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.

How do mortgages work?

Before you sign the contract, you and your lender will agree on terms and conditions like:

• The mortgage term: how long you’ll take to repay the loan
• The mortgage rate: how much interest the lender will charge you for the loan over this term
• The way you’ll repay: repayment or interest only

What is a mortgage term?

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.

What is a mortgage rate?

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.

How do you repay a mortgage?

When picking a mortgage deal, you can also choose how to pay back the loan: interest only or repayment.

• Interest only: every month, you only pay the interest on your loan. Your monthly repayments will be lower, but they won’t make a dent in the loan itself. At the end of the term, you’ll get a bill for the total loan amount, which means you’ll either need to have saved up in the meantime or sell your home to pay it back.

• Capital and interest (aka “repayment”): every month, you pay off an amount of the debt itself (the capital) and the interest, too. Month on month, your balance (the amount left on your loan) will go down and, by the end of your term, you’ll have paid off the loan in full.

Read more: The different types of mortgages

How do you get a mortgage?

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?

What else do you need to get a mortgage?

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:

• Your age (you need to be at least 18 to get a mortgage)
• Your UK residency status (you need to have lived in the UK for at least 3 years)
• The amount of money you want to borrow
• How much you’ve got saved as a deposit
• Your credit score
• Your employment status and income
• Your debts
• Your spending habits
• The type, size, and location of the property you want to buy (some lenders won’t lend on specific properties, like flats above bars, listed buildings, or ex-local authority properties)

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.

How much does a mortgage cost? 

It’s not just your deposit you need to factor in when getting a mortgage. There are fees and property taxes, too. These include: 

• Stamp Duty Land Tax (aka SDLT or just “stamp duty”): This is a tax you have to pay in England and Northern Ireland when you buy any property or land worth £125,000 and up. Check out our stamp duty calculator to understand how much you need to pay (and see how it works in Wales and Scotland too).
  
• Arrangement fee: Essentially an admin fee, you pay this to the lender for organising the mortgage. It’s typically around £999, but for very large mortgages, it can stretch to £1,499–£1,999.
  
• Booking fee: You pay this to the lender when you submit your application to secure the rate you want. Usually £100–£250, though some lenders don’t charge one (or they’ll roll it into the arrangement fee). This tends to be non-refundable, so if you don’t go ahead with the mortgage, chances are you won’t get it back.
  
• Legal fees: You’ll need a specialist property solicitor or a conveyancer to take care of the legal aspects of buying a house (which is called “conveyancing”). How much you pay will depend on the property price and whether it’s freehold or leasehold. Freehold means the seller owns the property and the land it’s built on. Leasehold means they own the property, but not the land.

On average, you can pay between £1,000 and £1,500 for legal work, including property searches, and checking and exchanging contracts.

• Valuation fees: Before approving a mortgage, lenders hire a surveyor to inspect the property. They want to know that it’s a sound investment to lend against, because if you don’t keep up with your mortgage repayments, they need to be sure they can sell the property and get back what they lent you.

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. 

• Bank transfer fee: The bank charges a small admin fee when you transfer large sums of money – like between lender and solicitor, and from your solicitor to the seller’s solicitor. Usually around £25 to £30.

Can you apply for a mortgage before you’ve found a property?

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!

Finally, what happens if you can’t pay your mortgage back?

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. 

The bottom line

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.