Understanding how a mortgage works is one of the biggest steps towards buying your first home. In this chapter, we'll explain how mortgages work, the different types available and the key terms you need to know, so you can make informed decisions with confidence.
By the end of this chapter you’ll understand:
✓ What a mortgage is
✓ How borrowing works
✓ How your monthly payments are calculated
✓ The different types of mortgage available
✓ The key mortgage terms you’ll hear during your journey
Estimated Reading Time: 12 minutes
A mortgage is simply a loan that helps you buy a property. For most people, buying a home outright isn’t possible.
Instead, you contribute your deposit and borrow the remaining amount from a mortgage lender. You then repay that loan over an agreed period through monthly repayments.
Think of it like this.
If you’re buying a home for £300,000 and you’ve saved a £30,000 deposit, you’ll usually need to borrow the remaining £270,000.
That borrowing is your mortgage. Over time, you’ll gradually repay the money you’ve borrowed, together with interest charged by the lender.
Did You Know?
The average mortgage lasts much longer than most people realise. Although your mortgage term might be 25, 30 or even 35 years, many homeowners review their mortgage regularly and may change deals several times before it’s fully repaid.
How does a mortgage work?
When your mortgage is approved, the lender provides the money needed to complete the purchase of your home. You don’t receive the money into your bank account. Instead, it’s transferred to your solicitor, who uses it (along with your deposit) to buy the property.
Once you’ve moved into your new home, you’ll begin making monthly mortgage payments to your lender. Each payment is made up of two parts:
The money you’ve borrowed
This gradually reduces the amount you owe.
Interest
This is the lender’s charge for lending you the money.
At the beginning of your mortgage, a larger proportion of your monthly payment usually goes towards interest. As time passes, more of your payment goes towards reducing the amount you’ve borrowed.
One of the biggest misconceptions about mortgages is that lenders simply multiply your salary by a fixed number.
In reality, lenders consider a range of factors when assessing how much they may be prepared to lend.
These often include:
Every lender has its own approach, which is why the amount available can vary from one lender to another.
What types of mortgage are there?
There are several different mortgage products available, but most first-time buyers will come across these two.
Fixed Rate Mortgage
Your interest rate stays the same for an agreed period, such as two or five years. This means your monthly mortgage payment remains predictable during that time. Many first-time buyers like the certainty this provides when budgeting.
Tracker Mortgage
A tracker mortgage follows another interest rate, often the Bank of England Base Rate, plus an additional percentage. This means your monthly payments could go up or down depending on how that underlying rate changes.
Did You Know?
The mortgage product you choose today doesn’t last for your entire mortgage. We will help you review your mortgage every few years to ensure it continues to meet your needs.
Loan to Value (LTV)
The percentage of the property’s value that you’re borrowing.
Example:
Property value: £250,000
Deposit: £25,000
Mortgage: £225,000
Loan to Value = 90%
Mortgage Term
The number of years you’ve agreed to repay your mortgage. Common terms include 25, 30 and 35 years.
Interest Rate
The percentage charged by the lender for borrowing the money.
Monthly Repayment
The amount you pay your lender each month. This is based on factors such as the amount borrowed, the interest rate and the mortgage term.
It’s natural to focus on borrowing as much as possible, but that’s not always the best approach.
The right mortgage is one that comfortably fits your lifestyle and leaves room for the unexpected. Buying your first home should feel exciting, not financially stressful.
Alex and Sophie bought their first home for £280,000.
They saved a £28,000 deposit, so they borrowed £252,000 from their mortgage lender.
Each month, they make one mortgage payment. Part of that payment reduces what they owe. The rest covers the interest charged by the lender.
With every payment they make, they own a little more of their home.
✓ What a mortgage is.
✓ How mortgage borrowing works.
✓ The main mortgage products you’ll come across.
✓ The key mortgage terms you’ll hear throughout your home-buying journey.
Next Chapter
What Is an Agreement in Principle?
Now that you understand how mortgages work, the next step is finding out how much you may be able to borrow. We’ll explain what an Agreement in Principle is, why it’s important and why many estate agents ask to see one before you start making offers.
