Mortgages

Every year, thousands of people in the UK get a mortgage so they can buy a property. In fact, data from the Bank of England (BoE) shows that there were 64,900 mortgage approvals in August 2024 alone.[1] But whether you're just starting out on your journey to homeownership or you're a seasoned mover, getting a mortgage can be a confusing - and at times daunting - prospect. In this guide, we run through the basics of everything you need to know about how mortgages work and what you can expect.

Repayment vs interest-only mortgages

Repayment mortgage

Quite simply, this means your monthly repayments are actually paying off your loan. So at the end of the term, you own your place outright and owe nothing more.

Pros and cons of a repayment mortgage

Pros

You own your property at the end of the term

You may be eligible for lower interest rates as you pay off more of the loan

Cons

Typically higher monthly repayments

Sometimes there are early repayment fees if you make overpayments

Interest-only mortgage

With an interest-only mortgage, your monthly payments are only paying off the interest on your loan. You will still owe the amount you actually borrowed to buy the property and will need to pay it off at the end of the term. You can do this by remortgaging the property, using money from somewhere else (such as savings), or with the money you make when you sell it.

Pros and cons of an interest-only mortgage

Pros

Often have lower monthly repayments

Can be a good option for those looking to sell their property on after a short period of time

Cons

You're only paying off the interest - not the loan itself

You still need to pay back the loan at the end of the term

Which is better?

There are pros and cons to both types of mortgage. If you can afford it, it normally makes sense for most people to opt for a repayment mortgage. That way you’re actually paying off the loan, and will consequently pay less interest on it over the long-term. It also means you fully own your home at the end.

However, the monthly repayments on an interest-only mortgage are often much lower. So this can help with affordability and could mean that you're able to purchase a more expensive property than you could with a repayment mortgage. This is also why those looking to buy-to-let might find that an interest-only mortgage is beneficial, as you could benefit from the comparatively lower monthly repayments and then opt to sell the property on once the let comes to the end of its term.

For most people though, unless you have a compelling reason, a repayment mortgage is usually the way forward. It's also the one you're most likely to get as some lenders don't offer interest-only deals at all. Those that do will want to see a credible repayment plan and might limit how much you can borrow.

Different types of mortgage

Fixed rate mortgages

The benefit of this is that you know exactly what interest rate you’re paying – and therefore exactly what your monthly payments will be – for as long the deal lasts. Most Fixed-rate deals are for a 2-5 year period, after which you fall onto the lender’s standard variable rate (SVR).

Standard variable rate (SVR) mortgages

This is a lender’s default rate. It doesn’t have to be pegged to the Bank of England base rate, and can be increased at any time by the provider. As a general rule SVRs aren’t the best rates on the market, so you should shop around when your initial 2 or 5 year deal expires.

Discount mortgages

Here, you get a discount on the lender’s SVR. For example, if the lender’s SVR is 4.5% and your mortgage has a 1.5% discount, you’ll pay 3%. Deals are sometimes ‘stepped’ – meaning you might get a 1.5% discount for year one, but only a 1% discount for year two.

Tracker mortgages

Tracker mortgages are linked to the Bank of England's (BoE) base interest rate. That is to say, if the BoE's base rate is 4% and your lender's tracker deal is 2% above the base rate, you'd be paying 6% interest on your mortgage (ouch!). On the other hand, if the base rate fell to 1%, you'd only have to pay 3% interest. At the end of the term, as with other types of mortgage, you're automatically moved onto your lender's default SVR.

Correct as at 2024-25 tax year.

How long is a mortgage?

A typical mortgage deal comes with a 25-year term. That is, at the end of the 25 years, you will have paid back the full loan (plus interest) and you will own your property outright. However, there are shorter and longer mortgages on the market, although these are rarer and usually have more strict lending criteria. You can actually get mortgages anywhere between six months and 40 years long.

For most people, the standard 25-year term is perfectly okay. A shorter term means you can pay off your loan faster (and so pay less interest overall) but often comes with higher monthly repayments. Conversely, a longer term means your monthly repayments will be lower, but you're paying back the loan for longer and so paying more interest overall.

Common mortgage fees

Don’t forget that you're likely to encounter many fees that come along with setting up a new mortgage. Arrangement fees, valuation fees, Land Registry fees... there can be a lot! And often there are exit penalties if you want to terminate your mortgage before any agreed timeframe. Essentially buying a property costs a lot more than what it appears to say on the tin. Here's a breakdown of some of the main fees you may have to pay as part of getting a mortgage.

Stamp Duty

Stamp Duty, also called 'Stamp Duty Land Tax' or SDLT, is a tax you have to pay to the UK government when you buy a property or land over a certain price (called the ‘threshold’) in England or Northern Ireland. You pay a similar tax called ‘Land and Buildings Transaction Tax’ in Scotland and ‘Land Transaction Tax’ in Wales.

The good news here is that if you’re a first time buyer and your property costs less than £450k, you won’t have to pay a penny in Stamp Duty. Yay! However, it then kicks in at a rate of 5% on properties worth between £425,001 - £625,000 and notches up even further for more expensive houses. Here's a breakdown of how Stamp Duty works for first-time buyers.

First-time buyer Stamp Duty rates:

If you’re a first-time buyer, you have to pay Stamp Duty at the following rates:

Example:

You’re a first-time buyer and you purchase a property worth £500,000. The amount of Stamp Duty you need to pay is calculated as:

Valuation fee

As part of your mortgage application process, your lender will check the value of the property you're buying to ensure that the amount you're applying for is appropriate. They do this with a valuation survey. Some lenders don't charge for this, and if they do it's typically around £300 - but can be as high as £1.5k depending on the value of the property. Note that that a valuation is not the same as a property survey so will not identify any structural problems - it's merely to confirm that the value of the property matches up with your mortgage application.

Survey fee

This is NOT something to scrimp on. A house survey is an inspection of your property by a qualified expert to identify if there are any issues or concerns about the condition of the building. There are several types of survey with varying degrees of detail. You can usually take advice from an estate agent on the level you’ll need (a simple one if it’s a newbuild vs a more thorough one if you’re in a particularly old or complex building), or it may be intuitive to you which is most suitable for your chosen property.

The survey should uncover whether the house has anything from rotting foundations to planning permission for a new nuclear power station opposite your front door - you never know! Painful as it might be for your wallet, sometimes a survey might mean you find out you should walk away from a property that could've been a bad investment. But it’s better to know that now than when you’re having to unexpectedly fork out £30k to stop the roof falling in! So it's a worthwhile fee which is typically in the range of between £250 - £600 for most properties.

Estate agent fees

If you're using an estate agent to buy your property, there will be fees to pay for their services. This should be discussed upfront when you initially select your agent, but as a general rule of thumb you can expect to pay around 1-3% of the sale price of the property (plus 20% VAT). Online estate agents, such as Zoopla or Rightmove, usually charge a flat fee which can work out lower than a traditional estate agent.

Legal fees

And finally, you’ll most likely need a lawyer to work through all the paperwork for you. Their costs vary depending on the price of your property but typically fall between £500 - £1,500. If you're buying with the help of an estate agent, they sometimes offer discounts on legal fees for pre-approved solicitors that they're affiliated with.

How to get a mortgage

If you're a first-time buyer looking to get a mortgage, there can be lots of paperwork and numbers to get your head around. Make sure you read our shortcut guide to getting a mortgage for a breakdown of the main things you need to know plus three things you can do to give yourself the best chance of being approved by your lender.

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[1] Bank of England, September 2024