Find out what mortgages are and the basics of how they work in our easy-to-understand guide.
what is a mortgage?
A mortgage is a loan that you use to buy a property.
When you buy a home, you’ll put down a cash deposit (usually at least 5% of the property price) and pay for the rest using a mortgage from a bank or building society.
You then pay the mortgage plus interest back in monthly instalments over a set number of years.
Watch our short, easy-to-understand video for the basics on how mortgages work.
What types of mortgage deals are there?
Pretty much all mortgages are either classified as repayment mortgages, where you pay back a bit of the loan and a bit of interest each month, or interest-only mortgages, where you just pay interest each month then pay back the sum you originally borrowed at the end of the mortgage term.
It is occasionally possible to be on a part-repayment, part-interest-only basis but this is very rare.
Within those two categories of mortgage, there are several different types of deal you can choose from. The most common are:
You can get a broad overview of each in our guide to mortgage types, or click the links above to learn about the individual options in more detail.
The type of mortgage you choose is usually only valid for a set number of years – usually between two and 10 – known as the introductory or deal period.
After that, you’ll be moved onto a standard variable rate mortgage, which usually has a higher interest rate. For this reason, most people choose to switch to a new deal – known as remortgaging – at that point.
Some important things that will affect your choice of mortgage, and the deals available to you, include:
- how much you’ve saved for a deposit
- the type of property you’re buying – a house, flat, new-build etc
- the length of time you want to be paying off the mortgage for (known as the mortgage term)
- how much you can afford in monthly mortgage payments
- whether you’re using any schemes, such as Help to Buy
An independent mortgage broker will be able to advise on the best option for you.
No matter what type of mortgage you go for, you’ll have to pay interest on the loan – but you shouldn’t choose a deal purely based on the interest rate.
That’s because you’ll also usually have to pay a fee to set up your mortgage (often referred to as an arrangement fee) – and these are often higher on low-rate mortgages.
Depending on your circumstances, a mortgage with a slightly higher interest rate and lower arrangement fee might be best for you.
- Find out more: finding the best mortgage deals
What is a mortgage agreement in principle?
When you’re ready to start viewing properties, estate agents might ask whether you have a mortgage agreement in principle (AIP).
Also known as a decision in principle, an AIP is a statement from a bank saying that they are, in principle, willing to lend you a certain amount of money, subject to full affordability checks being passed.
Having an AIP can help prove your budget to estate agents and show to sellers that you’re a serious buyer. However, having one won’t always be necessary and could in some circumstances make a dent in your credit score, so ask estate agents in your area whether you’ll need one before applying.
How long does a mortgage offer last?
When you apply for a mortgage and receive a formal offer from a lender, it will usually only be valid for a certain amount of time.
Most mortgage offers last for three to six months – though longer offers are available on new-build homes – and if you don’t complete your purchase in this time you’ll need to ask for an extension.
In some cases, this means you might have to go back through the bank’s affordability assessments.
What is a mortgage broker?
Searching for a mortgage can be complicated, but you could save time and money by using a mortgage broker (a professional adviser who can find and apply for a deal on your behalf).
Some mortgages are only available through brokers (‘intermediaries’), but in other cases the opposite is true and you’ll only get the deal if you apply yourself.
A whole-of-market broker should look at the entire mortgage market and recommend the right deal for you.
- Find out more: choosing a mortgage broker