Mortgages explained
At Habito, we’re on a mission to simplify mortgages. We don’t think they should be complex, and we don’t like jargon. This short guide explains what a mortgage is and how they work.
Last updated on
May 9, 2025 15:24
At Habito, we’re on a mission to simplify mortgages. We don’t think they should be complex, and we don’t like jargon. This short guide explains what a mortgage is and how they work.
A mortgage is a loan that you use to buy a property. It’s a legal agreement between you and a mortgage lender, which is usually a bank or building society, but there are also specialist lenders that deal purely with mortgages.
Each mortgage has terms and conditions, which set out how much the loan will cost you and how you’ll repay it. Usually, a mortgage is secured on the property you are buying, which means that if you stop repaying the loan, your lender will be able to take ownership of it.
A mortgage is a loan that helps you buy a home, but you’ll still need to put down a deposit (that’s the upfront cash contribution). The size of your deposit affects how much you can borrow and is used to calculate something called your Loan-to-Value ratio, or LTV for short.
Example: If you have a deposit equal to 10% of the property value, you would be borrowing at 90% LTV - or 90% of the total property value. In general, the bigger your deposit, the better your chances of unlocking lower interest rates, but every lender’s different, and the right deal depends on your situation.
Lenders use LTV to assess how much risk is involved with a particular loan - not the person applying, but the overall borrowing arrangement. A higher LTV means there’s a smaller cushion if property prices fall, so rates are often a bit higher to reflect that.
When you borrow money from a lender they need to benefit from the arrangement, so they charge interest - an additional amount you pay back on top of what you have borrowed. This is usually charged monthly over the full mortgage term.
A mortgage term is the full length of time that you have the loan. The average length of mortgage term in the UK is around 30-35 years, but can be longer or shorter, depending on your needs and circumstances.
There are different interest rate types to choose from, and alongside your LTV, this is how your interest rate is calculated.
To get a mortgage, you have to be approved for the loan by a lender. Each lender lays out a set of conditions that they want customers to meet to make them confident enough to lend to them, known as criteria.
Criteria vary from one lender to the next, which is why it can sometimes be beneficial to use a mortgage broker, like ourselves. It’s important to understand that you can qualify for a mortgage with one lender but be declined by another, due to their differing criteria.
How we can help, as a mortgage broker, is to ensure you apply with a lender whose criteria you’re able to meet. Because we’re a whole-of-market broker, we have access to a wide range of mortgage deals across many lenders, and can easily scan criteria to find a match!
Some examples of what lenders will be looking for in their criteria are:
The mortgage industry is rife with terminology and jargon, so even those people who fully understand what a mortgage is and how it works can, understandably, be confused about certain elements of mortgages.
Here we answer some of the most common FAQs related to mortgages:
There are lots of different types of mortgages available, and which type you need will depend on a number of factors, including your financial circumstances, your preferences, the type of property you plan to buy and how you intend to use it.
This is simply a mortgage that you take out with someone else and are responsible for repaying that mortgage with. Joint mortgages are not only for couples, you can take a mortgage jointly with family members or friends, and some lenders allow up to 4 people to apply for a mortgage together.
Also called sub-prime or bad credit mortgages, this refers to mortgages offered by some specialist lenders designed for people who’ve struggled with their finances in the past. This means that, even if you have a poor credit score, you may still be able to get a mortgage.
If you want to buy a property to rent out as an investment, rather than to live in, you’ll need a buy-to-let mortgage. These are used by landlords and are often set up on an interest-only basis, with the intention of repaying the loan by selling the rental property at the end of the mortgage term, although this depends on market conditions and carries risk.
With this type of mortgage, someone (usually a family member or close friend) agrees to cover your mortgage repayments if you’re unable to - they act as a guarantor, and they’re legally on the hook if things go wrong.
Guarantor mortgages aren’t very common these days. Instead, many people go for a Joint Borrower, Sole Proprietor (JBSP) mortgage, where someone helps with the mortgage without being named on the property deeds. JBSP mortgages can be a good alternative, but they still come with responsibilities for the joint borrower, so it’s important to get proper advice before going ahead.
There is a range of home ownership schemes available through the government and property builders, which are intended to make it easier for people, first-time buyers in particular, to buy a home. This might be through helping with deposit costs, discounting certain properties or allowing you to buy shares of a house, making the mortgage smaller.
You’ll often spot these terms in the small print when comparing mortgage deals. They stand for Annual Percentage Rate (APR) and Annual Percentage Rate of Charge (APRC). Both are designed to help you understand the overall cost of a mortgage, including interest and fees, shown as a yearly percentage.
APRC is based on the assumption that you’ll keep the same mortgage for the full term, which helps with comparing deals. In real life, many people switch or remortgage before then, so while the APRC gives a useful benchmark, your actual costs may differ.
Porting a mortgage simply means taking a mortgage with you to a new property if you decide to move house. Your lender would need to agree with your property choice, but many mortgages are now portable.
This is the point in the property buying process where things get legally serious. Once you exchange contracts, both the buyer and seller are legally committed to going ahead with the sale. You can technically still pull out after this point, but it usually means losing your deposit, and possibly facing other penalties too.
Equity is the element of your property that you already own, so includes your deposit and any of the loan that you’ve repaid. To calculate your equity, you need to look at the current value of your property minus your outstanding loan.
Keep in mind that your property value changes over time, which can also influence your equity. Negative equity is when you owe more than the current value of your property, and usually occurs if your property value falls.
Equity is used instead of a cash deposit when you remortgage to determine the loan-to-value of your remortgage.
Yes, it’s possible to have multiple mortgages at the same time, so long as you’re able to afford the repayments for all of them. Mortgages can be used for different purposes, so it’s not uncommon to have a residential mortgage on your own home and also a buy-to-let mortgage, for example.
Remortgaging is when you move from your current mortgage deal to a new one, usually because your initial deal has ended and you’re about to be moved onto your lender’s Standard Variable Rate (SVR), which is often more expensive.
You can remortgage by switching to a new lender, or you can stay with your current one and just switch to a new deal with them. That second option is called a product transfer — it’s technically still a remortgage, just with less paperwork (and usually no legal work).
The Bank of England (BoE) base rate is the UK’s official interest rate, and it has a big say in how expensive borrowing money becomes. It doesn’t set every mortgage rate directly, but it pulls a lot of strings. If you’re on a tracker mortgage, your rate will usually move in line with any base rate changes. Variable-rate deals tend to shift in response too. Fixed-rate mortgages work a bit differently - they’re more influenced by what’s happening in the wider money markets, like swap rates.
Sometimes called the title deed or the legal charge, the mortgage deed is the document that details property ownership - so names you as the legal mortgage holder. They also include details of the mortgage agreement and are usually held in digital form by the Land Registry.
If you remortgage with a different lender, you sign a new one and your conveyancer sends the new deed to the Land Registry.
Your home may be repossessed if you do not keep up repayments on your mortgage. Mortgage offers are subject to status and lender criteria.
Last updated: 28/04/2025
[Disclaimer] This content is intended for general guidance and is not a substitute for personalised mortgage advice.
Habito specialises in helping you get the best mortgage or remortgage, all online, for free
