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What is a mortgage?

Written by Ines Pena, Digital Content Executive

A mortgage is simply money lent to you by a mortgage lender to buy a property. With most mortgages, you'll pay this money back over time by paying a set amount each month.

So why do they feel so complicated? Well, to start with, there's hundreds of different mortgages to choose from in the UK and they all come with different interest rates, repayment terms and rules about who can open them and how you can pay the money back.

Don't panic. We've broken down the common phrases you'll hear about mortgages and explained how they work so you can start your property search knowing what to expect.

How do mortgages work?

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

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.

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.

How do you get 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.

They'll also help you apply for a mortgage when you're ready. You'll need to supply them with all sorts of paperwork, including payslips, bank statements and ID.

The home-buying process

Find out what you can afford.
You first step is speaking to a mortgage advisor. They’ll work out the best deal based on how much deposit you have, how long until you retire (most lenders will want the mortgage repaid before you retire), your income and how much you can afford to pay each month.
Apply for a mortgage-in-principle.
Your mortgage advisor can apply for a “mortgage in principle”. This is simply asking the mortgage lender if they would, in theory, lend you the money based on how much you earn etc. It’s not legally binding, so they can change their mind but it gives you a good idea of how much you can spend on your home.
Make an offer!
Find a property you want to buy and tell the estate agent how much you're willing to pay for it.
Apply for a mortgage.
Once you've had an offer accepted, you can ask your mortgage adviser to formally apply for the mortgage from the lender.

Paying your mortgage

On the day you get your keys, you’ll start repaying your mortgage. Your lender will have sent you a breakdown of how you’ll do this, including the interest you’ll pay.

Generally, you’ll have agreed to repay your mortgage over a set term, for example 30 years. The total amount you'll pay over that period of time will be the amount you borrowed plus interest. At the end of the mortgage term, you’ll own your home mortgage-free.

The quicker you pay your mortgage off, the less interest you’ll pay overall, but this can mean paying more each month to reduce the amount you owe quicker.

The amount of interest you pay on top of the money you borrow will depend on the borrowing interest rate.

You can agree to a “fixed interest rate”, which means you and your lender agree an interest rate and they guarantee they won’t change it for a set period of time, for example five years. This protects you from interest rates going up, but means you can’t take advantage if interest rates drop. Lenders tend to offer a lower interest rate if you’re happy to agree to a rate for a longer period. You can renegotiate with your lender at the end of the fixed period.

Alternatively, you could choose a “variable interest rate mortgage”, which means that you’ll pay whatever the interest rates currently are. When you take out your mortgage, you might find that this is lower than the rates being offered for fixed interest rates, but if mortgage rates go up then you’ll need to pay more each month so it is more of a gamble.

Your mortgage broker will be able to talk you through your different options and help you decide what’s right for you.

Can I afford a mortgage?

If you're already paying rent each month, paying this amount to your mortgage lender instead of your landlord can be a lovely feeling!

Each month you'll own slightly more of your own property, instead of helping your landlord pay off their own mortgage. And, once you've got the keys, you can renovate and decorate to your heart’s content.

But you need to know that you can comfortably afford to make your monthly repayments before taking on a mortgage.

Bear in mind that it's a good idea to take out life insurance and critical illness cover that will pay off your mortgage if you die or are unable to work. This is an extra cost that you'll also be taking on.

The amount you pay each month will depend on:

how much you've borrowed
how many months you're paying your mortgage back for
how much deposit you pay (a mortgage deposit is usually around 10% of the value of the house, but it can be as low as 5%, or even 0% in rare cases)
the interest rate - how much the bank will charge you to borrow the money.

You will be told exactly how much this is before you agree to anything and mortgage lenders have a duty not to lend you more money than you can afford to pay back.

Discuss with your mortgage broker how much you can reasonably afford each month and they’ll let you know how much you can probably borrow. It’s then up to you if this is enough to buy a property that you want to live in.

Keep in mind other costs on top of your monthly mortgage. Insurance is one but there's also stamp duty if you've owned property before, moving costs, buying your own furniture and paying your mortgage advisor.

Most importantly: get started

Got £25 in your current account? If you put it in a lifetime ISA now you'll be taking your first big step towards owning your own home. OneFamily's Lifetime ISA is a stocks and shares product, which means your money is invested in the stock market. While there is good potential for it to therefore grow in the long-term, there is a risk you could lose money.

Not yet sure if now’s the time? Sign up to receive our lifetime ISA guide by email using the form on this page to find out more about this savings shortcut.