What Is a Mortgage?

Looking to learn all about mortgages? This guide covers everything you need to know, from the different types of mortgages available to finding the perfect deal for your needs.

Whether you’re a first-time buyer, considering remortgaging, or just looking to expand your knowledge, this comprehensive mortgage guide has you covered. To estimate how much you could borrow, check out our Mortgage Calculators. For today’s best rates and deals, try our Mortgage Comparison Tool.

What is a mortgage, and how do they work?

A mortgage is a loan to buy property or land for residential or investment purposes. The mortgage lender will charge interest on the amount you borrow (otherwise known as the capital), and repayments will be made over a pre-agreed period, from as little as a few years to four decades.

The loan is secured against the property until it has been repaid, which means your home can be repossessed if you fail to make the repayments or breach your contract in any other way.

There are two ways you can repay your mortgage: either through a repayment or an interest-only arrangement.

• With a repayment mortgage, your monthly repayments will cover both the interest you owe and a portion of the capital, which means at the end of the term you’ll be mortgage-free and will own your home outright.
• An interest-only mortgage is slightly different, in that your monthly payments will only cover the interest owed on the amount you borrowed. This means you’ll need another method to repay the capital once the term comes to an end.

What types are available?

Once you’ve decided between a repayment or interest-only deal, you’ve then got several other mortgage types to choose from, including:

• Fixed-rate mortgages. As the name suggests, the interest rate is fixed for a set time, generally between two and 10 years, but in some (rare) cases, as long as 40. The benefit of this kind of deal is that your repayments will be guaranteed for the term of the offer period.
• Tracker mortgages are a variable rate and often track the base rate but with set margins applied (e.g. base rate +2%) over an initial term.
• Discount mortgages offer a discount on the lender’s standard variable rate (SVR) for several years.
• Capped-rate mortgages are again variable, but the lender will apply a cap on the highest rate you’ll be charged (and sometimes a collar on the lowest) over the initial period.
• Standard variable rate (SVR) mortgages charge the standard rate of interest as set by the mortgage provider. The rate can change at any time, often in line with the Bank of England base rate, and as such, repayments can similarly fluctuate. The SVR is usually called the revert rate, as borrowers would only pay it once the initial fixed or variable term ended.
• Offset mortgages are linked to another account, normally a savings account, with the balance being “offset” against your mortgage, so you pay less interest.
• Remortgages. A remortgage is simply moving your mortgage to another lender or a new deal, often at the end of an initial term and/or to get a better rate.
• Cashback mortgages offer a cash incentive for taking out the mortgage deal.
• Flexible mortgages offer a greater degree of flexibility in repaying the balance, such as allowing you to make overpayments or take payment holidays.
• Unencumbered mortgages are those placed on a property you own outright, often to release equity.
• Joint mortgages allow you to buy a property with another person (or people) and can come in different forms, such as joint borrower sole proprietor mortgages.

Given the vast range of mortgage types available, it’s often wise to consult a mortgage broker who can help you determine the type that best suits your particular requirements.

Investment mortgages

Investment mortgages are a specific subset purely used to buy a property to turn a profit rather than for residential purposes.

This includes:

• Buy-to-let mortgages allow you to buy a property to rent out to tenants.
• Commercial mortgages allow you to buy a commercial property, premises, or even a business itself.
• Buy-to-sell mortgages allow you to buy a property and sell it shortly afterwards. They’re a form of short-term finance often used by those who want to renovate and quickly put their property back on the market.

You may encounter different types of mortgage loans that can also be used for investment purposes, such as bridging loans and development finance. These are short-term loans (typically for 12-36 months) that can, for example, help finance the purchase of a property with a quick turnaround or fund a development project. Flexible terms and interest-only arrangements are commonplace.

Specialist mortgages

More specialised deals can include:

• First-time buyer mortgages This type of home loan usually comes with high LTVs (loan-to-value), typically around 90% or, in some cases, as high as 95%, and, therefore, higher mortgage rates. Still, it can be an excellent way for those with low deposits to climb the ladder. You may also come across gifted deposit and guarantor mortgages, which offer ways for family members to help new buyers.
• Help to Buy. This mortgage scheme is a Government-backed initiative offering financial assistance to those looking to buy their first home.
• Shared ownership mortgages allow you to buy a percentage of the property and rent the rest, with the option of purchasing a greater proportion over time.
• Self-employed mortgages are available to self-employed applicants, and lenders use different eligibility criteria to account for variable incomes and accounting procedures.
• Bad credit mortgages are designed for people with less-than-perfect credit histories who may struggle to source finance through mainstream lenders.
• Second-home mortgages are for those with more than one property, often with stricter criteria to ensure you can keep up with the repayments on both properties.
• Self-build mortgages are for those who want to build their own home. The funds are often released in stages that coincide with construction.
• New-build mortgages are for newly built properties that can often be more difficult for lenders to value.
• Overseas mortgages are for those who want to move abroad or perhaps have a holiday home overseas. In a similar vein, expat mortgages allow those already living overseas to buy a property either in their country of origin or the one they currently reside in.
• Second-charge mortgages allow you to take out additional lending on your property, often to release equity or as an alternative to a standard remortgage.
• Retirement mortgages are specifically for those approaching retirement for whom standard deals would be difficult. They come in several forms, including lifetime (a kind of equity release) and retirement interest-only mortgages.

How to get a mortgage

If you’re wondering whether you can get a mortgage, the answer is yes, but there are several steps you’ll need to take to secure one.

The mortgage application process can be daunting if you’ve never done it before. Our guide to mortgage applications includes step-by-step instructions about how to apply, but the first step should be to speak to a mortgage broker.

Get matched with the right mortgage broker

A mortgage broker should be the first port of call for anyone looking to arrange a new mortgage loan, not only for their expertise but also for their lender contacts. But how can you find the advisor to suit? We can help.

Our unique, no-obligation broker matching service will connect you with a broker who can accommodate your requirements, whether you’re looking for a simple remortgage or need something more specialist. Just call us on 0330 818 7026 or make an enquiry, and we’ll take it from there.