How Mortgages Work in the UK: Beginner Guide

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Key takeaways

A mortgage is a loan secured on your home, so missing payments puts your home at risk
Repayment mortgages clear the debt by the end of the term, while interest-only mortgages do not
A lower LTV usually means a lower rate
Lenders check affordability, credit history and deposit
Compare the total cost of deals, including fees, not just the headline rate

A mortgage is a loan used to buy a property, secured against that property. If you do not keep up the repayments, the lender can take possession of your home and sell it to recover the debt. Because it is usually the biggest borrowing most people ever take on, it pays to understand how mortgages work before you start looking. This guide covers the basics for people buying in the UK.

The main parts of a mortgage

The deposit: the part of the price you pay from your own money.
The loan: the amount you borrow from the lender.
The term: how long you take to repay, commonly 25 to 35 years.
The interest rate: the cost of borrowing, which can be fixed or variable.
The repayment type: repayment or interest-only.

Loan-to-value (LTV)

LTV is the loan as a percentage of the property's value. If you buy a £250,000 home with a £25,000 deposit, you borrow £225,000, an LTV of 90%. The lower the LTV, the less risk to the lender, and the lower the interest rates tend to be. Rates are often grouped in LTV bands such as 60%, 75%, 85%, 90% and 95%.

Repayment and interest-only mortgages

Repayment

Each monthly payment covers the interest and some of the capital. At the end of the term, you have repaid the loan and own the property outright. In the early years, most of each payment goes on interest, so the balance falls slowly at first.

Interest-only

You pay only the interest each month, and the loan stays the same. At the end of the term, you must repay the whole amount, usually from savings, investments or the sale of the property. Lenders will want to see a credible repayment plan, and interest-only is less common for residential mortgages. If you do not have a plan, you risk owing a large sum with nothing to pay it.

You can test both against your own numbers with our mortgage repayment calculator.

Types of interest rate

Fixed rate: the rate stays the same for a set period, commonly two, three or five years, so your payments are predictable.
Tracker: the rate follows a base rate, usually the Bank of England base rate, plus a set margin. Your payments rise and fall with it.
Standard variable rate (SVR): the lender's default rate, which it can change at any time. You usually move onto it when a deal ends, and it is often higher than the deals on offer.
Discount: a reduction from the lender's SVR for a set period.
Offset: savings are linked to the mortgage and reduce the interest you pay on the balance.

Our guide to fixed and tracker mortgages compares them in more detail.

What lenders look at

Lenders must make sure you can afford the mortgage, now and if rates rise. They look at:

Income: salary, self-employed profits, benefits and bonuses
Outgoings: rent, bills, childcare, loans, credit cards and other commitments
Credit history: your credit report and bank statements; see how credit scores work
Deposit size
Employment status
Property: its value, type, condition and location

Under rules from the Financial Conduct Authority, lenders carry out affordability assessments and stress tests for interest rate rises. Typically a lender will lend a multiple of your income, such as around four to four and a half times, although this varies by lender and circumstances.

Costs besides the deposit

Buying a home includes other costs such as stamp duty (in England and Northern Ireland), land and buildings transaction tax (Scotland) and land transaction tax (Wales), legal fees, surveys, mortgage fees and moving costs. See our guide to the costs of buying a home.

The steps to getting a mortgage

Check your finances. Look at your credit report and budget.
Save a deposit. See how much deposit you need.
Get an agreement in principle. A lender or broker can say how much they might lend, often using a soft search. It is not a guarantee.
Choose a lender or broker. Mortgage brokers can search the market and complete applications. Some charge a fee and some are paid by the lender, so ask how they are paid.
Find a property and make an offer.
Apply formally. The lender will check your documents and arrange a valuation.
Receive the mortgage offer. Read it carefully, including the rate, fees and early repayment charges.
Exchange and complete. Your solicitor or conveyancer manages the legal process.

Questions to ask

What is the total cost over the deal period, including fees?
What happens when the deal ends?
Are there early repayment charges, and how much?
Can I overpay each year, and by how much?
Is the mortgage portable if I move?
Are the fees added to the loan, with interest on top?

Warnings

Your home may be repossessed if you do not keep up repayments on your mortgage.
Do not borrow the maximum just because you can. Leave room for rate rises, repairs and life changes.
Be careful with fees added to the loan. They cost interest over the whole term.
If you face difficulty paying, contact your lender early; see mortgage arrears: what to do.

Overpayments and flexibility

Many mortgages let you overpay a set percentage of the balance each year without charge, commonly up to 10%. Overpaying reduces the capital sooner, which cuts the interest and can shorten the term. Check the limit before you do it, because overpaying above the allowance during a fixed deal may trigger an early repayment charge. Some mortgages also allow payment holidays or underpayments when you have built up overpayments, which can help in an emergency. Ask the lender how these features work and whether they affect your rate.

Mortgage protection

Because you owe a large sum secured on your home, it is worth thinking about what would happen if you could not work or if you died. Insurance products such as life cover, critical illness cover and income protection can pay out in those situations. They are optional and need to be compared carefully. See our guides to life insurance and income protection and critical illness cover.

Frequently asked questions

How much can I borrow for a mortgage?

It depends on your income, outgoings, credit history and the lender's rules. Many lenders offer roughly four to four and a half times your income, but this varies.

Do I need a broker?

No, but a broker can search more deals and help with complex situations. Ask how they are paid.

What is an agreement in principle?

It is an indication of how much a lender may lend, based on basic information. It is not a mortgage offer.

What happens when my fixed rate ends?

You normally move onto the lender's standard variable rate unless you choose a new deal. See how to remortgage.

Sources and further reading

Mortgages: the basics — MoneyHelper
Consumer help and guidance — Financial Conduct Authority
Buying and selling your home — GOV.UK

This page provides general information only. It is not personalised financial, legal or tax advice, and rules and figures can change. Your situation is unique — please check official sources such as GOV.UK and MoneyHelper, and speak to a qualified, FCA-authorised adviser before making important decisions about your money.

Written by

MoneyBrink Editorial Team — Editorial team

The MoneyBrink Editorial Team researches, writes and reviews every guide on this site. We work from official UK sources such as GOV.UK, the Financial Conduct Authority, MoneyHelper and the Money and Pensions Service, explain things in plain English, and update articles when the rules change. We do not sell financial products and we do not give personal advice.

Read how we research and check our guides in our editorial policy.

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How Mortgages Work in the UK: A Beginner's Guide