What is a mortgage?

How mortgages work

Mortgages are a type of loan, specifically used to buy property or land.

They work by allowing you to buy a home or business without having to save the full amount. You'll likely save a mortgage deposit and the rest of the cost will come from a mortgage provider or lender.

When you buy a property with a mortgage, you need to pay that money back, plus interest. Most people pay their mortgage back over several years by paying a little each month along with the interest from that month.

If your mortgage is "interest only", then you'll only pay back the interest each month. But you'll usually have agreed a date for when you're going to pay back the full amount.

Getting a mortgage

If you're ready to make the move from renting to owning, it might be time to speak to a mortgage adviser. This professional can tell you how much you could potentially borrow and how much it'll cost you to pay back.

They can check what interest rates are currently being offered and advise you on which provider you should apply for a mortgage with.

Your mortgage provider will then apply for a "decision in principle". This is an agreement from a mortgage lender to lend you the money you need, but it's not binding.

After you've had an offer accepted, your mortgage adviser will usually apply for the mortgage that you've agreed on your behalf. You'll need to supply them with pay slips, bank statements and ID.

Alternatively, you can apply for a mortgage directly through a provider without using a mortgage advisor, but it's a good idea to shop around to make sure you're getting the best rate available to you.

Mortgage in principle

Also known as a "decision in principle", this is a document that confirms a mortgage provider is willing to lend you an amount of money, in theory.

The agreement is usually based on information you've provided that hasn't yet been checked. They're saying that, assuming everything you've told them is accurate, the property you're buying is worth that amount and that nothing has changed, they will lend you the money you need to buy a property. But you'll still need to apply in full to get the money.

Some estate agents ask you to have a decision in principle already before they'll let you view properties.

The mortgage in principle will usually have an expiry date on it.

Repayment mortgages

If you have a repayment mortgage, you'll pay back the amount you've borrowed over time. Every time you make a payment, you'll pay interest and some of the capital (the amount you own).

Your mortgage provider will be able to give you a schedule of payments which will show you how many payments you'll make with your current deal and what date they expect you to have paid your mortgage off completely.

The alternative is an "interest-only mortgage". With an interest-only mortgage, your regular payments will only pay off the interest accrued. The amount you owe won't go down.

Mortgage brokers

Also known as "mortgage advisers", mortgage brokers are professionals whose job it is to help you find and apply for the right mortgage for you.

They can be independent, meaning they'll look at the whole mortgage market to make a recommendation to you. Or, they can be employed by a mortgage provider, in which case they're likely to only recommend that provider's mortgages. Some will receive commission if they recommend, and you choose, certain mortgage products, but they have to tell you if this is the case.

It's worth asking if they're independent when you're looking for a mortgage broker and finding out how much they charge if they are.

Loan-to-value ratio

Put simply, this is the percentage of a property that's paid for by a loan (mortgage).

So, if a property cost £300,000 and the mortgage is £250,000 (you put in £50,000 of your own money as a deposit), the loan-to-value is 83%.

£250,000 divided by £300,0000 = 0.83

0.83 x 100 = 83%

Mortgage overpayments

Most mortgages will let you make extra payments to bring down the amount you owe. Every time you do this, you reduce the amount you need to pay interest on so it can make a big difference in the long term.