Mortgages explained

For more mortgage information about some of the terms we use, click on the highlighted words or see our mortgage glossary.

What is a mortgage?

A mortgage is a loan given specifically to buy a property. The property you buy is used as security against the loan while you repay it.

You borrow a sum of money to buy a property over a set number of years (usually 25-35 years) and you make monthly payments to pay off the interest or both the interest and loan.

What are the basic types of mortgage?

There are two basic types of UK mortgage depending on how you repay the loan - a repayment mortgage and an interest-only mortgage, although you can have a combination of the two.

With a repayment mortgage your monthly payments repay the capital and the interest. With an interest-only mortgage your monthly repayments just pay the interest, and you will have to find other means of repaying the capital at the end of the mortgage.

You can use a mortgage repayment calculator to quickly work out what your monthly payments will be.

What are the advantages and disadvantages of a repayment mortgage?

With a repayment mortgage you are paying off both the interest and some of the capital each month, which means you are guaranteed to have paid off the whole loan by the end of the term. Therefore, repayment mortgages are usually considered a low risk option.

With a repayment mortgage you can also make lump sum payments and overpayments to reduce the interest and the capital you owe. However, your monthly payments will be higher than they would be with an interest-only mortgage and there may be fees for overpaying your mortgage.

What are the advantages and disadvantages of an interest-only mortgage?

With an interest-only mortgage your monthly payments only pay off the interest and are lower than if you have a repayment mortgage. However, you will need some other way to repay the capital you borrowed - typically this is done by paying into a savings plan or investment.

What types of mortgage deals are available?

There are plenty of different types of mortgage - the most popular are variable rate, fixed rate and tracker mortgage deals.

• Variable rate mortgages - This is a mortgage where you pay the variable or standard variable interest rate (SVR) of the mortgage lender. Each lender has its own standard variable rate which will be higher than the Bank of England's base rate but will roughly track it, going up and down when the bank changes its rate. Lenders' variable rates can differ widely.

• Fixed rate mortgages - With a fixed rate mortgage the interest rate is fixed for a period of time - usually two, three or five years - which is good if you want to know exactly how much you will have to budget for. However, if interest rates drop during the term of the deal your mortgage could be more expensive than others. So it's important to think about whether you should get a fixed rate mortgage or a variable rate mortgage.

• Tracker mortgages - With a tracker mortgage the interest rate follows, or tracks, the Bank of England's base rate and is usually set at percentage above it for a period of time or for the lifetime of the mortgage.

What do I need to consider when choosing a mortgage?

The main things to think about are:

• The amount you can afford to borrow

• How long you want to borrow it for (the term)

• Whether you want a repayment or interest-only mortgage (or a combination of the two)

• The type and period of interest deal (fixed, variable, tracker)

• The economic climate - think about whether interest rates are likely to go up or down

You might also want flexibility with your home mortgage so that you can pay off lump sums if you come into money or, if you run into temporary problems, so that you can take a payment holiday.

What first-time buyer mortgages are available?

Sometimes mortgage lenders will offer special deals for first-time buyers, such as mortgages aimed at recent graduates and key workers in the public sector (such as teachers and nurses). Some lenders will also help with legal and valuation fees and waive their arrangement fees.

You could also consider a shared ownership scheme as a way of getting onto the first rung of the housing ladder.

As a first-time buyer you will need a good deposit and a good credit score to get a mortgage loan. In 2022-23, the average first deposit was £53,414, according to UK first-time buyer statistics. It is a good idea to check your credit report before you apply for your mortgage.

What are the mortgage options if I want to buy-to-let?

You can get special buy-to-let mortgages which are usually interest-only - the idea being that you use the rental income to cover the interest payments and pay off the capital when you sell the property.

You will need a bigger deposit compared to an ordinary mortgage. According to buy-to-let statistics, this could be anything between 20-40% of the property value, and the lender could insist the rent you receive is at least 125% of the mortgage costs.

What deals are available for remortgaging?

If you have owned property for a long time, have a good credit record and good equity in your property, then there are plenty of deals out there if you want to switch mortgage lender.

If you're thinking of remortgaging you should first check what it will cost you to change lenders - for example, if you're on a fixed-rate deal you may have to pay a penalty charge of a few months. You may also have to pay legal and valuation fees, although some lenders will refund this, and an arrangement fee.

What are my mortgage options if I have a bad credit record?

The credit crisis has meant that it is more difficult now for people with debts or a bad credit record to get mortgages. Whether you can get a mortgage loan or not will depend on your individual circumstances, how large a deposit you have and how bad your credit problems were.

You are also likely to be charged a higher interest rate. If you have a bad credit record then it's best to get advice from a specialist mortgage adviser.

It's a good idea to check your credit report before you apply for a mortgage.

What fees or other costs are involved in taking out a UK mortgage?

When you take out a mortgage you have to pay legal fees, a mortgage valuation fee,and most lenders charge an arrangement or booking fee to secure the mortgage.

If you have a fixed rate mortgage  you will have to pay an early repayment penalty, of several months' interest, if you want to end it before the set time. Also, some lenders charge exit fees if you want to switch to another lender or pay off your mortgage.

Glossary

Arrangement fee Also known as a booking fee, this is what lenders charge you to secure the mortgage.

Base Rate The interest rate from which lenders set their rates for lending. It is usually based on the base rate set by the Bank of England.

Buy-to-let mortgage A mortgage designed for someone wanting to buy a property with the intention of letting it to others.

Capital The amount of money you borrow.

Capital repayments Payments you make to repay the money you borrowed.

Credit rating Credit rating is a way for the lender to see how reliable you have been in the past with financial products and to make sure you're a good risk if they lend you money.

Credit reference agencies Organisations that store financial information about the payment history of people who have received credit. They are used by lenders to check your credit rating.

Early redemption penalty A fee imposed by a lender if all or part of a mortgage is paid off before the end of a mortgage deal with a specified time.

Equity The difference between the market value of a property and the amount you owe on the mortgage.

Fixed rate mortgage A mortgage where the interest rate doesn't change for a set period.

Flexible mortgage A mortgage that allows you to overpay or underpay without penalty and, in some cases, to take payment holidays.

Interest only mortgage A mortgage where you only pay the interest for the duration of the loan with the amount borrowed to be repaid at the end.

Interest rate The amount of interest you are charged for the loan.

Legal fee The charge made by a solicitor or licensed conveyancer for carrying out the conveyancing and other legal work connected with buying and selling a property.

Loan to value (LTV) The amount you are borrowing in relation to the value of the property, expressed as a percentage of the property's value.

Mortgage A loan secured against a property.

Mortgage lender A financial institution that offers mortgages.

Mortgage term The length of the mortgage agreement. This is normally 25 years but it can be longer or shorter.

Overpayments Increased or additional mortgage payments made by the borrower usually to repay the mortgage early.

Redemption Charges Fees charged by the lender to cover administration costs when a borrower pays off a mortgage.

Remortgage Changing mortgage lenders without moving house and using the proceeds from the new mortgage to repay the old one.

Repayment mortgage A mortgage where part of the loan (the capital) and the interest is paid each month.

Repayment period The number of years over which you agree to pay back the mortgage. Also called the mortgage term.

Standard variable rate (SVR) The default interest rate charged by lenders which is usually in line with the Bank of England base rate. Also called variable mortgage rate.

Valuation fee A fee paid to the lender to cover cost of the valuation of a property for mortgage purposes.

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