How Does a Mortgage Work: First-Time Buyers Guide

To o help answer the question ‘how does a mortgage work?’, we’ve put together advice for first-time buyers. We’ve looked at everything from mortgages to government help-to-buy schemes to help you better understand what costs are involved in buying a house.

Whether you’re a first-time buyer or not, it’s likely you’ll need a mortgage in order to purchase your new home. Our first tip is to speak to a qualified mortgage adviser early on. They can explain the process, assess your circumstances and help you understand the options available to you.

A mortgage adviser can help you explore suitable mortgage products based on your financial circumstances, although the range of mortgages available will depend on the lenders and products they have access to.

Your home may be repossessed if you do not keep up repayments on your mortgage.

What is a mortgage?

A mortgage is a specific type of loan used to purchase a property. A lender provides a certain percentage of the overall cost of your home, and this loan is ‘secured’ against the property.

This means that, if you fall behind with your repayments or encounter financial difficulties, the lender has certain rights over your property. In serious cases, your home could be repossessed.

You repay the mortgage over an agreed period, known as the mortgage term, with interest charged on the amount you borrow.

How does a mortgage work and how do I get a mortgage?

Many people will look at a comparison website or speak to their bank when it comes to getting a mortgage. Our advice would be to also speak to a qualified mortgage adviser who can explain the different types of borrowing and help you understand what might suit your circumstances.

There are a number of ways you can improve your chances of getting a mortgage, including reviewing your credit history, understanding your monthly spending and saving towards a deposit.

What information will a lender consider?

Part of understanding how a mortgage works is finding out what information a lender will consider.

A lender will want to assess whether you can afford your mortgage repayments both now and in the future, taking into account your financial circumstances and the possibility of changes to interest rates.

Mortgage lenders are required to assess affordability using information about your income, expenditure and other financial commitments. They may also consider how changes in your circumstances or mortgage repayments could affect affordability.

Your mortgage criteria

There are different criteria lenders will consider, enabling them to assess applications from different types of borrowers, including self-employed people and retirees.

However, ultimately, they need to be satisfied that you meet their lending criteria and can reasonably afford the mortgage.

Be prepared to provide accurate information about your financial circumstances to a lender or mortgage adviser. This will help them assess how much you may be able to borrow and which mortgage options may be available.

Income and outgoings

Make sure you are aware of all your individual and household outgoings before beginning this process.

Lenders will usually consider regular expenses such as household bills, existing loan repayments, credit commitments and other essential spending.

It’s also important to be honest about any payment defaults or debts you may have, as these don’t automatically mean you’ll be unable to get a mortgage.

Speaking to a qualified mortgage adviser can be useful when understanding how different lenders assess applications and what options might be available.

It’s good to know how a mortgage works, but understanding what you can realistically afford is just as important.

How does a mortgage work: Different types of mortgage

There are two main types of mortgage repayment structure: a repayment mortgage and an interest-only mortgage.

Repayment mortgage

A repayment mortgage is a loan on which you pay the interest, plus a portion of the capital borrowed, each month.

This means that the amount you owe gradually decreases over the mortgage term.

Provided you make all the required repayments, and assuming there are no additional amounts outstanding, your mortgage should be fully repaid at the end of the agreed term.

Interest-only mortgage

Interest-only mortgages were once more common in the UK, as the monthly payments are generally lower than those on a comparable repayment mortgage.

This is because you’re only paying the interest each month, rather than reducing the amount you’ve borrowed.

However, this means the original mortgage balance normally remains outstanding at the end of the term.

If you have an interest-only mortgage, the lender will usually want to see a credible repayment strategy demonstrating how you intend to repay the capital.

This might involve savings, investments or another repayment arrangement acceptable to the lender.

It’s important to remember that investment values can rise or fall, and any repayment strategy needs to be carefully considered.

Interest-only mortgages are still available from some lenders, although eligibility requirements can be stricter and they won’t be suitable for everyone.

How does a variable rate mortgage work?

A variable rate mortgage has an interest rate that can change during the mortgage term.

Depending on the type of mortgage, the rate may be influenced by the Bank of England Bank Rate, the lender’s own standard variable rate or another benchmark.

This means your monthly repayments could increase or decrease over time.

Before committing to a variable rate mortgage, it’s important to consider whether you could afford higher repayments if interest rates rise.

How does a fixed rate mortgage work?

Lots of buyers opt for this type of mortgage as it offers them the security of ‘fixing’ their interest rate for an agreed period.

During that period, your interest rate won’t change, helping you plan your monthly mortgage repayments.

Many homeowners choose a fixed rate for two or five years, although other periods may be available.

When the fixed period ends, you’ll normally move onto the lender’s reversion rate, often its standard variable rate, unless you arrange another mortgage deal.

You may be able to switch products with your existing lender or move to a new lender. Switching to a different lender is known as remortgaging.

Remember that early repayment charges may apply if you want to leave a fixed rate deal before the agreed period ends.

Tracker mortgage

A tracker mortgage offers a variable interest rate that follows an external benchmark, most commonly the Bank of England Bank Rate.

For example, the mortgage rate might be set at a certain percentage above Bank Rate.

If the benchmark increases, your mortgage interest rate will usually rise. If it falls, your rate will usually decrease, subject to the mortgage’s terms and conditions.

Tracker mortgages may suit some borrowers, but it’s important to understand how potential interest rate changes could affect your repayments.

Capped-rate mortgage

This is another form of variable rate mortgage, but the interest rate has an upper limit for an agreed period.

This means the rate can change, but it won’t rise above the specified cap during that period.

Capped-rate mortgages can provide some protection against increasing interest rates, although they aren’t widely available from all lenders.

As with any mortgage, it’s important to compare the overall cost, fees and conditions rather than focusing solely on the initial interest rate.

Discounted rate mortgage

This is a mortgage with an interest rate based on a lender’s variable rate, usually its standard variable rate.

As a borrower, you receive a discount from that rate for an agreed period.

For example, a lender may offer a set percentage discount from its standard variable rate for two years.

However, because the underlying rate can change, your mortgage repayments may still rise or fall during the discounted period.

At the end of the discounted period, the rate normally reverts to the rate specified in your mortgage agreement, unless another deal is arranged.

Offset mortgage

An offset mortgage takes into account eligible savings you hold in a linked account with your mortgage lender.

Instead of earning interest on those savings, they are used to reduce the mortgage balance on which interest is calculated.

For example, if you have a mortgage of £300,000 and £30,000 in eligible linked savings, the lender may calculate mortgage interest on £270,000.

However, your actual outstanding mortgage balance doesn’t automatically reduce by £30,000.

The way the interest saving is applied depends on the lender and the specific mortgage product.

Offset mortgages can offer flexibility, particularly for people with substantial savings, but it’s important to compare the potential interest savings with the rates and terms available on other mortgage products.

How does a mortgage work? How much interest will I pay?

The interest rate is one of the main factors determining how much money you’ll repay to a lender over and above the original loan amount.

Lenders set their mortgage rates according to a range of factors, including market conditions, funding costs, competition and the Bank of England Bank Rate.

The amount of interest you’ll pay depends on several things:

• The amount you borrow.
• Your mortgage interest rate.
• The length of your mortgage term.
• Whether you have a repayment or interest-only mortgage.
• Whether your interest rate changes during the mortgage term.

It’s important to understand that the lowest advertised interest rate doesn’t necessarily mean the lowest overall mortgage cost.

Product fees, early repayment charges and other conditions can all affect how much you pay.

A mortgage adviser can help explain the different options and the potential costs involved, based on your circumstances.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Getting mortgage help from your family

It’s common for first-time buyers to receive help from family members towards their deposit, particularly when saving enough money to buy a home can take several years.

A financial gift from family can help increase your deposit and potentially reduce the amount you need to borrow.

However, it’s important to understand how lenders treat gifted deposits.

Most lenders require confirmation that the money is a genuine gift rather than a loan that needs to be repaid, and that the person providing it won’t have an ownership interest in the property.

Remember that misunderstandings about money can prove divisive to even the closest family units. Make sure everyone understands the arrangement before making any financial commitments.

If you don’t have a friend or family member who is happy to give you money towards your deposit, there are also mortgage products that allow family members to provide other forms of financial support.

These may include guarantor mortgages or family-assisted mortgages, where a relative may use their savings or property as additional security.

This doesn’t necessarily mean they have to hand over money towards your deposit.

However, these arrangements can involve significant financial risks for the family member providing support. Depending on the agreement, their savings or property could be at risk if you cannot meet your mortgage obligations.

It’s important that everyone involved understands their responsibilities and considers obtaining independent legal advice where appropriate.

You can also explore our guide to buying a house with friends or family for more considerations when purchasing a property with someone else.

Getting mortgage help from the government

Property prices can make saving for a deposit particularly challenging, especially for first-time buyers.

The government has introduced several schemes over the years to help people get onto the property ladder.

However, some of the older schemes have closed, while others remain available subject to eligibility requirements.

Help to Buy and other government schemes

Help to Buy was the name given to several government initiatives designed to support homebuyers.

The Help to Buy Equity Loan scheme in England closed to new applications on 31 October 2022, with final purchases completed by May 2023.

However, there are other government-backed options that may help eligible buyers today.

These include the First Homes scheme, Shared Ownership, certain deposit-saving initiatives and the Mortgage Guarantee Scheme, which supports the availability of eligible mortgages requiring deposits as small as 5%.

Each scheme has its own rules, and availability can vary depending on where you’re buying.

We’ve put together a separate guide explaining the different government schemes to help you buy a home, including which schemes are still available and how they work.

Shared Ownership

In the Shared Ownership model, you buy a share of a property and pay rent on the remaining portion, which is usually owned by a housing association or another registered provider.

In England, you can typically purchase between 25% and 75% of a property, although some homes allow you to buy an initial share as small as 10%.

You can then purchase additional shares over time, known as ‘staircasing’, depending on the terms of your lease.

Alongside your mortgage repayments and rent, you may also need to pay service charges and other property-related costs.

How do I qualify?

In England, Shared Ownership may be available if:

• You’re buying your first home.
• You’ve previously owned a property but can no longer afford to buy a suitable home.
• You’re an existing Shared Ownership homeowner looking to move.
• Your household income is £80,000 or less, or £90,000 or less in London.
• You cannot afford the deposit and mortgage repayments needed to buy a suitable home outright.

Other qualifying circumstances and local eligibility requirements may also apply.

The scheme offers some flexibility. For example, you may be able to start with a smaller share and purchase more when you can afford to.

There are also specific arrangements for some older buyers, including Older Persons Shared Ownership for eligible people aged 55 and over.

When you sell your property, the provider will often have a period in which it can nominate or find an eligible buyer, depending on the terms of your lease.

It’s important to understand these restrictions, alongside any maintenance obligations and service charges, before proceeding.

Help to Buy Equity Loan scheme – now closed in England

The Help to Buy Equity Loan was designed to help eligible buyers purchase a new-build property with a smaller deposit.

Under the scheme, buyers provided a deposit of at least 5%, while the government could lend up to a further 20% of the purchase price, or 40% in London.

The remainder was funded through a mortgage.

For example, on a property costing £400,000, the arrangement could have involved:

• A 5% deposit of £20,000.
• A government equity loan of £80,000.
• A mortgage for the remaining £300,000.

However, this scheme is no longer available to new applicants in England.

Existing borrowers still need to manage and eventually repay their equity loans under the terms of their agreements.

Importantly, the amount repayable is generally linked to the property’s value at the time of repayment.

For example, if someone originally borrowed 20% of a property’s value and later sold the home for £500,000, they would generally need to repay 20% of the sale price, or £100,000, subject to the scheme’s terms and any earlier repayments.

The equity loan was interest-free for the first five years, with interest charges applying from the sixth year. These interest payments don’t reduce the outstanding equity loan itself.

Different versions of the scheme also had different terms and interest adjustment rules.

A separate Help to Buy equity loan scheme remains available in Wales, subject to its own eligibility requirements.

If you’re considering buying your first home today, it’s worth exploring which current schemes might be available rather than relying on the previous Help to Buy Equity Loan.

All government-supported buying schemes have their own advantages, limitations and financial commitments.

Make sure you understand what your obligations are and what the implications might be when you eventually want to sell your property.

Need a mortgage?

We understand that buying a house can be tough, but we hope our ‘how does a mortgage work’ guide has helped you get a better understanding of the process.

Move iQ is here to help you navigate your home-buying journey, from understanding the different mortgage types to preparing for the costs involved.

Researching mortgages can feel overwhelming, particularly when you’re buying your first home.

Speaking to a qualified mortgage adviser can help you understand the options available, how much you may be able to borrow and what the different mortgage terms could mean for your finances.

Important mortgage information

This article provides general information about mortgages and the home-buying process. It is not personalised mortgage advice or a recommendation of any particular mortgage product.

Mortgage availability, eligibility and terms depend on your individual circumstances and the lender’s criteria. Before making a decision, consider speaking to a suitably qualified mortgage adviser who can assess your circumstances and explain the options available.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Last Updated: October 23rd, 2026