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How does a mortgage work?
Find out all you need to know about how a mortgage works, so you can feel more confident when you start house hunting.
You could lose your home if you don’t keep up your mortgage repayments
Know your budget
You’re going to need to know how much you might be able to borrow.
Use our mortgage calculator to get an idea of the value of property you could be able to afford.
You’ll also get an estimate of what the monthly repayments could be.
Save up a deposit
Probably one of the most difficult parts of getting a mortgage is saving up for the deposit.
The more you can put down as a deposit, the less you’ll be borrowing. A higher deposit will also lower your loan to value ratio (LTV).
This could increase your chances of getting a mortgage and getting a lower interest rate.
Whether you’re buying alone or with a partner, try setting a monthly saving budget to build up your deposit fund.
1. Get an Agreement in Principle
Before you start searching for a home, you'll need to know how much you might be able to borrow. You can do this by applying for a mortgage Agreement in Principle.
Applying involves soft credit checks on you and anyone you’re looking to buy with, as well as looking at your financial position and commitments. Learn more about how credit checks work.
A mortgage adviser will be able to discuss the different types of mortgages available.
This isn’t an official mortgage offer, but it’s an indication of how much the lender may be willing to lend you. After you’ve got an Agreement in Principle, you can start house hunting and speak to a mortgage adviser.
2. The application
Once you’ve found your perfect home and had an offer accepted, it’s time to apply for your mortgage.
At this point, you’ll need to think about what kind of mortgage you want.
3. Get a home valuation
Your lender will need to carry out an independent valuation of the property you want to buy. This is to make sure the house is worth what you’re offering to pay for it, and this will be used to work out your loan to value ratio.
4. Get your mortgage offer
If all is well with the valuation and your application has gone smoothly, you’ll receive a mortgage offer. This offer will confirm that the lender is happy to lend you the money and shows the repayment terms.
5. Completing the deal
If you’re happy with your mortgage deal, you’re on the home straight. At this point, all that’s left to do is bring in a conveyancer. A conveyancer will complete the various checks, so you know what you’re buying, and take care of the legal and administrative aspects of transferring property ownership.
The conveyancer will draw up contracts and handle the exchange of these with the seller’s representative. They’ll also sort the payment of your deposit. You can use our Halifax conveyancing service to compare quotes for your legal costs from our panel of up to 200 conveyancers.
Now, you should receive a completion date, after which you’ll be free to start looking forward to moving into your new home.
Handy to know
Mortgage interest
You’ll pay interest on your mortgage. How much will depend on your mortgage interest rate, how much you borrow and for how long. The quicker you pay off your mortgage, the less interest you’ll pay.
How much you pay back each month will depend on:
- The type of mortgage you get.
- How much you borrow.
- The term of your mortgage.
- The interest rate you have agreed with the lender.
Choosing the right mortgage
Which mortgage you pick can depend on the type of house you’re buying, your finances and where you want to live. Here’s a summary of the different types of mortgages.
Repayment mortgages
The most common type of mortgage.
You pay a deposit, then make monthly repayments, including both capital and interest.
Tracker mortgages
Your interest rate changes based on the Bank of England’s bank rate. It could be set at a percentage above or below the bank rate. Your monthly repayments could go up and down during the term of your mortgage.
If the Bank of England's bank rate is low, your mortgage repayment could be less as it won’t include as much interest. But if it rises, you might have to pay more each month.
Fixed rate mortgages
The interest rate you pay won’t change for a set period arranged with your lender.
This can be a useful way to manage your money, as you’ll have a good idea of the amount you must pay each month.
Offset mortgages
These offset your savings against the mortgage amount.
This means the overall interest you pay is generally lower than a repayment mortgage. Lenders ‘take away’ the amount in your savings account from how much you owe on your mortgage.
You only pay interest on what’s left.
Interest-only mortgages
This is where you agree to pay back only the interest on what you’ve borrowed, rather than the sum itself. So, after your deposit, you’ll pay the interest each month, not the capital. Then you’ll pay off the capital at the end of the mortgage term.
First time buyer guide
Buying your first home is one of the most exciting things you'll do. There's lots to think about, including finding the right mortgage for you. Find out everything you'll need to know when buying your first home here.
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