What is a mortgage? Your basic introduction
Everything you need to know about mortgages and how they work
Last updated on
Oct 15, 2024 22:36
What is a mortgage? In simple terms, it’s a type of loan you take out to buy a property.
You usually borrow the money from a bank or building society (that’s the “mortgage lender”). You can take out a mortgage loan on your own or as a joint mortgage with one or more people.
The word “mortgage” has its roots in Old French – the literal translation is “death pledge.” Cheerful, we know. Thankfully, it’s nothing to do with your own death, it just means that the pledge (loan) dies (ends) when it’s fully repaid.
Today, when we use the word “mortgage,” we’re talking about both the loan itself and the legal agreement between you (the "borrower") and your lender.
Before you sign the contract, you and your lender will agree on terms and conditions like:
A mortgage can be between 5 and 40 years (most go up to 35).
The number of years you take to pay back your loan is called your mortgage term. The shorter the term, the more you pay off each year, and the sooner you become mortgage-free (owning your property outright).
A shorter term might also mean a lower total cost over the life of your loan – in other words, the total you’ll have paid at the end of your term, as you’d likely pay less in interest.
The flipside is that a shorter mortgage term usually means larger monthly mortgage payments, as you have to pay off more of the loan each month.
A mortgage broker (like Habito) can help you work out the best term for you.
Sadly, mortgage lenders aren’t lending money out of the goodness of their hearts. They’re doing it to make money in the long run. So with a mortgage, you pay back the amount you’ve borrowed, plus interest. You agree on an interest rate or rate before you sign the contract with your lender.
Let’s say you want to borrow £130,000. Your bank or building society offers to lend you the money you need at a rate of 3.5%, to be repaid over 25 years. That means you’ll pay back £651 a month over those 25 years, resulting in a total repayment of £195,311.
You can also choose the type of interest rate you’d like applied to your loan. Broadly, there are two types. The first is a fixed rate, which guarantees exactly what you pay over a particular length of time (for example, 2 or 5 years, or your full mortgage term). There’s also variable rates, which are less predictable, as they can go up as well as down.
At the end of your fixed-rate mortgage term, you can remortgage (change your mortgage deal) either by switching to a different lender, or by staying with your current lender but getting a different rate from them. Learn more about remortgaging.
When picking a mortgage deal, you can also choose how to pay back the loan: interest only or repayment.
Read more: The different types of mortgages
To get a mortgage, you’ll need a big upfront payment, called a deposit – sometimes called a “down payment.” This is usually 5%–10% of the total price of the property you want to buy.
For example, if you want to buy a £180,000 house, you’ll need between £9,000 and £18,000 as a deposit, borrowing the other 90%–95% from the mortgage lender.
The bigger the percentage of deposit you come up with upfront, the smaller the loan you have to pay off over the mortgage term.
Plus, many mortgage rates reduce for every 5% you can put down in your deposit. That means if you have a 15% deposit, you’ll enjoy a lower interest rate than if you had a 10% deposit, and so on.
Read more: How much do you actually need for a mortgage deposit?
Beyond a deposit, you’ll need to tick a few boxes with the mortgage lender before they let you borrow money. This is what’s known as their “eligibility criteria.”
Generally speaking, lenders want to know:
The lender uses the info above, along with their own unique criteria, to work out what’s referred to as your “affordability.” This means they want to be sure you can afford to pay back what you’ve borrowed.
When you’re ready to apply for a mortgage, your lender will ask for documents to prove your identity, address, income, and spending habits. Essentially, they want to make sure you can pay back the loan and that you’re not a fraudster.
See what you need to apply for a mortgage here.
It’s not just your deposit you need to factor in when getting a mortgage. There are fees and property taxes, too. These include:
On average, you can pay between £1,000 and £1,500 for legal work, including property searches, and checking and exchanging contracts.
You pay this fee when your mortgage application is sent. Sometimes, there’ll be an admin fee attached, covering the cost of arranging the valuation. The amount will vary depending on the price of the house, but it can cost anywhere from £150 to £1,500.
Short answer is: nope. You won’t be able to apply for a mortgage until you’ve found a specific home to secure the loan against.
But if you don’t have a property in mind, that’s OK. You can still start thinking about your mortgage in broad terms and apply for a mortgage in principle (MIP).
An MIP is a handy certificate showing what you can afford to borrow. It also shows estate agents and sellers that you’re serious about buying, and in a position to do it.
Get a mortgage in principle from Habito today. It’s free, and there’s no credit check!
A mortgage is what’s known as a “secured loan.”
The loan is “secured” against the property you’re buying. So, if you can’t pay back the loan, the lender can repossess your home and sell it to get back the money they lent you.
This doesn’t mean lenders are always ruthless repossessors – many will try to help you make your repayments first, if you’re struggling. For example, if your income has dropped for an unexpected reason, they may lower your monthly payments, change your payment dates, or offer you a short mortgage holiday (a break from paying your mortgage) to help you get your affairs in order.
If you’ve ever wondered, “what is a mortgage?” now you know! It’s a long-term loan designed to help you buy a property. We know it can sound a bit complex and scary, but it doesn’t have to be. So, if you’re ready to apply for a mortgage, Habito can help.
Get unbiased advice, then apply online with ease. And the best bit? It’s totally free, as we get paid by lenders. Start here.
To help you make up your mind, we’ve broken down the pros and cons here.
Wondering how to get a mortgage? Here’s everything you need to know, from saving a deposit to signing on the dotted line.
Habito specialises in helping you get the best mortgage or remortgage, all online, for free