Mortgage

A mortgage is a large loan secured against the home you are buying or already own, typically repaid over ten to thirty years. Because there is collateral, rates are lower and limits higher than unsecured credit, but failure to repay means losing the house to foreclosure.

Two rules set how much you can borrow. One caps the loan against the property's value, the loan-to-value ratio; the other caps repayments against your income, the debt-service ratio. The first looks at the collateral, the second at your ability to pay. So however much house prices rise, your limit does not grow if your income has not.

The repayment structure changes the burden significantly. Equal-installment repayment keeps the monthly amount constant, which makes budgeting easy. Equal-principal repayment is heavier early but costs less interest overall. A grace period paying interest only feels light at first, but principal does not shrink at all during it, raising both later payments and total interest.

Getting a feel for the numbers matters. Borrow $300,000 at 4% over 30 years and the payment is about $1,430 a month, with roughly $215,000 paid in interest over the term, about 70% of the amount borrowed added on top. So when buying, it is safer to work backwards from the monthly payment you can sustain for 30 years than from the price of the house. And if you choose a floating rate, calculate the payment at two percentage points higher before you sign.