Mortgages Explained: A UK Guide

What is a mortgage?

A mortgage is a loan used to buy a property, or to borrow against one you already own. The property is the security for the loan, which is why a lender can take action to recover its money if payments are not kept up.

You usually put down a deposit yourself and borrow the rest. The size of the loan compared with the property's value is the loan to value, or LTV. A £20,000 deposit on a £200,000 home means borrowing £180,000, an LTV of 90%. The deposit guide explains how that figure affects what is on offer.

Repayment and interest-only mortgages

• Repayment. Each monthly payment covers the interest and pays off some of the amount borrowed. If the payments are kept up, the loan is fully cleared at the end of the term. This is by far the most common type.
• Interest-only. Each payment covers only the interest, so the original loan is still owed at the end of the term and has to be repaid another way. Very few are offered to ordinary home buyers now, and they are mostly found with buy-to-let or in later life.

How the interest rate works

The rate is the biggest driver of the monthly payment, and the mortgage calculator shows how much a rise would add. The main types are:

• Fixed rate. The rate stays the same for the deal period, commonly 2 to 10 years. Payments are predictable, but you do not benefit if rates fall, and leaving early can trigger a charge.
• Tracker. The rate follows a benchmark, usually the Bank of England base rate, plus a set margin. Payments rise and fall with it.
• Discounted rate. A discount off the lender's standard variable rate for a set period. Because that underlying rate can change, so can your payments.
• Standard variable rate (SVR). The lender's default rate, which it can change at any time. It is often higher than the rate on a deal.

What happens when a deal ends?

A deal period is not the same as the mortgage term. A 25-year mortgage might have a five-year fixed rate, and at the end of it the mortgage usually moves onto the lender's SVR unless you take a new deal, either with the same lender or by remortgaging elsewhere. Payments often rise if that happens, so it is worth knowing the end date from the start.

Costs beyond the monthly payment

• Early repayment charges. Fixed and discounted deals often charge a fee for leaving early or overpaying beyond an annual allowance, which is often 10% of the balance.
• Arrangement and valuation fees. Some deals charge a product fee, and the lender arranges a valuation of the property.
• Buying costs. Solicitor fees, surveys and, in England and Northern Ireland, Stamp Duty Land Tax can apply on top of the deposit.
• Insurance. Lenders usually require buildings insurance. Many households also look at life insurance and income protection so the mortgage can still be paid if something happens. Mortgage protection explained compares the options.

How lenders decide how much to lend

Lenders look at income, outgoings, credit history, the deposit, the property and how secure your job is. They commonly cap borrowing at around 4.5 times annual income, though many people are offered less, and the formal affordability rules that once applied were scrapped in 2022, so each lender applies its own. Getting an early idea of the figure is what a mortgage in principle is for.

Questions worth asking before choosing a deal

• What is the total cost over the deal period, including fees, not just the headline rate?
• When does the deal end, and what rate would apply afterwards?
• How much can be overpaid each year without a charge?
• What happens to the payments if rates rise, or if income falls?
• Is the mortgage portable if you move, and what would leaving early cost?