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How mortgages work

A mortgage is a loan to buy your home. You borrow money and pay it back with interest over
a period of time (the mortgage term) that you agree with the lender, usually a bank or building society.

The loan is secured against your home so if for any reason you are unable to repay it, the
bank or building society can sell you home to  get its money back.


This depends on your personal circumstances, such as you income and expenditure and whether
youre buying alone or with a  partner.

Its not a good idea to have a mortgage term that continues past retirement age unless you are sure that you will be able to afford the payments then.

How much can I borrow?


How much you can borrow:
Lenders should lend responsibly. This means they should consider whether you can afford the
mortgage repayments now and throughout the mortgage term. For example, some lenders offer
a  discounted  rate to start with, but will you be able to afford the repayments when the  
discounted rate ends??

Mortgage lenders have in the past offered to lend a sum based in a multiple of your salary (before tax) or your income if you  were self employed.

If you have other money coming in such as bonuses, overtime or commission, lenders may take account of only half of this  because it isnt guaranteed income.

It is more common now for lenders to make an affordability assessment when calculating how much they will lend you.

Each lender has its own method, but generally they all try to calculate your disposable income, taking account of:

Your total income.

Any money you owe, such as loans and outstanding credit card balances.

Any household bills and living expenses.

As well as considering whether or not you can afford the mortgage payments, the lender sets a limit on how much you can borrow as a percentage of the property's value (the loan to value or LTV).


You can choose to pay your mortgage back in one of the  following ways:


The payments you make to the lender every month reduce the amount you owe as well as paying the interest on the loan. So each month you pay off a small part of your mortgage.

Its a simple, clear approach- you can see your loan getting smaller. If you make all the agreed payments, the loan will be paid off in full by the end of the mortgage term.

However, in the early years your payments will be mainly interest, so if you want to repay the mortgage or move house, you'll find that the amount you owe wont have gone down by very much.

Interest Only

As the name suggests, your monthly payment only pays the interest charges on your loan- you dont reduce the loan itself. Because you are only paying off the interest your monthly payments will be lower than an equivalent repayment loan. It is very important that you arrange some other form of repaying the whole loan at then end of the term, for example through an investment or savings plan.

If you are thinking of getting an interest-only mortgage. Your main option is to save regularly so that you build up a lump sum that will pay off the loan at the end of the term. You should check the progress of the plan regularly. If it does not grow as expected, you will have a shortfall and you will need to think about further ways of making up the difference.

Types of mortgages available

Mortgage Features and Interest-Rate deals.

As well as choosing between a repayment and an  interest-only mortgage, you can also choose different features and  interest rate deals to go with it.

Offset Mortgages

With an Offset Mortgage, your bank current account, savings accounts, or both are linked to your mortgage. Your accounts are usually, but not always, held with the mortgage lender. Each month, the mortgage lender reduces the amount you owe on your mortgage by the amount in these accounts. It then works out the interest due on the balance of the mortgage. So, as your current account and savings balances go up, you pay less interest on your mortgage. As they go down, you pay more interest.

An Offset Mortgage can be tax efficient if you pay tax on your savings. This is because you don't earn any interest on your savings and so don't pay any tax on them. Instead you pay less interest on your mortgage.

The interest you save on your mortgage is usually more than the interest you would have earned after tax on your savings. This benefit is greater if you are a higher rate taxpayer.

Flexible Mortgages

This type of mortgage offers a number of flexible features. You can change your mortgage payments to suit your ability to pay.

Several flexible features are becoming more common, and they are not confined to loans that have flexible in their name. Consider which of the features are important to you.

Cashback Mortgages

Your lender may offer this with any of the interest-rate deals. The lender pays you a sum (for example 3-5% of the amount you borrow) shortly after you complete on your mortgage.

If you move to another lender in the early years, you must repay some or all the cashback you received.

Whichever mortgage you choose, youll then need to look at the interest-rate deals on offer.

Mortgage lenders offer different interest rates and also different deals.

Here are some of the most common types available:

You have two important decisions when choosing an  interest-rate deal:

Whether to choose a fixed or variable rate mortgage.

Whether to choose a short-term or longer-term deal.

Each one has advantages. The best for you depends on your practical needs and circumstances



Your payments are the same every month for a certain period, say, two, five or ten years or longer. At the end of the deal period, the lender  usually charges you its standard variable rate (unless the rate is fixed  for the whole term).

Tracker (changes in line with a specified rate)
With this variable-rate loan, the interest is a set amount above or below the Bank of England or, some other, base rate, and so always  tracks changes in that rate. At the end of the deal period, the lender  usually charges you its standard variable rate.

Your payments are variable, but they are set at less than the lenders  standard variable rate for a period of time. At the end of this period, the lender usually charges you its standard variable rate.

Your payments are variable and often linked to a base rate, but fixed  not to go above a set level (the cap or ceiling) during the deal  period. At the end of the period, the lender usually charges you its  standard variable rate.

This may be used un combination with either, or both capped rate or a  tracker. Your payments are variable but will not fall below a set level  (the collar or floor).Standard Variable Rate

Standard Variable Rate
Your payments go up or down at the lenders discretion. Their decision  may be influenced by changes in the Bank of England interest rate.



Legal Disclaimer

A combination of repayment and interest only

Before taking out the mortgage, you agree with the lender how the loan will be split between the two ways of paying it back.

Fees that I need to take into account

Estate Agency Fees



To the Estate Agency, for marketing and selling  your home.


Typically 1-3% of the selling price- always ask for a quote.

Stamp Duty and Land Tax

To the Government, as a tax on buying property.

Varies depending on the purchase price.  You can find out more  information on the  governments website at

Legal Fees

To the Solicitor for searches, land registry fees and so on.

Survey Fee

To the surveyor, if you want a more in-depth report on the property.

Varies according to the surveyor and the type of report- always ask for a quotation.

Budget for at least 1,000 pounds.
Always ask for a quotation.