by looking at the list you can see that there are a variety of reasons to take out a mortgage. In response, lenders have created a number of different products to suit those needs. This has caused the residential and commercial mortgage market to grow to the scale we see it today.