What is a mortgage?

What is a mortgage?

A mortgage is a loan you take out to help you buy a property. You usually pay it off over a period of several years while you are living in the property, which means your lender can take it back if you don’t keep up with payments.

A typical mortgage term is usually 25 years, but some lenders will allow longer terms of up to 30 years or even longer, depending on your age and circumstances. You can get a shorter term if you want, but your monthly payments will be more.

How does a mortgage work?

When you take out a mortgage, your lender (bank or building society) gives you the money to buy the property. You then pay the lender back each month. This monthly payment usually covers:

• Part of the amount you borrowed (the capital)
• Interest charged by the lender for the loan

Most mortgages have a fixed period for the interest rate at the start, after which it can change. You can also choose from different repayment styles to suit your budget and goals.

Types of mortgage explained

There are several main types of mortgage.

Fixed rate mortgage

Your interest rate stays the same for a set period, usually 2 to 5 years but they can be 10 or longer. This gives you predictable monthly payments but might have higher rates than other types.

Variable rate mortgage

With this type of mortgage, your interest rate can go up or down over time. If interest rates drop, your payments will get cheaper, but if interest rates rise, so will your monthly repayment.

Tracker mortgage

The interest rate is linked to the Bank of England’s base rate. It can go up or down depending on changes to the base rate, meaning your payments can vary.

Offset mortgage

Your savings account is linked directly to your mortgage. Instead of earning interest on your savings, the money in your savings account is used to reduce the amount of your mortgage that interest is charged on.

Interest-only mortgage

You only pay the interest each month, so your monthly payments are lower. However, you’ll still owe the original loan amount at the end of the term, which means you need a repayment plan in place.

Who can get a mortgage?

Lenders usually look for someone who:

• Is over 18
• Has a steady income
• Has a good credit history
• Can afford the repayments

They will also check the property you want to buy to make sure it’s worth the loan amount.

How much deposit do I need for a mortgage?

Most lenders ask for a deposit of at least 5% of the property’s value. A bigger deposit, such as 10% or 20%, can unlock better mortgage deals with lower interest rates. Your deposit shows the lender you’re committed and reduces their risk.

First-time buyer mortgage basics

If you’ve never bought a house before you’ll be classed as a first time buyer. Because you’re a first time buyer you might be able to take advantage of schemes offered by both the government and house builders that can help get you on the property ladder.

The first step to getting your mortgage is to work out how much you can borrow and what monthly payments you can afford. To do this you can use our simple mortgage calculators.

Government mortgage schemes

Government schemes are designed to help people get on the property ladder, but will come with certain criteria you’ll need to meet to be eligible.

Shared ownership

Buy part of the property and pay rent on the rest

First Homes scheme

Discounted homes for local first-time buyers and key workers

Mortgage guarantee scheme

Helps lenders offer 95% mortgages to buyers with smaller deposits

Right to Buy

Allows eligible council and housing association tenants to buy their home at a discount

How much can I borrow?

How much you can borrow will depend on your income, spending, debts, and the size of your deposit. Lenders usually offer up to 4–5 times your annual income, but they will also check your outgoings to make sure repayments are affordable. See how much you caould borrow with our mortgage calculator.

What does a mortgage adviser do?

A mortgage adviser can help you understand your options and find the most suitable deal. They’ll compare lenders, explain the terms, and guide you through the application. Some advisers work for one lender, while others are independent and can search across the whole market. Your L&C mortgage adviser has access to over 90 lenders and 1000s of deals, some of which are exclusive to L&C.

What is a mortgage term?

The mortgage term is how long you have to repay the loan. Common terms are 25 or 30 years, but it can be shorter or longer. A longer term usually means smaller monthly payments but more interest overall. This shouldn’t be confused with a fixed rate mortgage, which is where your deal will last for a certain amount of time, but you won’t pay off the mortgage during that term.

What is a mortgage repayment?

A repayment is the amount you pay your lender each month. It usually covers the capital (the amount you borrowed) and the interest. If you have a repayment mortgage and make all payments on time, you’ll fully own the property by the end of the term.