Understanding mortgages

A mortgage is probably the biggest financial commitment you’ll ever make — and understanding the basics before you start viewing houses saves real money. This guide covers the essentials: how the numbers work, the types of mortgage, and the costs nobody warns you about.

What a mortgage is

A mortgage is a loan secured against your home. You provide a deposit (usually at least 5% of the price), the lender provides the rest, and you repay it with interest over a term — typically 25 years. If you can’t keep up payments, the lender can repossess the home, which is why affordability matters.

The three numbers that matter

• Loan amount — the price minus your deposit
• Interest rate — the cost of borrowing, which determines your payment
• Term — how long you repay, which spreads the cost

Worked example — £250,000 mortgage over 25 years. At 4.5%, the monthly payment is about £1,386. At 5%, about £1,462. That 0.5% difference is roughly £76 a month — over £22,000 across the term. Rates matter.

Fixed vs variable

• Fixed rate — your interest rate (and monthly payment) is locked for a set period, typically 2–5 years. Certainty, but you won’t benefit if rates fall, and you’ll face an early repayment charge if you exit early.
• Variable rate — moves with the lender’s standard variable rate or the Bank of England base rate. Payments can go up or down.

Most buyers fix for 2–5 years, then remortgage to a new deal when the fix ends.

How much can you borrow?

Lenders typically offer around 4–4.5× your income, but affordability checks look at your full picture: debts, credit commitments, dependants, childcare and everyday spending. A mortgage broker helps you find lenders who’ll accept your situation.

Loan-to-value (LTV)

LTV = mortgage ÷ property value. A £225,000 mortgage on a £250,000 home is 90% LTV. Lower LTVs (bigger deposits) get better rates, because the lender’s risk falls. Improving your LTV is one of the quickest ways to lower your payment.

The costs beyond the deposit

Budget for these alongside the deposit:

• Stamp duty — a one-off purchase tax; use the stamp duty calculator for your figure
• Valuation and survey fees — a few hundred pounds
• Conveyancing/legal fees — typically £1,000–£1,500
• Buildings insurance — usually required from completion
• Mortgage arrangement fee — sometimes hundreds of pounds, sometimes added to the loan

Before you commit

Check your credit record (see our understanding credit guide), get an Agreement in Principle, and compare deals — don’t just accept your bank’s offer. A small rate difference is worth thousands over a 25-year term.

See the numbers

The mortgage calculator models payments across terms and rates, and the stamp duty calculator shows the tax you’ll owe on your purchase price.