How UK Mortgages Work: Types, Rates and Getting Approved
For most people a mortgage is the largest financial commitment they'll ever make. Understanding the different types, how rates work, and what lenders look for can save you thousands over the lifetime of the loan.
What is a mortgage?
A mortgage is a loan secured against a property. If you stop making repayments, the lender has the legal right to repossess and sell the property to recover what you owe. This security is why mortgage rates are significantly lower than unsecured borrowing such as personal loans or credit cards.
You borrow a set amount (the principal), pay interest on the outstanding balance, and the lender holds a legal charge on the property until the loan is fully repaid. Most mortgage terms run for 25 years, though 30 and 35-year terms are increasingly common as a way to reduce monthly payments.
Repayment vs interest-only
The most fundamental choice is how you pay back what you borrow.
Repayment mortgage
Each monthly payment covers both interest and a portion of the capital (the amount borrowed). In the early years most of the payment is interest; over time the balance shifts until the final payment clears the debt entirely. At the end of the term you own the property outright. This is the standard residential mortgage for most buyers.
Interest-only mortgage
Monthly payments cover only the interest. The original loan amount is unchanged throughout the term and must be repaid in full at the end. You need a credible repayment vehicle (savings, investments, or sale of the property) to clear the capital. Interest-only is mainly used for buy-to-let mortgages, and some higher-net-worth residential borrowers. Most mainstream lenders require proof of a repayment strategy before approving one.
Types of mortgage rate
Once you have chosen repayment or interest-only, you need to select an interest rate type. This determines how your monthly payment may change over time.
| Rate type | How it works | Typical term |
|---|---|---|
| Fixed rate | Rate is locked for a set period. Payments don't change even if the Bank of England base rate moves. | 2, 3, 5 or 10 years |
| Tracker rate | Tracks the Bank of England base rate plus a fixed margin (e.g. base rate + 0.75%). Payments move up or down when the base rate changes. | 2 years or lifetime |
| Discount variable | A discount off the lender's Standard Variable Rate (SVR). Moves when the lender changes its SVR, which doesn't always track the base rate precisely. | 2–3 years |
| Standard Variable Rate | What you revert to after a deal ends. Set by the lender and usually significantly above the market rate. Most borrowers should remortgage before reaching SVR. | Ongoing until you switch |
Fixed vs tracker: which is better?
A fixed rate gives certainty. Your payments won't rise even if interest rates do. A tracker may be cheaper when rates fall but exposes you to rises. Most first-time buyers and those on tight budgets prefer a fixed rate for the payment predictability it offers.
How much can you borrow?
Lenders use two main tests to decide how much to lend:
Income multiple
Most lenders cap borrowing at 4 to 4.5 times your annual income (or joint income for a couple). Some lenders offer up to 5 or 5.5 times income for higher earners or those in certain professions, subject to regulatory limits. The Financial Conduct Authority limits how many high loan-to-income mortgages any lender can issue.
Affordability / stress test
Lenders must check that you could still afford payments if rates rose. They typically stress-test at 2–3% above the current rate. Your existing debts, credit cards, car finance, and other committed spending all reduce the amount you can borrow.
A rough starting point: on a £50,000 income you might borrow £200,000–£225,000. On £80,000 joint income, £320,000–£360,000. Use the mortgage affordability calculator for a more precise estimate based on your specific income and outgoings.
Loan-to-value (LTV) and why it matters
Loan-to-value is the ratio of your mortgage to the property's value. A £180,000 mortgage on a £200,000 property is 90% LTV (you have a 10% deposit). LTV is one of the most important factors in determining your mortgage rate.
Lenders charge higher rates for higher-LTV mortgages because they are taking on more risk. The rate difference between 95% LTV (5% deposit) and 60% LTV can be 1.5–2 percentage points, which on a £200,000 mortgage amounts to thousands of pounds per year.
| LTV | Deposit | Relative rate |
|---|---|---|
| 60% | 40% | Lowest rates available |
| 75% | 25% | Very competitive |
| 85% | 15% | Good rates available |
| 90% | 10% | Higher rates; fewer lenders |
| 95% | 5% | Highest rates; limited choice |
The mortgage process step by step
Understanding the stages helps you know what to expect and prepare the right documents at each point.
- 1
Agreement in Principle (AIP)
A lender confirms in writing that they would be willing to lend you a given amount, subject to a full application. An AIP usually involves a soft credit check and is valid for 60–90 days. Estate agents often ask for one before accepting an offer.
- 2
Full mortgage application
Once your offer on a property is accepted, you submit a full application. The lender will conduct a hard credit check and request documents: typically 3 months' payslips, P60, 3 months' bank statements, and proof of deposit. Self-employed applicants usually need 2–3 years of accounts or SA302 tax calculations.
- 3
Valuation
The lender arranges a valuation of the property to confirm it is worth the agreed purchase price. This is primarily for the lender's protection, not yours. You should commission a separate survey (Homebuyer's Report or full structural survey) to identify any issues with the property.
- 4
Mortgage offer
Once underwriting is complete, the lender issues a formal mortgage offer. This is legally binding on the lender for a set period (typically 3–6 months). Your solicitor reviews the offer alongside the property title and local authority searches.
- 5
Exchange and completion
On exchange of contracts you pay your deposit and are legally committed to the purchase. Completion (when you get the keys) can be the same day or weeks later. Your solicitor transfers the funds from the lender and pays the seller.
Costs to budget for beyond your deposit
The deposit is only part of the upfront cost. Budget for these additional expenses:
| Cost | Typical amount | Notes |
|---|---|---|
| Stamp Duty (SDLT) | £0–£15,000+ | Depends on purchase price and buyer status. First-time buyers get relief up to £425,000. |
| Solicitor / conveyancing | £1,000–£2,500 | Includes legal fees and disbursements (searches, Land Registry). |
| Survey | £400–£1,500 | Homebuyer's Report ~£400–700; full structural survey ~£800–1,500. |
| Mortgage arrangement fee | £0–£2,000 | Some products have no fee but a higher rate; others charge a flat fee or a percentage of the loan. |
| Valuation fee | £0–£500 | Many lenders offer free basic valuations. May be included in the arrangement fee. |
| Buildings insurance | £150–£400/year | Required by all mortgage lenders from exchange of contracts. |
Budget at least 2–3% of the purchase price on top of your deposit to cover all buying costs. On a £250,000 property, that is £5,000–£7,500 before stamp duty.
Remortgaging: what happens at the end of your deal
When your initial fixed or tracker rate ends, you roll onto the lender's Standard Variable Rate (SVR), which is typically 2–4% above current market deals. Most borrowers should start looking at new deals 3–6 months before their current rate expires.
You can remortgage with your existing lender (a product transfer, usually simpler with no new affordability checks) or switch to a new lender for a potentially better rate. Switching lenders involves another full application and legal fees, but many lenders offer free legal work and valuations as an incentive.
Early Repayment Charge (ERC)
Most fixed and tracker deals have an Early Repayment Charge if you leave before the deal period ends. These are typically 1–5% of the outstanding balance, declining each year. Always check the ERC before exiting a deal early.
Five tips to get a better mortgage
- 1
Save a larger deposit. Moving from 10% to 15% or 25% deposit can unlock significantly lower rates and save more over the loan term than the additional saving takes.
- 2
Check your credit report before applying. Correct any errors on your Equifax, Experian, and TransUnion reports. Register on the electoral roll if you haven't already, as it has an outsized impact on credit scores.
- 3
Compare the true cost of a deal. A low headline rate with a high arrangement fee can cost more than a higher rate with no fee over a short term. Always compare the total cost over the deal period.
- 4
Use a whole-of-market broker. A fee-free whole-of-market mortgage broker searches thousands of deals including some not available directly. They are paid by the lender, not you, and can save significant amounts.
- 5
Overpay when you can. Most mortgages allow overpayments of up to 10% of the outstanding balance per year without an ERC. Even small regular overpayments can reduce the term by years and save thousands in interest.