Mortgages. Clearly Explained.

The biggest purchase of your life, and probably the least understood. Here's what you need to know.

Here’s everything need to know about mortgages, whether you’re a first time buyer, moving home, remortgaging or investing in a buy-to-let.

1. Understanding mortgages2. Mortgage essentials3. Getting your mortgage4. FAQs

1. Understanding mortgages

Introduction to mortgages

Not sure where to start with mortgages? They can feel complicated when first trying to understand them, but don’t feel overwhelmed, be patient and spend some time reading this guide and you’ll be confident in no time.

What actually is a mortgage?

Mortgages aren't as confusing as the word might suggest, a mortgage is just a loan, but a loan specifically used to buy property or land.

The property or land purchased is then held as security for the loan. Which means it's part of the contract between you and the loan provider, (otherwise known as lender, normally a bank or building society).

If you cannot repay the loan in the form of monthly repayments, the lender will take back (repossess), the property or land and would then typically sell it to get their money back.

The contract also includes things like what interest rate you are paying, how long the loan is and of course how much you are repaying each month. We’ll cover these in more detail too.

How do mortgages work?

A mortgage works by having a lender and a borrower, the same as any loan. But the length of time is far higher than a typical loan, as high as 40 years in some cases, although typically start at 25 years.

Repayments are made monthly, and normally a set amount per month from the start of the mortgage but changes after a number of years. More on this below.

You are also normally required to put a deposit of your own money down, a minimum of 5%, to buy the house, and the loan is for the remaining share, so 95% of the house value.

Types of mortgages

There are in fact different types of mortgages, all to suit different personal circumstances.

The most common ways of repaying a mortgage are a ‘repayment’ mortgage and ‘interest-only’, and the most common types of mortgage interest rates are ‘fixed rate’ or ‘variable rate’.

Mortgage repayment types

Repayment mortgage

You might also hear this as a capital and interest mortgage.

If you imagine the loan as the borrowing amount itself, so let’s say £100,000, (this is called the capital, or sometimes principal).

We take that figure and add on the interest that the mortgage lender has set to get to an overall figure.

So let’s say the interest rate is 3.5% and doesn’t change over the whole mortgage term of 25 years, then the interest we would pay is £50,000. (let’s not worry about the maths for now).

So the total cost of the mortgage is £150,000.

A repayment mortgage would mean your monthly repayments include paying back some of the interest, the £50,000 figure, as well as some of the capital, the actual loan, the £100,000.

So eventually over 25 years both are completely paid back and you are stress-free for the rest of your life.

Interest-only mortgage

So with the above in mind, an interest only mortgage means you are only paying back the interest portion of the mortgage. You will not be reducing the original loan amount at all. And at the end of the mortgage term, in the above example 25 years, you will be required to pay back the full amount of the loan, the £100,000.

The benefits of this are much lower monthly repayments, as you are just paying the interest, but are typically not suitable for most people.

They are very common when using a buy-to-let mortgage as it helps increase cash flow for the investor (the amount of spare cash they are receiving), so they can make more investments or use it for refurbishing the property.

Plus, they are betting the house price will increase when they are ready to sell it, at which point they will repay the mortgage loan.

However, you need to prove you are able to repay the loan at the end of the mortgage term in order to get an interest-only mortgage.

Part and Part mortgage

This is where it gets a little bit confusing, a part and part mortgage is a combination of both a repayment mortgage and an interest-only mortgage. Sounds a bit crazy right?

So it’s part repayment, and part interest, or sometimes known as part capital and part interest mortgage.

It means at the end of the mortgage, you will still have some capital left to repay.

Just like on an interest-only mortgage you have the whole loan amount left to repay, but it won’t be the whole loan amount as you are also paying part of the capital as you would on a repayment mortgage.

There’s no set amount to how much you would have left to pay off at the end of your mortgage, that’s between you and your lender.

You might typically get a part and part mortgage because you want lower monthly repayments than you would have on a standard repayment mortgage, but a lower amount to repay at the end of the mortgage term than you would if you went with a full interest-only mortgage.

You may have some money or investments elsewhere that you can use to pay off the mortgage, but perhaps these aren’t enough to pay off the whole mortgage, so over the years you need to reduce the final loan amount due to be repaid.

You will also need to prove that you can pay back the remaining loan amount at the end of the mortgage term as well.

Mortgage rate types

Standard variable rate (SVR)

A standard variable rate, is the ‘normal’ rate of your lender, or their standard rate. It varies across lenders, and they can change it whenever they like.

It’s normally linked to the Bank of England base rate, which is a rate that governs the UK and used to control the economy.

We don’t need to go into exactly what that means, but all you need to know if the base rate goes up, lenders standard variable rate normally goes up too, and if the base rate goes down, lenders standard variable rates normally go down too. But it is up to the lender to choose to do it, they have no obligation to, and sometimes don’t.

Fixed rate

These are the most common types of mortgages in the UK – fixed rate mortgages.

Imagine a total mortgage term of 25 years, as part of that, there will be a length of time where the interest rate you pay is fixed, it won’t change, and is typically for either 2, 3, 5, 7 or 10 years. With 2 and 5 years the more common ones.

After this fixed rate ends, also called the introductory period, the interest rate changes to a variable rate that the lender sets (often their standard variable rate (SVR), and is normally a lot higher than the fixed rate.

The fixed rate is essentially used as a sales tactic to make it look like the mortgage has a lower rate and compete with other mortgage lenders.

This is why you shouldn’t shop for mortgages just by their rate. Look at the overall cost of the fixed rate period.

Why not look at the average rate of the mortgage over the whole mortgage term?

Because what’s good about these mortgages, is when it’s time for you to pay the higher rate (the standard variable rate), you can remortgage. That means you can replace your current mortgage on the same house with another mortgage.

So you can go shopping again for a new fixed rate mortgage with a much lower rate than your now variable rate, and save quite a lot of money.

And simply repeat this until your mortgage is paid off.

Discount variable rate

Imagine a lenders standard variable rate (SVR), which is just their boring old normal rate. A discounted variable rate mortgage is where for a set period of time, you get a discount from the standard variable rate. It’s as simple as that.

You need to be careful however, as the standard variable rate can change at any time, meaning your mortgage interest rate can change too.

Tracker rate

A tracker rate mortgage is a rate that is linked to a specific interest rate, and so it tracks that rate and then adds a fixed amount on top.

This is normally the Bank of England base rate, with an added fixed amount.

For instance, a mortgage might be created from the Bank of England base rate, plus 1%. So if the base rate is 0.25%, you simply add 1% and your mortgage rate will be 1.25%.

It’s great for transparency and when the base rate is low or falling, but it could change at any point the base rate does and cause your repayments to increase too.

Capped rate

A capped rate is a variable rate mortgage, so a standard variable rate, discount variable or tracker rate, but has a maximum amount of interest that can be charged, or put simply a cap on the interest rate.

You might do this if you think the interest rates are due to go up soon, but you pay a premium with a higher initial rate than an uncapped mortgage.

Other mortgage types

Flexible mortgage

This means that your mortgage payments are flexible. You are able to pay more than your set monthly payment amount if you want to, or you could pay less than your set monthly payment amount if you want to. This is called overpaying or underpaying.

You can also take what’s called a payment ‘holiday’ which is a break from making any payments at all if you need for a set period of time.

And you are normally able to build up a ‘reserve’ of money – a collection of overpayments you’ve made, and access it later if you need to.

Offset mortgage

If you have savings with the same lender, or sometimes a current account, and on a flexible mortgage, you can also ‘offset’ these against your mortgage to help reduce the amount of overall interest you pay.

That sounded complicated, but it means you can still keep your savings in a savings account, but then deduct the savings figure from your mortgage total, and only pay interest on that.

For instance if you have £20,000 in savings, and £100,000 remaining to pay on your mortgage, you would only pay interest on £80,000. You can add to or withdraw from your savings at any time, and the mortgage would adjust accordingly.

So what this means for you then, is two options.

1. You can keep your monthly mortgage payments the same, and because you are now paying less interest per month, as the mortgage interest has been reduced from your savings, you will pay more towards the capital part of your mortgage and therefore reduce the loan faster – meaning you will be paying off your mortgage quicker.

2. Or, you could use the reduced interest payments to reduce your monthly mortgage payments and keep the same total mortgage length – the number of years of your mortgage.

Better yet, you may be able to switch between the two options over the years if your lender allows it. Always check first.

This does come at a cost however, which is normally a higher interest rate overall, and you normally won’t be earning interest on the savings. So be careful when considering these types of mortgages.

2. Mortgage essentials

What to look for in a mortgage

There are some things about mortgages everybody needs to know before they start looking for a mortgage, and ideally before they start looking for a house.

It’s not as complicated as it might seem, but get familiar with this section so you can be confident you know what to look for in a good mortgage deal, and more importantly be able to steer clear of the bad deals.

Mortgage fees

There are normally fees involved when getting a mortgage, sometimes you might pay a mortgage broker too (but we recommend using a free broker, more on that below).

Ignoring that for now, by mortgage fees we mean the fees you pay to your lender for giving you the loan.

Seems a bit greedy to be charged a fee from the lender who is giving you the loan right? Well it is, and that’s how the banks make so much money. Unfortunately, we can’t do much about it, but we can factor these into our assessment when looking for the best mortgage deal.

The fees can be very high too, the typical fee charged is called an arrangement fee, simply a fee for arranging the mortgage for you. These can sometimes be £0, but typically £100s and sometimes £1000s.

On top of that some lenders charge a booking fee, which is a fee to reserve the mortgage while your house purchase goes through, and are normally non-refundable, so if your house move falls through and you don’t get the mortgage, you still have to pay this.

The relatively good thing about mortgage fees is you can normally add them to the mortgage amount, rather than paying them directly when you get the mortgage, but you can if you want to. So you don’t need to worry about the cash expense, but adding to your mortgage will mean you ultimately pay more, as you will be paying interest on the fee too, and over the lifetime of the mortgage, i.e. 25 years.

Mortgage incentives

On the opposite side of paying mortgage fees, when the market is competitive, meaning lenders are competing for customers, they sometimes offer incentives to you for taking out the mortgage, this is normally in the form of cashback, sometimes £100s, but could be additional free products or anything the lender feels is suitable.

However, always factor the mortgage fees and incentives into an overall cost, don’t be swayed by the incentive itself, there could be better deals without the incentives.

This can get complicated, our advice is to always use a mortgage broker – one that doesn’t also charge a fee!

The mortgage term

The mortgage term is the overall duration of the mortgage. It is normally up to you how long you want the mortgage to be for, but it does depend on your age as you still need to be earning an income to pay off the mortgage, so lenders typically don’t like lending into your retirement years.

For example, if you are 50 and you expect to retire at 65, you would only be able to get a mortgage for 15 years.

It’s a big decision as the length of the mortgage dictates how much interest you pay in total. With a shorter mortgage term having less interest overall.

But, the longer the mortgage term is, typically the less you pay per month, making it more affordable, but more expensive overall due to higher interest.

What’s becoming more common is getting a longer mortgage term, but making overpayments, that means paying more than you have agreed to, in order to reduce the amount of interest you pay overall.

This gives you flexibility – you can overpay when you want, or stick with the lower contracted monthly payment amount when you want. More on overpayments below.

Mortgage overpayments

Mortgage overpayments, or overpaying on your mortgage, means paying more than the agreed amount of your monthly repayments – which are decided when you take out a mortgage, based on the interest rate, mortgage term and the mortgage amount.

Most lenders allow you to overpay if you like, you normally can’t just pay it off completely, (lucky if you can!), but you can typically pay off 10% per year. And you can do this by either a one-off lump sum, or increasing the amount you pay every month, or even both of these options.

The main reason to overpay on your mortgage is to reduce the total mortgage amount as fast as possible, and therefore reduce the total amount of interest you pay over the life of the mortgage.

However, it may not be right for you, only do it if you can afford it. You might also be able to get a better return in a savings account or investments, or building up your rainy day fund.

Loan-to-value (LTV)

Not as complicated as it sounds! When you take out a mortgage, you are normally required to pay a deposit on the house as well, normally savings or a gift from your parents. This is because the lenders want to reduce their risk by having you commit your money too.

So let’s imagine your deposit was 10% of the house price. That means the amount you borrow on your mortgage loan is the remaining 90% of the house price. So, the loan part of your mortgage is 90% of the value of the house, making your loan-to-value 90%. Simple.

You can think of it as the complete opposite to your deposit, so if your deposit was 20%, your LTV will be 80%.

The lower your LTV, and by that we mean 80% is lower than 90%, the more money you have in the house itself, and the less the lender has, which means less risk for the lender.

Therefore typically, lower LTV mortgages have lower interest rates – so it’s a good idea to try and put as much of your own money in as possible, providing you can afford it.

Early repayment charge (ERC)

So, as you might have guessed. An early repayment charge, or ERC, is a charge for repaying your mortgage early.

You might think you’ll never do that unless you win the lottery. Not quite!

You will technically be paying your mortgage off when you want to remortgage, that is, to replace your mortgage with a new, better mortgage. You might also want to pay your mortgage off when you move home.

What this means is you cannot just pay your mortgage off whenever you like for free, or switch to a new mortgage whenever you like, you have to time it to when the ERCs expire – which are normally when the good low rate ends too, for instance on a fixed rate mortgage.

ERCs are normally a percentage of the mortgage amount, so can be quite a lot, 5% of a £200,000 mortgage is £10,000.

Imagine a 25 year mortgage with a 5 year fixed rate, that’s the part of the mortgage with a low interest rate that’s fixed for 5 years, and then for the remaining 20 years you will be on a higher standard variable rate (SVR).

The ERCs would normally end after the 5 years fixed rate period, and often they would step down every year, so typically you might see the first year as a 5% charge, the second year as 4%, third year as 3%, fourth year as 2% and the last year as 1% – and then after that you’re free to remortgage with no charge at all.

Always factor this in when looking to remortgage, as it normally doesn’t make financial sense to remortgage when paying an early repayment charge. Always check with a mortgage broker beforehand.

Mortgage eligibility

It’s often not as simple as walking into a bank, or going online these days, and walking out with a mortgage.

You have to meet a certain criteria in order for the bank to loan you the money. And can sometimes be quite difficult to meet.

You’ll have an idea of how much you want to borrow, but lenders will need to know:

  • What sort of property you want to buy
  • how much deposit you have
  • Your employment status (full time, part time, self employed etc)
  • How much you earn
  • Your credit rating
  • Any debts you have (credit cards, personal loans etc)
  • Your regular spending habits

You’ll also need documents to prove your identity - passport, driving license etc. And documents to prove your income, such as payslips or income statements if you are self employed. This is normally only 3 months if you are unemployed, but typically 2 or more years if you are self-employed.

And sometimes you may need to show your bank statements and credit card statements to prove your expenditure.

3. Getting your mortgage

Steps to getting a mortgage

Getting a mortgage is simpler than you might think. There’s not too many steps to do, it’s the home buying process that’s the longer bit as you are normally waiting on other people, such as solicitors, (or normally conveyancers in home buying), to do things, and they don’t like to do things in a hurry!

Step 1: Find out much how much you can borrow

This is actually super easy. Get your salary if you are employed or income figure for the year if you are self-employed, and any other income you might have. And if you are getting a mortgage with your partner, get theirs too.

Then you can just use your total income figure and times it by 4.5. This will give you a very rough estimate of how much you can borrow.

So if you have a total income per year of £30,000, just times that by 4.5, and you’ll get £135,000. And that’s it, you can get a mortgage in the region of £135,000.

Don’t forget your deposit at this point before you go house-hunting. If you just add that on, let’s say you’ve saved £20,000, add that on for £155,000, and that’s the house price you can afford.

Step 2: Get a mortgage in principle

A mortgage in principle is a fancy word for a document showing how much you can borrow. It means that providing there’s nothing to stop you from getting a mortgage (the ‘in principle’ bit), you should be able to get a mortgage for the shown amount.

It’s only really needed if you are house-hunting, and is often asked for by estate agents before showing you houses – although not legally required.

Anyway, it will roughly be the same figure as above, 4.5x your income, but slightly more accurate as it assesses your expenditure and current debts.

Speak to a mortgage broker to get a mortgage-in-principle, and, would you look at that, it's the next step.

Step 3: Find a good mortgage broker

This step might have surprised you, but we don’t recommend getting a mortgage yourself. A good mortgage broker has the expertise and technology available to search every mortgage deal out there to find the right mortgage for you. 

There’s around 12,000 mortgages at any one time, from more than 90 lenders, this is also called the ‘whole market’.

If you’re not familiar with what a broker does, they sit between you and the lender as a middleman. They will assess your personal circumstances to find the right mortgage, and place you with the right lender. They will often then do all the paperwork, apply for mortgage and do all the admin involved for you.

However, you need to make sure that your mortgage broker can actually find the best mortgage for you, there’s a lot of mortgage brokers out there, but not very many that can actually get you the best deal.

They must be able to search the whole market in order to find you the best deal, otherwise how would they and you know it’s the best deal? It’s actually fairly uncommon, so make sure you ask.

Online mortgage brokers

Technology has finally caught up to the mortgage industry, and mortgage brokers have been able to set up online. 

This is huge, as they now have the ability to search the whole market in seconds for the right deal for you, but also a great time saver, you are able to start and progress your mortgage whenever you want, in the evenings, at weekends, when you have a spare 10 minutes at work, whenever!

You can also just upload the documents needed, rather than wait days in the post, and use the live chat feature to get help and advice whenever you need it. If you're confident with online services, these might be for you.

The best mortgage brokers

To save you time, and give you a bit more confidence using a mortgage broker, we’ve reviewed the market and rated the biggest nationwide brokers, coming up with a table of the best.

You can find the best mortgage brokers here.

Step 4: Check direct-only lenders

Although we’ve mentioned mortgage brokers search the whole market – it’s actually an industry term that means they search enough mortgages to be representative of the whole market, enough to give a very good recommendation. 

There are some lenders who don’t deal with mortgage brokers, and the main ones are First Direct, and Yorkshire Bank. It’s worth checking these out too, just to see how they compare with your broker's mortgage recommendation (more on that below).

Step 5: Get your mortgage recommendation

Once you’ve filled out your details on the mortgage brokers website, or if you’ve chosen to speak to a broker face-to-face or over the phone, provided all the information they’ve asked for. Next you’ll be provided with an official mortgage recommendation. 

This is the brokers professional advice, regulated by the Financial Conduct Authority, and what they are licensed to provide. They will consider all of your personal circumstances, income and expenditure and future plans, different for everyone, and come to the best mortgage deal for you.

It’s normally provided on an official document, called a Key Facts Illustration (KFI), or a European Standardised Information Sheet (ESIS).

It can all suddenly feel very real at this point, exciting but sometimes overwhelming. Be sure to take stock and understand what you are committing to, as the next step is applying for the mortgage.

Step 6: Apply for your mortgage

This might sound like the hardest step, but it’s actually the easiest. When you’re ready to go ahead and apply, simply let your mortgage broker know and they will do it all for you. Easy.

There will be a credit check at this point, so make sure you are committed to the mortgage.

At this stage your ‘case’ (application), might get transferred to another team who specialise in dealing with the lenders, rather than the mortgage adviser you’ve been speaking to dealing with the lenders themselves, as they are specialised in dealing with you, the customers, rather than the lenders – some lenders can be complicated.

But there’s no need to panic or worry, it actually makes things faster.

Once it’s applied for, the lender will review your case on their side, checking your credit and affordability, the property valuation, the mortgage policy, and fraud checks. 

There’s nothing you need to do here, as you’ve provided all the necessary information to your mortgage broker, who will deal with the lender. Typically this is called underwriting, and once they’re happy, issue you with a mortgage offer.

Step 7: The mortgage offer

Congratulations! You’re all set.

If you’re remortgaging then your mortgage will be transferred automatically by your broker. And if you’re buying a home, your mortgage is ready for whenever you’re ready to complete the purchase.

There will be a time limit that the mortgage offer is valid for, which varies depending on the lender, anywhere from 1 month to 6 months, so do check.

4. FAQs

Should I speak to my bank or building society?

We recommend that you don’t speak to your bank or building society about getting a mortgage. They can only offer the mortgages that they have, so very few. You need to compare all the mortgages available out there, and that's over 12,000, to find the right one for you. The difference can be £1000s in savings.

We recommend using a mortgage broker to do this, and better yet, your bank or building society’s mortgages will show up when your broker searches, so there really is no need to speak to them.

Should I look at comparison websites?

Nope. By comparison sites we mean those sites that list loads of mortgages in a table. They are great for an indication of what’s out there, but don’t use them to find the actual mortgage for you.

They don’t have every mortgage available, and sometimes have paid advertising listings appear at the top, which won't be the best deal for you.

But more importantly they are typically ordered by lowest rate or lowest monthly repayment, which may sound good, but when reviewing a mortgage you actually need to look at the overall cost of the mortgage during the fixed rate period, that’s the interest rate plus all the fees involved. The difference between the fees and rates can be huge, and you could end up paying £100s more per month.

It’s best to use a mortgage broker who can compare all the mortgages currently out there for you.

What happens if I move house?

This can get fairly complicated. If you are planning on moving in the short term, it’s probably not a good idea to get a mortgage right now because of all the fees involved versus renting. 

However, should you want to move home when you have a mortgage, you have 2 options, the first is to ask your lender to move your current mortgage to the new home. This is called ‘porting’ the mortgage. Not all lenders allow you to do this however, and if they do, you still need to effectively re-apply for the mortgage and pass all the necessary checks, i.e. credit checks and affordability. You may also then need to apply for an additional mortgage if the house price is higher and you need to borrow more.

The second option is to pay off the mortgage, and get a new one. However, this can be costly if you have a typical mortgage and are in the introductory period with an early repayment charge (ERC) (which you should always be in as it’s cheaper, if you are not, you should consider remortgaging). 

The ERCs are typically 1-5% of the mortgage depending on how long ago you got the mortgage. If this is the case, you may want to time the house move to when your introductory period ends and you move onto your lender's standard variable rate, which won’t have any ERCs. But plan ahead as you’ll then be paying a higher interest rate and higher monthly payments until you move.

How do I know how much I can borrow?

Easier than you might think! All you need to do is take your salary, and your partners salary if you are buying together, then add them together. After that, if you have any additional income, whether from shares or anything that is reliable and consistent you can add that on too.

If you are self-employed, it’s exactly the same, just not your salary but your total income.

Then simply multiply that figure by 4.5 and you will get a very rough estimate of how much you can borrow. So if your total income is £30,000 per year, you could borrow £135,000.

It’s not 100% accurate because you may have some expenses that need to be deducted, but as a guide it’s great. To get a more accurate estimate, which is called a mortgage-in-principle, and is what you need to go house hunting, speak to a mortgage broker to get yours.

Fact checked
This article has been fact checked
Headshot of Ash Jensen
Ash Jensen (CeMAP)

Director & Head Broker of Make My Mortgage

Ash has more than 20 years’ experience in the mortgage industry, making him a true expert when it comes to anything to do with mortgages (trust us, anything that Ash doesn’t know about mortgages isn’t worth knowing!).

Make My Mortgage searches the whole market to make finding the right mortgage for you quick and easy, whether you’re buying your first home, a buy-to-let property, or remortgaging.

View full bio

Website iconLinkedin iconFacebook icon

Need mortgage advice?

We recommend using a mortgage advisor to find the best deal for you.
Find an advisor now