How Does a Mortgage Work?

The simple version

You borrow money from a bank or building society to buy a property. Each month you make repayments that cover both the interest charged on the loan and (usually) a portion of the original amount borrowed. Over the mortgage term — typically 25 to 35 years — you gradually pay off the full loan.

The property acts as security. If you miss payments, the lender has the legal right to repossess it and sell it to recoup what you owe.

Repayment vs interest-only

• Repayment mortgage: your monthly payment covers both interest and a slice of the capital (the amount borrowed). By the end of the term, the mortgage is fully paid off and you own the home outright. This is by far the most common type for residential buyers.
• Interest-only mortgage: you only pay the interest each month — the capital stays the same throughout. At the end of the term, you still owe the full original loan. You need a credible plan to repay the capital (e.g. selling the property, a pension lump sum). Common in buy-to-let, rarer for residential.

Fixed rate vs tracker vs SVR

• Fixed rate: your interest rate is locked for a set period — typically 2, 5, or 10 years. Your monthly payment doesn’t change during this period, regardless of what happens to the Bank of England base rate. Most popular choice for security and budgeting.
• Tracker rate: your rate moves in line with the Bank of England base rate (e.g. base rate + 1%). If the base rate rises, your payment goes up. If it falls, you benefit immediately. Higher risk, sometimes lower initial rate.
• Standard Variable Rate (SVR): your lender’s default rate, which they can change at any time. Usually the most expensive option. You end up on it when your fixed or tracker deal expires — this is when you should remortgage.

What is LTV?

LTV stands for Loan-to-Value. It’s the size of your mortgage expressed as a percentage of the property’s value.

If you buy a £300,000 home with a £30,000 deposit, you’re borrowing £270,000 — an LTV of 90%.

LTV matters because it directly affects your interest rate. The lower your LTV, the less risk the lender takes, and the better rate they offer. Moving from 90% to 75% LTV can save you thousands of pounds a year in interest. As you pay down your mortgage and house prices rise, your LTV improves — meaning better rates when you remortgage.

How much can I borrow?

Most lenders will offer up to around 4.5 times your annual income as a rough starting point. So on a salary of £40,000, you might borrow up to £180,000.

In practice it’s more complex: lenders look at your income, outgoings, credit history, existing debts, and whether you pass their affordability stress test (which checks you could still afford payments if rates rose). Joint mortgages combine both applicants’ incomes.

What happens when my deal ends?

When a fixed or tracker deal ends, the borrower is moved automatically onto the lender’s SVR. SVR rates are set by each individual lender and are not directly tied to the base rate, though they tend to move broadly in line with it.

Many lenders allow borrowers to lock in a new deal up to 6 months before the existing deal expires. Switching to a new mortgage product — either with the same lender (a ‘product transfer’) or a different one — is called remortgaging. The FCA’s consumer guidance on mortgages is available at fca.org.uk/consumers/mortgages.

Mortgage fees to watch for

• Arrangement fee: the lender’s admin fee to set up the mortgage. Can be £0–£2,000. Can often be added to the loan (but you pay interest on it).
• Valuation fee: the lender values the property to confirm it’s worth what you’re paying.
• Early repayment charge (ERC): if you pay off your mortgage or switch during the initial deal period, you’ll often pay a penalty — typically 1–5% of the outstanding loan. Check before overpaying or remortgaging early.
• Broker fee: if you use a mortgage broker, they may charge a fee (or be paid by commission from the lender).