What is a mortgage?
What you'll learn
Understand what a mortgage is and the parts that make it up.
A mortgage is a loan to buy a property, secured against the property itself. You put down a deposit, the lender lends the rest, and you repay it with interest over a long term, usually 25 to 40 years. Because the loan is secured, the lender can repossess the home if you stop paying.
Five parts make up every mortgage.
| Part | What it is |
|---|---|
| Deposit | The cash you put in up front |
| Loan (capital) | The amount the lender lends you |
| Loan-to-value (LTV) | The loan as a percentage of the property's value |
| Interest rate | The price of borrowing, fixed or variable |
| Term | How long you take to repay, often 25 to 40 years |
Most UK mortgages are repayment mortgages: each monthly payment covers the interest plus a slice of the capital you borrowed, so the balance falls to zero by the end of the term. With interest-only, you pay just the interest and still owe the full balance at the end.
In the early years, most of your payment is interest, because interest is charged on a large outstanding balance. As the balance shrinks, more of each payment chips away at the capital. That is why overpaying early saves the most interest.
Key takeaways
- A mortgage is a long-term loan to buy a property, secured against that property.
- The main parts are the deposit, the loan, the LTV, the rate and the term.
- Repayment mortgages clear the balance over the term; interest-only does not.
- Early payments are mostly interest, so overpaying early saves the most.
Illustrative only, at an assumed 5% rate over 25 years. Real interest depends on your rate, term and overpayments.
Frequently asked questions
What is the difference between repayment and interest-only?
A repayment mortgage clears the balance to zero by the end of the term, because each payment covers interest plus a slice of capital. Interest-only pays just the interest, so you still owe the full balance at the end and need a separate plan to repay it.
What does loan-to-value (LTV) mean?
It is the loan as a percentage of the property's value. A £180,000 loan on a £200,000 home is 90% LTV. Lower LTV usually unlocks cheaper interest rates.
Can the bank repossess my home?
Yes. A mortgage is secured against the property, so if you persistently fail to pay, the lender can repossess it as a last resort. This is what makes the rate lower than unsecured borrowing.
General information, not financial advice. The value of investments can fall as well as rise, and figures and rules can change; check the current position before acting.