A mortgage is a loan used to buy a property. The loan is secured against the property, which means the lender has a legal interest in the home until the mortgage is repaid.
Most people use a mortgage because they do not buy a home entirely with cash. Instead, they put down a deposit and borrow the rest from a lender. The mortgage is then repaid monthly over an agreed term.
A mortgage can help you buy sooner, but it is also a long-term financial commitment. Before you apply, it helps to understand how mortgages work, what your payments cover and what lenders look at when deciding whether to approve you.
Mortgages in simple terms
- A mortgage helps you buy a property by borrowing money against the home itself
- Your deposit covers part of the purchase price, while the lender provides the rest
- Monthly repayments depend on the amount borrowed, interest rate, mortgage term and mortgage type
- A repayment mortgage reduces the loan over time, while an interest-only mortgage needs a separate repayment plan
- Lenders check your income, spending, deposit, credit profile and the property before approving a mortgage
How a mortgage works
When you buy a property with a mortgage, the lender agrees to lend you part of the purchase price.
How the numbers work
Property price: £250,000
Deposit: £25,000
Mortgage: £225,000
Loan-to-value: 90%
This is known as the loan-to-value ratio, often shortened to LTV. A 90% LTV mortgage means you are borrowing 90% of the property value.
Your monthly repayments then depend on how much you borrow, the interest rate, the mortgage term and the type of mortgage you choose.
What your monthly payment covers
What your monthly payment covers depends on the type of mortgage you choose. The main difference is whether your payment reduces the loan itself or only covers the interest.
Repayment mortgage
Your monthly payment usually covers the interest charged by the lender and part of the original loan.
Over time, the balance should reduce, provided you keep up with payments.
Learn more: Repayment mortgage
Interest-only mortgage
Your monthly payment only covers the interest.
The original loan does not reduce, so you need a separate plan to repay the balance at the end of the mortgage term.
Learn more: Interest-only
For most residential buyers, repayment mortgages are more common because they are designed to repay the loan by the end of the term.
How the mortgage term affects your payments
A mortgage term is the length of time you agree to repay the mortgage over.
Many mortgages are arranged over 25, 30 or 35 years, although some lenders may offer shorter or longer terms depending on your age, income, affordability and plans.
A longer term can reduce the monthly payment because the loan is spread over more years. However, it can also mean paying more interest overall.
A shorter term can increase the monthly payment, but it may reduce the total interest paid over the life of the mortgage.
What lenders check before approving a mortgage
Before approving a mortgage, lenders want to understand whether the borrowing looks affordable and whether the property is suitable security for the loan.
They may look at your income, deposit, spending, credit profile, debts, employment type and bank statements. They will also consider the property value and the amount you want to borrow.
This means mortgage approval is not based on income alone. Two people earning the same amount may be offered different borrowing amounts if their deposit, debts, spending or credit history are different.
Get a clearer borrowing estimate
Use our mortgage borrowing calculator to see what you may be able to borrow before comparing mortgage options.
Fixed and variable mortgage rates
When choosing a mortgage, you usually need to decide what type of interest rate suits you.
Fixed-rate mortgage
Your interest rate stays the same for an agreed period, such as two, five or ten years.
This can give you more certainty because your monthly payments stay the same during the fixed period.
Learn more: Fixed-rate mortgage
Variable-rate mortgage
Your interest rate can move up or down.
This means your monthly payments may change if the rate changes.
Learn more: Variable-rate mortgage
The right option depends on your budget, plans and how much payment certainty you want.
Mortgage fees and buying costs
The interest rate is important, but it is not the only cost to consider.
Some mortgages come with product fees, valuation fees, arrangement fees or early repayment charges. If you are buying a property, you may also need to budget for legal fees, survey costs, stamp duty and moving costs.
That is why it helps to compare the full cost of a mortgage, not just the monthly payment or headline rate.
Before you apply for a mortgage
A mortgage can help you buy a home, but it should fit your wider financial situation.
Before you apply, it helps to check your borrowing position, deposit, likely monthly payments, credit profile and future plans. It is also worth thinking about how long you may stay in the property, whether you need flexibility and how your payments could change over time.
The right mortgage is not only about how much you can borrow. It should also fit your budget, property plans and how much certainty or flexibility you need.
Ready to explore your mortgage options?
Muttuo Mortgages works with over 100 lenders to help you explore suitable deals and find an option that fits your circumstances.
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Frequently asked questions about mortgages
What is a mortgage?
A mortgage is a loan used to buy a property.
A mortgage lets you borrow money to buy a home, then repay it monthly over an agreed term. The loan is secured against the property.
Is a mortgage the same as a loan?
A mortgage is a specific type of secured loan.
A mortgage is a loan used to buy property. It is secured against the home, which means the lender has a legal interest in the property until the mortgage is repaid.
What does a mortgage payment include?
It depends on whether you have repayment or interest-only.
With a repayment mortgage, payments usually cover interest and part of the loan. With an interest-only mortgage, payments only cover the interest.
How long can a mortgage last?
Many mortgages last 25 to 35 years, but terms can vary.
The mortgage term depends on your age, affordability, lender criteria and plans. Longer terms may reduce monthly payments but can increase total interest.
What do lenders check for a mortgage?
Lenders look at affordability, credit history and the property.
Lenders usually review your income, deposit, spending, debts, credit profile and the property before deciding whether to approve a mortgage.
