How does a mortgage work in the UK? The basics explained

A mortgage is a loan used to buy property, secured against the property itself — meaning the lender can repossess the property if you fail to keep up repayments. Understanding the basic mechanics of how a mortgage works helps you make better decisions whether you are a first time buyer or remortgaging an existing property.

The basic structure of a mortgage

When you take out a mortgage, you borrow a sum of money (the loan) from a lender to buy a property, and agree to repay it over an agreed term — commonly 25 to 35 years, though shorter and longer terms are available. You pay interest on the loan throughout the term, and the mortgage is secured against the property, meaning the lender has a legal charge over it until the mortgage is repaid in full.

Repayment vs interest-only mortgages

There are two main types of mortgage repayment structure. With a repayment mortgage, each monthly payment covers both interest and a portion of the capital (the original loan amount), so by the end of the term the full loan is repaid and you own the property outright. With an interest-only mortgage, your monthly payments cover only the interest, meaning the original loan amount remains unchanged throughout the term — you must have a separate plan to repay the capital at the end, such as savings, investments, or selling the property. Interest-only mortgages are now much less common for residential purchases due to regulatory changes, though they remain available for some buy-to-let purchases.

Fixed vs variable interest rates

Mortgages also differ in how interest rates are set. A fixed-rate mortgage keeps your interest rate the same for an agreed period (commonly two, five or ten years), meaning your monthly payment stays constant regardless of wider interest rate changes — providing certainty but potentially missing out if rates fall. A variable-rate mortgage has an interest rate that can change, often linked to the lender's standard variable rate or the Bank of England base rate, meaning payments can rise or fall over time. Tracker mortgages are a type of variable rate that moves directly in line with the Bank of England base rate plus a fixed margin.

Loan-to-value (LTV)

Loan-to-value describes the size of your mortgage relative to the property's value, expressed as a percentage. If you buy a £200,000 property with a £20,000 deposit, your mortgage is £180,000, giving an LTV of 90%. Lower LTV mortgages (larger deposits) generally come with better interest rates, as they represent lower risk to the lender.

How are mortgage payments calculated?

Monthly repayment mortgage payments are calculated using an amortisation formula that ensures the loan, plus interest, is fully repaid by the end of the term. In the early years of a repayment mortgage, a larger proportion of each payment goes towards interest, with the proportion going towards capital increasing over time — this is a standard feature of how amortising loans work, not something specific to any particular lender.

Mortgage terms and overpayments

The term is the total length of time over which the mortgage is scheduled to be repaid. A longer term reduces your monthly payment but increases the total interest paid over the life of the loan; a shorter term increases monthly payments but reduces total interest. Many mortgages allow overpayments — paying more than the required monthly amount — which can reduce the total interest paid and shorten the effective term, though some lenders impose limits or early repayment charges on overpayments, particularly during a fixed-rate period.

What happens at the end of a fixed or tracker deal?

When a fixed-rate or tracker deal ends, if you do not arrange a new deal, your mortgage typically reverts to the lender's standard variable rate (SVR), which is usually significantly higher than competitive fixed or tracker rates. Most borrowers remortgage or switch to a new deal with their existing lender shortly before their current deal ends, to avoid moving onto the more expensive SVR.