Whether you're looking to buy your first home, remortgage, or explore different mortgage options, this guide will take you through the key terms, processes, and mortgage types you need to know.
What is a mortgage?
To put it simply, a mortgage is a loan used to buy property or land. As most people can't afford to buy a home outright, they borrow money from a lender—usually a bank or building society—and repay it over an agreed term, often 25 to 35 years. The total amount repaid over the mortgage term will include the original loan amount plus interest, which is the cost of borrowing the money.
How do mortgages work?
Mortgages work by allowing you to borrow a large sum of money to purchase a property, which you then repay in monthly instalments. These payments will cover both the loan amount (called the principal) and the interest charged by the lender.
The type of mortgage you choose (such as fixed-rate, variable, or tracker) will determine how your payments are structured and whether they can change over time. The mortgage is secured against the property, so if repayments aren’t made, the lender may take legal action to recover the money owed.
What is a mortgage deposit?
A mortgage deposit is the initial lump sum you need to pay towards the purchase price of a property. It’s usually expressed as a percentage of the property’s value. For example, if you're buying a £300,000 home with a 10% deposit, you’ll need to put down £30,000 and borrow the remaining £270,000. Generally, the larger your deposit, the better your chances of securing a competitive mortgage deal with lower interest rates, as lenders view you as a lower risk.
With Shared Ownership, a smaller deposit is required as you can buy a share of a home, typically starting from 25%. You will only need a deposit for the share you are buying. So, for a £300,000 home, a 10% deposit for a 25% share would be £7,500.
How can I find the best mortgage?
Finding the best mortgage involves comparing deals based on your financial situation, your deposit size, and long-term goals. Start by checking your credit score, setting a realistic budget, and determining how much you can borrow.
It’s wise to compare mortgages by using tools online, and we recommend speaking to a mortgage advisor who can help you navigate the market and access exclusive deals. Factors to compare include interest rates, fees, flexibility, and early repayment charges. The best mortgage isn't just about the lowest rate; it’s about the overall value and suitability for your situation. For Shared Ownership mortgage advice, you can see our list of recommended mortgage advisors and mortgage lenders.
What types of mortgages are available in the UK?
There is a range of different mortgage types, which can be confusing for first-time buyers doing research for their first purchase. We’ll give an overview of the different types of mortgages available in the UK to help you make an informed decision.
Fixed-rate mortgages
Fixed-rate mortgages are one of the most popular financing options available to homebuyers. With this type of loan, borrowers make monthly payments that cover the principal (the original amount borrowed) and the interest, which is calculated at a rate agreed upon at the outset of the loan.
The main benefit of a fixed-rate mortgage is that the interest rate remains unchanged for an agreed period, usually between two and ten years. This stability allows borrowers to budget with confidence, knowing their repayments won't fluctuate during the fixed term.
Standard variable rate mortgages
A Standard Variable Rate (SVR) mortgage is the default mortgage type borrowers move to after an introductory or fixed-rate period ends. Once the initial deal expires, the loan automatically shifts to the lender’s standard variable rate.
Unlike fixed-rate mortgages, the interest rate on an SVR mortgage is not locked in and can change at the lender’s discretion or in response to broader economic factors. This means, monthly payments can increase or decrease over time, depending on how the interest rate fluctuates.
Tracker mortgages
A tracker mortgage is a type of variable rate loan where the interest you pay moves in line with an external benchmark, most commonly the Bank of England’s base rate in the UK. As the base rate rises or falls, your mortgage interest rate adjusts accordingly, usually by a fixed margin above the base rate.
Some tracker mortgages include specific terms, such as minimum or maximum rate limits (known as rate floors or caps). It’s important to review these conditions to understand how potential rate changes could impact your repayments.
Discount mortgages
A discount mortgage offers borrowers a reduced interest rate for a set period, calculated as a fixed percentage below the lender’s Standard Variable Rate (SVR). Since the SVR can change over time, the interest rate, and therefore monthly payments, on a discount mortgage will fluctuate in line with those changes. While the discounted rate can provide initial savings, borrowers should be prepared for potential increases in payments if the SVR rises.
It’s essential to review the terms of the discount deal, including how long the discount applies and any conditions.
Interest-only mortgages
Interest-only mortgages allow borrowers to pay just the interest on their loan each month, rather than repaying any of the original loan amount (the principal) during the mortgage term. As a result, monthly payments are lower compared to repayment mortgages. However, the full loan amount must be repaid in a lump sum at the end of the term.
This type of mortgage is typically suited to borrowers who have a solid repayment strategy in place (e.g. investments, savings, or the sale of assets) to ensure they can repay the full balance when the term ends.
Flexible mortgages
Flexible mortgages offer borrowers greater control over how they repay their loans. This type of mortgage allows you to make overpayments (either through extra lump sums or by increasing your monthly payments,) which can reduce the total interest paid and shorten the length of the mortgage term.
The flexibility to pay off your loan faster can be especially beneficial for those with irregular income or who anticipate having surplus funds at certain times. However, it’s important to check the lender’s terms, as some flexible mortgages may have limits or conditions on overpayments.
Guarantor mortgages
A guarantor mortgage is a type of home loan where a third party (such as a parent or close family member) agrees to cover the mortgage repayments if the borrower is unable to do so. By acting as a guarantor, they provide additional security for the lender, which can help the borrower qualify for a mortgage or access better terms.
Guarantor mortgages are often used to help first-time buyers, particularly those with limited income or little deposit, take their first step onto the property ladder. However, guarantors should be aware that they are legally responsible for the debt if the borrower defaults.
Shared Ownership mortgages
Shared Ownership mortgages support a government-backed scheme that allows you to buy a share of a property (usually between 25% and 75%) while paying rent on the remaining portion owned by a housing association. This can be a more affordable route to homeownership, especially for first-time buyers or those with lower incomes. You can use our Shared Ownership mortgage affordability calculator to see what you can afford.
Once you’re approved for the Shared Ownership scheme, it’s important to seek out lenders who specifically offer mortgages tailored for this arrangement. Over time, you will have the option to increase your ownership share through a process known as "Staircasing".
What is the mortgage process?
The mortgage process in the UK involves several steps to secure a home loan, including:
- Assessment of financial situation: Lenders will assess your income, expenses, credit history, and the amount of deposit you have.
- Mortgage application: Once you choose a mortgage lender, you’ll submit an application, providing all required documents such as proof of income and identification.
- Approval in principle: The lender may issue a “mortgage in principle,” which gives you an idea of how much you could borrow based on your financial circumstances.
- Offer and valuation: If your application is successful, the lender will make a formal offer. A property valuation will be carried out to ensure it’s worth the amount you're borrowing.
- Exchange of contracts: If you’re satisfied with the terms and conditions, you’ll exchange contracts with the seller, and a deposit will usually be paid.
- Completion: The mortgage loan is finalised, and you take possession of the property. At this point, monthly repayments begin.
What does remortgaging mean?
Remortgaging is the process of switching your current mortgage to a new deal, either with the same lender or a different one, without moving home. Many people choose to remortgage to get a better interest rate, lower monthly payments, or release equity in their property.
This can happen when your current deal comes to an end, or you may choose to remortgage earlier if it’s financially beneficial. The process typically involves applying for a new mortgage, going through a credit check, and having your property valued. Remortgaging can be a good way to save money, but it’s important to carefully consider any fees or early repayment charges from your current lender before making the switch.
Frequently asked questions about mortgages
To get approved, you’ll need to meet several criteria, including a good credit score, proof of stable income, and a deposit (typically 5-20% of the property value). Lenders will also assess your affordability by reviewing your monthly income and outgoings to ensure you can manage the repayments. The property you’re buying will be valued to ensure it’s worth the loan amount, and all these factors will help determine your approval.
The mortgage process usually takes between 2 and 6 weeks. It involves submitting your application, waiting for approval, and having the property valued. After the lender issues a formal offer, it can take more time to complete legal paperwork and exchange contracts. Delays can occur depending on your situation or how quickly the lender processes everything.
Missing a payment can lead to late fees and damage your credit score. If this happens, contact your lender right away to explore options, such as deferring a payment or setting up a new repayment plan. If missed payments continue, the lender may take legal action, including starting repossession proceedings, though most lenders will try to work with you to avoid this.
