What is a mortgage?

For many of us, buying a home is one of the biggest financial commitments we'll ever make. It's an exciting journey, but it can also be a complex one, especially when it comes to understanding mortgages. In this blog post, we'll demystify what a mortgage is, how it works in the UK, and the key elements you need to know about.

What is a Mortgage?

In simple terms, a mortgage is a type of loan taken out to buy property or land. Most mortgages run for 25 years, but the term can be shorter or longer. The loan is 'secured' against the value of your home until it's paid off. This means if you can't keep up with your repayments, the lender (usually a bank or building society) can repossess your home and sell it to get their money back.

How Does a Mortgage Work?

When you take out a mortgage, you'll put down a deposit on a property, which is typically between 5% to 20% of the property's value, but can be higher. The mortgage loan covers the rest. You then make monthly repayments to the lender to pay back the loan. These repayments include both the capital (the amount you borrowed) and the interest on the loan.

There are two main types of mortgage repayment structures in the UK:

Repayment Mortgages

With this type of mortgage, your monthly repayments are part interest and part capital repayment. By the end of your mortgage term, you'll have paid off the entire loan and the interest, and the property is fully yours.

Interest-Only Mortgages

With an interest-only mortgage, your monthly repayments only cover the interest on the loan. The capital you borrowed is repaid in full at the end of the mortgage term. You'll need a plan to pay off the loan at the end of the term, like an investment or savings plan.

Types of Mortgage Deals

There are various types of mortgage deals available in the UK, but the most common ones are:

Fixed-Rate Mortgages

The interest rate is fixed for a set period, usually two to five years, but it can be longer. This means your monthly payments stay the same for that period, making it easier to budget. You can find out more about fixed-rate mortgages here.

Variable Rate Mortgages

The interest rate can change. This includes standard variable rate mortgages (SVR) where the rate is set by the lender and can go up or down, and tracker mortgages which follow the Bank of England's base rate plus a set additional percentage. Find out more here.

Applying for a Mortgage

When applying for a mortgage in the UK, lenders look at your credit score, income, outgoings, and debt to determine how much they're willing to lend. It's recommended to seek advice from a mortgage broker or financial advisor to understand the best options for your situation.

Remember, every mortgage comes with terms and conditions. Always make sure to read the fine print and understand what you're agreeing to.

Final thoughts

Understanding mortgages can seem like a daunting task, but with some basic knowledge, it becomes much more manageable. A mortgage is not just a loan; it's a step towards owning your dream home. Whether you're a first-time homebuyer or looking to move up the property ladder, knowing how mortgages work can make the journey smoother and more transparent. Always remember to seek financial advice if you're unsure.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Approved by In Partnership FRN 192638 July 2023.