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Home > Lifetime ISA > First-time buyers > What is a mortgage?

What is a mortgage?

A mortgage is simply money lent to you by a mortgage lender to buy a property. With most mortgages, you'll pay this money back over time by paying a set amount each month.

So why do they feel so complicated? Well, to start with, there's hundreds of different mortgages to choose from in the UK and they all come with different interest rates, repayment terms and rules about who can open them and how you can pay the money back.

Don't panic. We've broken down the common phrases you'll hear about mortgages and explained how they work so you can start your property search knowing what to expect.

Mortgages simplified

"Mortgage broker" or "mortgage advisor". A professional who can work out how much you are likely to be able to borrow from a mortgage lender. They'll search for the best mortgage for you and even apply on your behalf.

Some mortgage advisors won’t charge you for their services as they’ll be paid by the mortgage lender you use, but some will ask you to pay their fee so it’s worth finding out if you'll need to pay them before you start the process.

Applying for a mortgage

  1. Finding a mortgage. You first step is speaking to a mortgage advisor. They’ll work out the best deal based on how much deposit you have, how long until you retire (most lenders will want the mortgage repaid before you retire), your income and how much you can afford to pay each month.
  2. Applying in principle. Your mortgage advisor can apply for a “mortgage in principle”. This is simply asking the mortgage lender if they would, in theory, lend you the money based on how much you earn etc. It’s not legally binding, so they can change their mind but it gives you a good idea of how much you can spend on your home.
  3. Making an offer! Find a property you want to buy and tell the estate agent how much you're willing to pay for it.
  4. Applying for real. Once your offer is accepted, the mortgage broker will then formally apply for the mortgage from the lender.

Paying your mortgage

On the day you get your keys, you’ll start repaying your mortgage. Your lender will have sent you a breakdown of how you’ll do this, including the interest you’ll pay.

Generally, you’ll have agreed to repay your mortgage over a set term, for example 30 years. The total amount you'll pay over that period of time will be the amount you borrowed plus interest. At the end of the mortgage term, you’ll own your home mortgage-free.

The quicker you pay your mortgage off, the less interest you’ll pay overall, but this can mean paying more each month to reduce the amount you owe quicker.

The amount of interest you pay on top of the money you borrow will depend on the borrowing interest rate.

You can agree to a “fixed interest rate”, which means you and your lender agree an interest rate and they guarantee they won’t change it for a set period of time, for example five years. This protects you from interest rates going up, but means you can’t take advantage if interest rates drop. Lenders tend to offer a lower interest rate if you’re happy to agree to a rate for a longer period. You can renegotiate with your lender at the end of the fixed period.

Alternatively, you could choose a “variable interest rate mortgage”, which means that you’ll pay whatever the interest rates currently are. When you take out your mortgage, you might find that this is lower than the rates being offered for fixed interest rates, but if mortgage rates go up then you’ll need to pay more each month so it is more of a gamble.

Your mortgage broker will be able to talk you through your different options and help you decide what’s right for you.

Can I afford a mortgage?

If you're already paying rent each month, paying this amount to your mortgage lender instead of your landlord can be a lovely feeling!

Each month you'll own slightly more of your own property, instead of helping your landlord pay off their own mortgage. And, once you've got the keys, you can renovate and decorate to your heart’s content.

But you need to know that you can comfortably afford to make your monthly repayments before taking on a mortgage.

Bear in mind that it's a good idea to take out life insurance and critical illness cover that will pay off your mortgage if you die or are unable to work. This is an extra cost that you'll also be taking on.

The amount you pay each month will depend on:

  • how much you've borrowed
  • how many months you're paying your mortgage back for
  • how much deposit you pay (a mortgage deposit is usually around 10% of the value of the house, but it can be as low as 5%, or even 0% in rare cases)
  • the interest rate - how much the bank will charge you to borrow the money.

You will be told exactly how much this is before you agree to anything and mortgage lenders have a duty not to lend you more money than you can afford to pay back.

Discuss with your mortgage broker how much you can reasonably afford each month and they’ll let you know how much you can probably borrow. It’s then up to you if this is enough to buy a property that you want to live in.

Keep in mind other costs on top of your monthly mortgage. Insurance is one but there's also stamp duty if you've owned property before, moving costs, buying your own furniture and paying your mortgage advisor.

A person holding a wooden model house and a pair of keys.

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