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How does a mortgage work?
Looking to buy your first home? Get to know more about what a mortgage is and how mortgages work.
What is a mortgage?
A mortgage is a type of loan used to help you buy a home. It’s usually a lot larger than any other type of loan. You’ll need to pay a deposit up front, and then borrow a lump sum from a lender for the remaining cost of the property. This is secured against your home.
There are different types of mortgage you could take out. Which one you pick will determine how you pay back what you’ve borrowed.
How mortgages work
How different types of mortgages work
Different types of mortgages work in slightly different ways. Here are a few of the different mortgage types.
Repayment mortgage
You’ll make monthly repayments that pay off both the capital you borrowed and the interest. There are two main types of repayment mortgage:
- Fixed rate mortgage – your interest rate is guaranteed to stay the same for a set period.
- Tracker mortgage – your interest rate tracks the Bank of England Base Rate, plus a bit more. This means your monthly repayments and interest rates can go up or down during your term.
Interest-only
With an interest-only mortgage, what you pay each month only covers the interest on what you’ve borrowed. At the end of the term, you’ll need to pay back the original amount, usually in full.
When buying a house, you’ll need to get a solicitor, also known as a conveyancer, to sort all the legal documents. This is known as conveyancing.
The conveyancer will deal with the Land Registry, draw up contracts and transfer cash from you to the seller on your behalf. They’ll also transfer the legal ownership from the seller to the buyer.
You can find more detailed information about our own conveyancing service by visiting the Lloyds Bank Conveyancing Service.
You could lose your home if you don’t keep up your mortgage repayments
Let’s look at the details
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Usually, lenders will allow a maximum of four people to be on a mortgage. This is known as a joint mortgage. A joint mortgage will be in all your names, which means each person is responsible for paying it back.
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Your first mortgage payment will usually be due on the first month after you complete, and your mortgage starts. Your lender should let you know how much your first payment will be and when it needs to be paid.
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The amount you can borrow from a lender is usually based on your financial circumstances. For example, mortgage lenders will often look at your income and outgoings to see if you can afford to make the monthly repayments.
Use our mortgage calculator to get a better idea of how much you may be able to borrow and what your monthly repayments could look like.
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There isn’t a specific credit score you need for lenders to offer you a mortgage. Not all lenders operate in the same way, and they often have different ways of making decisions. But before they decide to make you an offer, a lender will usually check your financial history and other factors such as your salary. So, a higher credit score may help you get a better mortgage deal.
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APRC stands for ‘Annual Percentage Rate of Charge’ and refers to your full borrowing costs for the year. It includes your annual interest rates and standard fees. This means your APRC will usually be higher than your interest rate.
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