How does a mortgage work?

August 09, 2019 | 2 MIN READ

How does a mortgage work?

A mortgage is a long-term, secured loan used to buy property or land.

It works in 3 main steps. You agree a price for your home, and you pay your deposit, usually at least 5% of the property’s value. Then your lender loans you the money to pay the rest at an agreed interest rate. Finally, you pay back the lender, plus the interest, in monthly instalments over many years.

Because the loan’s secured against your property, it can be repossessed if you can’t keep up your repayments.

How much can I borrow?

That mainly depends on how much you earn, how big your deposit is, and your existing financial commitments. There’s more info on our mortgage page.

How much interest will I pay?

It depends on the deal you choose. With a fixed-rate mortgage, you’ll pay the same amount of interest each month until the end of that period.

After that, your lender transfers you to their standard variable rate, which is usually more expensive. Don’t worry – you can remortgage for a better deal before this happens.

If you opt for a variable rate mortgage, your lender can increase or decrease the amount of interest you’ll pay. The interest on these deals are usually linked to the Bank of England's base rate.

What happens if I want to sell my house?

There are a few different options available when you’re ready for a new house.

Some mortgage lenders let you port your existing mortgage to your new home. You effectively reapply for your mortgage deal, so your lender needs to be happy you can still afford the repayments, but can avoid early repayment charges.

If you need more money to move house, you can ask your lender for the additional funds you need. They’ll then assess if you can afford to pay them back.

If you’re not tied into your mortgage, and there aren’t any early repayment fees, you could get a new mortgage with a different lender for your next property.

Next steps to getting mortgage ready

  1. Find out more about saving a deposit for your first home
  2. Discover what lenders will want to know about your finances
  3. Use our Mortgage Matcher to find out what you could borrow when you’re ready