Homebuyer FAQs: What is a mortgage?

A mortgage is a type of loan designed specifically for purchasing property or land, with the property serving as collateral for the loan. That means that if you default on repaying the loan, the lender can take ownership of your home.

A mortgage loan has two parts: the principal, which is the amount borrowed, and the interest, which is the cost of borrowing the principal. UK mortgages can be repaid in different ways. The most common of these is a repayment mortgage, where monthly payments repay both interest and part of the principal, gradually reducing the loan amount and increasing the homeowner’s equity – the amount of the home they own – over time. Alternatively, with an interest-only mortgage, the monthly payments cover only the interest, and the principal is repaid in full at the end of the term.

Mortgage terms typically range from 25 to 35 years, with shorter terms resulting in higher monthly payments but less interest paid overall. The length of mortgage available to you may vary depending on your age, and specifically how much longer you will be of working age. 

Interest rates on mortgages can be fixed, where the rate remains the same for a specified period, or variable, where the rate can change based on the lender's standard variable rate (SVR) or other benchmarks. Tracker mortgages, for example, follow the Bank of England base rate plus a set percentage.

Buyers usually need to provide a deposit, typically between 5% and 20% of the property's value, with higher deposits often securing better mortgage rates. This is because you’re paying for more equity in your home upfront and requiring a smaller loan amount.

There are additional costs involved in purchasing a UK home, including Stamp Duty Land Tax (SDLT) on properties over a certain value, valuation and survey fees to assess the property's condition, legal fees for conveyancing solicitors, and mortgage arrangement fees charged by the lender.

The process of obtaining a mortgage involves several steps: an initial financial assessment by the lender, an approval in principle, a detailed full application, a property valuation, and finally, a formal mortgage offer. Upon acceptance, the funds are released to complete the purchase.

You can read more about the full mortgage process here.

Various mortgage types cater to different needs, such as first-time buyer mortgages with incentives or buy-to-let mortgages for rental properties. Mortgages in the UK are regulated by the Financial Conduct Authority (FCA), ensuring fair treatment and transparency for borrowers. Consulting a mortgage broker can help navigate these complexities and find the best options available.

Disclaimer: The information provided in this blog post is for informational purposes only and does not constitute financial advice. While we strive to provide accurate and up-to-date information, individual circumstances may vary, and readers are encouraged to seek personalised advice from qualified financial advisors or mortgage brokers before making any financial decisions. We do not accept any liability for the consequences of actions taken based on the information provided herein.