What is a mortgage?
Quick answer: A mortgage is a loan you use to buy a home. You pay it back over many years, usually with interest. Your deposit covers part of the property price; the mortgage covers the rest. Mortgage loans are “secured” against your home. This means if you cannot make the payments, the lender could take the property and sell it.
The average mortgage lasts for 25 years — although they can range from six months to 40 years — during which you’ll make monthly repayments. In this guide we’ll cover the meaning of a mortgage and explain everything you need to know about how they work.
How does a mortgage work?
When you buy a home you’ll usually put down a lump sum, called a deposit, towards the property’s purchase price. The remaining cost of your home can be paid for with a mortgage. You’ll own your home, but you must make monthly repayments on the mortgage to keep it.
Your regular mortgage payments will include interest, which is what the lender charges for allowing you to borrow money. The amount of interest you pay depends on the mortgage interest rate — this is a percentage of the total amount you still owe.
There are several different types of mortgages, including:
- First-time buyer mortgages
- Home mover mortgages
- Remortgages
- Buy-to-let mortgages
If you want to live in the property, you’ll find that most of the mortgages available to you are repayment mortgages. This means you’ll pay off a bit of the loan every month, on top of paying interest.
However, if you’re getting a buy-to-let mortgage, you’ll find most of them are interest-only. This means you’ll only pay interest each month, and you’ll still owe the amount borrowed at the end of your mortgage term.
How does mortgage interest work?
Mortgage interest is the price you pay to borrow money to buy a property. It’s charged as a percentage of the amount you still owe, called your outstanding balance. The higher the interest rate, the more expensive your mortgage will be.
If you have a fixed-rate mortgage, your interest rate will stay the same during your mortgage deal. If you have a variable-rate mortgage, your interest rate and monthly payments can go up or down.
Most mortgages are repayment mortgages. With a repayment mortgage, each monthly payment does two jobs: it pays that month’s interest and clears a bit of the loan.
Three things make the biggest difference to what you pay:
- Your interest rate: A higher rate means higher monthly repayments and a higher total cost. Even a small change can add up over 20 or 25 years.
- Your mortgage term: The term is how long you take to repay the mortgage. A longer term can make monthly payments lower, but you’ll usually pay more overall because interest runs for longer. A shorter term usually costs more each month but can cut the total interest you pay.
- Your mortgage balance: The more you borrow, the more interest you’ll pay. Paying down the balance through regular repayments, or overpayments if your lender allows them, can reduce the interest charged over time.
How does getting a mortgage work?
Getting a mortgage can seem complicated at first. But it can be broken down into a few key stages:
- Find out how much you can borrow. Our mortgage calculator gives you a good idea of how much you may be able to borrow. You can also find out how much your mortgage will cost, too.
- Save your deposit. This is the cash you put towards the home upfront. The rest of the price is covered by the mortgage. A bigger deposit can help you get lower mortgage rates.
- Apply for your mortgage. Once you’ve saved your deposit, found a property, and the seller has accepted your offer, you can apply for a mortgage. You can get a mortgage direct from a lender, or through a mortgage broker. A broker can search hundreds of deals for you, offer personalised advice, and help manage the whole process.
How does a mortgage work when moving house?
When you move house, you have two main options with your current mortgage.
Transfer or “port” your mortgage: This means taking your current mortgage deal with you to the new property. You’ll need your lender to approve the move, and you may need to borrow more if the new home costs more.
Remortgage: This is where you switch to a new mortgage deal. It might be with your current lender or a new one. Check for fees first, including any early repayment charge if your current deal has not ended.
Mortgage advantages and disadvantages
Getting a mortgage isn’t right for everybody. Here we break down some of the key advantages and disadvantages of having one.
| Advantages of a mortgage | Disadvantages of a mortgage |
|---|---|
| You can spread the cost. Paying over many years can make home ownership more manageable month to month. | You pay interest. You’ll repay more than you borrowed, and the rate can make a big difference to the total cost. |
| You build equity and wealth over time. As you repay the mortgage, you own more of your home. | Your home is at risk. If you cannot keep up repayments, the lender could repossess the property. |
| You may get more certainty. A fixed-rate mortgage means you know how much you’ll pay while it lasts. No rent increases or having to move out at short notice. | Rates and fees can change the cost. You may face higher repayments when a deal ends, plus fees for setting up, switching or leaving a mortgage early. |
How much deposit do you need for a mortgage?
It depends on how much of a risk the lender sees you as. Typically, the more of a risk you seem, the larger a deposit you’ll need to get approved for a mortgage.
When you apply for a mortgage, the company will decide how much of a risk you are by assessing your affordability and your credit history. They’ll usually look at things like:
- Information from your credit report — this helps them see if you’ve repaid credit successfully in the past
- Your income and regular expenditure — this helps them see how much you can afford to repay each month
- Your other financial commitments, such as credit cards and loans — this helps them understand how much debt you already have
Generally, companies will see you as higher risk if you have a poor credit score. You can get an idea of how companies may see you by checking your free Experian Credit Score.
The size of your deposit can also affect your mortgage interest rate and how much you pay each month — a larger deposit usually means better rates and smaller monthly payments. It’s possible to get mortgages with a 5% or 0% deposit, but they generally come with high interest rates, and you may need a guarantor to get one.
Credit and Mortgage Expert
What our expert says
A higher credit score can improve your chances of being approved for a mortgage and may help you access more competitive rates. If you're thinking about buying a home, checking your score early can give you a clearer picture of your options and highlight any areas you could improve before applying.Jacqui Hamilton, Experian UK
What is a remortgage?
When you remortgage, you either take out a new loan with your existing lender or with a different one. Many people remortgage because they want to get a better rate, change their interest rate type, increase or decrease their monthly payments, or free up equity, such as for home improvements.
How can I improve my chances of getting a mortgage?
If you want to get a mortgage, you’ll need to prove to lenders that you’re a reliable borrower, and that you can afford the repayments.
Here are our top tips for improving your chances of acceptance:
- Be realistic about what you can afford. That five-bed house with the swimming pool may have caught your eye, but you won’t enjoy it half so much if you’re struggling to meet your mortgage payments. Review your finances, get out a calculator, and decide what you can afford — both now and in the future. Remember to take into account the possibility of rising interest rates.
- Try and improve your credit score. A good credit score for a mortgage is important. But remember your score isn’t set in stone — it changes with your financial behaviour, so you have the power to influence it. There are several steps you may be able to take to improve your score and boost your chances of getting a mortgage.
- Consider using a Help to Buy scheme. If you’re struggling to drum up enough for a decent deposit, you might want to check out the government’s Help to Buy schemes.
- Consider using a guarantor. A guarantor mortgage means that someone — usually a parent or older relative — promises to make your repayments if you can’t. This reduces risk for the lender, so they may be more likely to approve you. Make sure you understand the risks for you and the guarantor first.
Finally, remember to compare mortgages before you apply, to find the right one for your needs and circumstances. You can compare mortgages from across the UK market with Experian — it’s free and it won’t affect your credit score.
FAQs
How long is an average mortgage?
A common mortgage term is 25 years, but your term can be shorter or longer depending on your lender, age, income and what you can afford each month. A longer term usually means lower monthly payments, but you’ll pay more interest overall.
How do mortgage payments work?
You make monthly payments to your lender. With a repayment mortgage, each payment covers that month’s interest and pays off part of the loan. With an interest-only mortgage, you pay interest each month, then repay the full amount borrowed at the end.
Does a mortgage include the deposit?
No. Your deposit is the lump sum of cash you pay upfront towards the property price. The mortgage covers the remaining amount you need to borrow. For example, if you buy a £200,000 home with a £20,000 deposit, your mortgage would cover £180,000.
What is included in my mortgage?
Your mortgage includes the amount you borrow to buy the property, plus the interest charged by the lender. It may also include fees if you choose to add them to the mortgage, but this means you’ll pay interest on those fees too.
What is included in a mortgage payment?
On a repayment mortgage, your monthly payment usually includes interest and part of the loan amount you’ve borrowed. Some payments may also include fees you’ve added to the mortgage. Costs like buildings insurance, life insurance, service charges or council tax are usually separate.