Last updated: 29 July 2026 · Sourced from official UK government publications
This is a plain-English definitions guide based on publicly available information about how UK mortgages work. For regulated mortgage advice, speak to a qualified mortgage adviser authorised by the Financial Conduct Authority (FCA). This is not financial advice, see the disclaimer below.
A mortgage is a loan secured against your home, meaning if you stop paying, the lender can repossess the property. You repay it in level monthly instalments, and each one is split between interest and the loan itself. This guide covers how that split works, how it shifts over the years, and what the rest of the jargon actually means.
A mortgage is a loan from a bank or building society used to buy a property. You repay it in monthly instalments covering both the interest charged and a portion of the amount borrowed. Over the term, typically 25 to 35 years, you gradually pay off the full loan and own the property outright.
The property acts as security. If you miss payments, the lender has the legal right to repossess it and sell it to recoup what you owe.
In level monthly instalments over an agreed term. Each instalment covers the interest that has built up since the last payment, plus a slice of the amount you actually borrowed. That structure is called a repayment mortgage, sometimes written as ‘capital and interest’, and it is how the large majority of UK residential mortgages are repaid.
Three things normally stay fixed: the term (how many years you have to clear it), the payment date, and, while you are on a fixed-rate deal, the amount that leaves your account. What changes every single month is what that payment is made of. The interest part shrinks, the capital part grows by exactly the same amount, and the total stays level.
The other option is an interest-only mortgage, where the payment clears the interest and nothing else. The balance never moves, so the full original loan is still owed on the last day of the term.
Every payment is applied to interest first and capital second. The lender works out the interest owed on the balance you currently have, takes that out of your payment, and puts whatever is left against the debt. Because the balance is at its biggest on day one, the interest slice is at its biggest on day one too. That is the whole reason early payments barely seem to dent the loan.
Most UK lenders calculate interest daily and charge it monthly, so the exact pennies depend on how many days are in the month and on when your payment lands. Some older products use monthly or annual rest instead, which shifts the timing slightly. The shape of the split is the same either way.
Take £200,000 borrowed at 4.5% over 25 years on a repayment basis. That 4.5% is an illustrative rate used to show the mechanics, not a quote and not a current market average. It gives a monthly payment of about £1,112.
Here is what that same £1,112 is made of at the start of selected years. Figures are rounded to the nearest pound.
| Payment | Interest | Capital | Capital share | Balance left |
|---|---|---|---|---|
| Month 1 | £750 | £362 | 33% | £199,638 |
| Year 5 (month 49) | £679 | £433 | 39% | £180,586 |
| Year 10 (month 109) | £570 | £542 | 49% | £151,413 |
| Year 15 (month 169) | £433 | £678 | 61% | £114,895 |
| Year 20 (month 229) | £263 | £849 | 76% | £69,181 |
| Year 25 (month 289) | £49 | £1,063 | 96% | £11,958 |
| Final payment (month 300) | £4 | £1,108 | 100% | £0 |
Nothing about the payment changes, but the job it does changes completely. In month one only about a third of the money is buying you any of the house. By year 20, three quarters of it is.
Working through the first payment by hand, so you can see where those numbers come from:
Next month the interest is charged on £199,638 rather than £200,000, so it comes out a little lower, and a little more of the payment is freed up for capital. Repeat that 300 times and you get the table above.
None of that is a penalty or a hidden charge. It is simply what happens when interest is charged on a balance that starts high and falls slowly. Worth remembering too that those pounds are not all worth the same. A payment that stays flat in cash terms generally gets easier to find as wages and prices drift upwards over a couple of decades, which is one of the quieter effects of inflation on long-term debt.
The monthly figure itself comes from the standard amortisation formula, which works out the level payment that will clear the loan in exactly the number of months you have agreed:
Monthly payment = P × r × (1+r)n ÷ ((1+r)n − 1)
P = loan amount, r = monthly interest rate (annual ÷ 12), n = number of monthly payments (years × 12).
Two inputs move that number more than anything else. A higher rate raises the payment, obviously. A longer term lowers the monthly payment but raises the total interest, because the balance sits there for longer collecting interest. Stretching a mortgage to 35 years instead of 25 makes each month cheaper and the whole thing more expensive.
Yes, and it is the one lever that moves the numbers a lot. An overpayment goes straight to capital, so it does not just clear that pound of debt, it also cancels every future month of interest that pound would have generated. The earlier it lands, the more months it cancels.
On the same £200,000 at 4.5% over 25 years, an extra £100 a month from the start clears the mortgage in 21 years and 6 months rather than 25, which is 3 years and 6 months early, and cuts total interest from £133,500 to about £112,400. That is roughly £21,100 of interest avoided.
The limit is the early repayment charge. Most deals allow overpayments of up to 10% of the outstanding balance a year without a charge, and exceeding that during a fixed-rate period usually triggers one. The exact allowance is set out in the mortgage offer document, and it varies by lender and product.
With a repayment mortgage, monthly payments cover both the interest and a slice of the loan itself, so the balance reduces over time and is cleared at the end of the term. With an interest-only mortgage, payments cover only the interest, the original loan remains unchanged and must be repaid separately at the end.
A fixed-rate mortgage locks your interest rate for a set period (typically 2–10 years), so monthly payments stay the same regardless of Bank of England base rate changes. A tracker rate moves in line with the base rate. A Standard Variable Rate (SVR) is your lender’s default rate, usually the most expensive option, which you revert to when a fixed or tracker deal ends.
At the time of writing, 29 July 2026, the Bank of England base rate is 3.75%. It has been at that level since December 2025, when the Monetary Policy Committee cut it from 4.00%. The MPC meets roughly every six weeks and can move the rate at any of those meetings, so a tracker payment is only ever settled until the next decision.
LTV stands for Loan-to-Value. It’s the size of your mortgage expressed as a percentage of the property’s value.
If you buy a £300,000 home with a £30,000 deposit, you’re borrowing £270,000, an LTV of 90%.
LTV matters because it directly affects your interest rate. The lower your LTV, the less risk the lender takes, and the better rate they offer. Moving from 90% to 75% LTV can save you thousands of pounds a year in interest. As you pay down your mortgage and house prices rise, your LTV improves, meaning better rates when you remortgage.
Most lenders will offer up to around 4.5 times your annual income as a rough starting point. So on a salary of £40,000, you might borrow up to £180,000.
In practice it’s more complex: lenders look at your income, outgoings, credit history, existing debts, and whether you pass their affordability stress test (which checks you could still afford payments if rates rose). Joint mortgages combine both applicants’ incomes.
Worth noting that lenders work from gross salary, while the payment leaves the account you actually get paid into, after income tax and National Insurance have come out. The gap between those two numbers is wide enough to matter. The take-home pay calculator turns a gross salary into a monthly net figure, which is the number a monthly mortgage payment actually has to come out of.
The mortgage covers the property. Everything else on completion day comes out of cash you already have, which is the part that tends to surprise first-time buyers.
Stamp Duty Land Tax is usually the biggest of these in England and Northern Ireland. Scotland and Wales run their own separate versions. First-time buyer relief means no SDLT on the first £300,000, then 5% on anything between £300,001 and £500,000. Above a £500,000 purchase price the relief disappears entirely and the standard rates apply instead: nothing up to £125,000, 2% from £125,001 to £250,000, and 5% from £250,001 to £925,000. The stamp duty guide walks through how the bands stack.
On top of that sit conveyancing fees, searches, a survey if you have one done, removal costs, and the lender fees listed further down this page.
Deposits are usually built up in a savings account or an ISA. One product is aimed specifically at first homes: the Lifetime ISA. You can pay in up to £4,000 a tax year and the government adds a 25% bonus, worth up to £1,000 a year. It can be opened between the ages of 18 and 39, and paid into until you turn 50.
The rules around getting the money out are strict and worth knowing before the money goes in. A charge-free withdrawal for a first home requires the property to cost £450,000 or less and the account to have been open at least 12 months. Take the money out for any other reason before age 60 and a 25% withdrawal charge applies, which takes back the bonus and a slice of your own savings with it. The LISA withdrawal rules cover the exceptions. Note that the £4,000 counts towards your overall £20,000 annual ISA allowance rather than sitting on top of it.
One live development: on 23 June 2026 the government opened a consultation on a new First Time Buyer ISA, proposed to replace the Lifetime ISA, with the bonus paid at purchase and no withdrawal charge. The consultation closes on 18 August 2026 and no start date has been set. Lifetime ISAs can still be opened until the new product exists, and existing holders can keep saving under the current rules.
When a fixed or tracker deal ends, the borrower is moved automatically onto the lender’s SVR. SVR rates are set by each individual lender and are not directly tied to the base rate, though they tend to move broadly in line with it.
Many lenders allow borrowers to lock in a new deal up to 6 months before the existing deal expires. Switching to a new mortgage product, either with the same lender (a ‘product transfer’) or a different one, is called remortgaging. The FCA’s consumer guidance on mortgages is available at fca.org.uk/consumers/mortgages.
Mortgages come with several fees beyond the interest rate. The most significant are the arrangement fee (up to ~£2,000 to set up the deal), valuation fee (charged by the lender to assess the property), early repayment charge (a penalty of typically 1–5% for leaving a deal early), and any broker fee if you use a mortgage adviser.
With a repayment mortgage, each monthly payment reduces both the interest and the outstanding loan balance, so the debt is fully cleared by the end of the term. With an interest-only mortgage, monthly payments cover only the interest, the original loan amount remains unchanged throughout and must be repaid in full at the end, usually from savings, an investment, or a property sale.
LTV stands for loan-to-value. It expresses the mortgage amount as a percentage of the property's value. For example, a £180,000 mortgage on a £200,000 property gives an LTV of 90%. Lenders generally offer lower interest rates at lower LTV bands, reflecting reduced risk. A larger deposit reduces your LTV and can give access to more competitive rates.
A fixed-rate mortgage locks in your interest rate for a set period, typically two or five years, so monthly payments stay the same regardless of Bank of England base rate changes. A variable-rate mortgage, including tracker and standard variable rate products, can change over time, meaning monthly payments may rise or fall. Speaking to a mortgage adviser can help you understand which type may suit your circumstances.
Most lenders require a minimum deposit of 5% of the purchase price, giving an LTV of 95%. A larger deposit, typically 10%, 15%, or more, generally unlocks access to lower interest rates and a wider choice of products. The deposit required can vary by lender, property type, and individual circumstances. A mortgage adviser can help clarify what options are available to you.
A mortgage in principle (also called an agreement in principle or decision in principle) is a written indication from a lender stating how much they may be willing to lend, based on a preliminary assessment of your income and credit profile. It is not a formal mortgage offer and does not guarantee a mortgage will be approved at full application. Estate agents sometimes ask for one before accepting an offer on a property.
Each monthly payment on a repayment mortgage is split between interest (on the balance you still owe) and capital (a slice of the loan). The standard formula is M = P × r × (1+r)^n / ((1+r)^n - 1), where P is the loan, r is the monthly rate, and n is the number of monthly payments. Early in the term most of the payment is interest; toward the end most is capital.
You repay both the interest and a slice of the loan each month. By the end of the term the loan is fully cleared and you own the home. Example: £200,000 borrowed at 4.5% over 25 years means a monthly payment of around £1,112, made up of about £750 interest and £362 capital in month one. The split shifts toward capital over time as the balance falls.
Most UK residential mortgages are repaid on a repayment basis, also called capital and interest: one level monthly payment for an agreed term, usually 25 to 35 years, with each payment covering the interest built up since the last one plus a slice of the amount borrowed. The balance falls a little every month and hits zero on the final payment. The alternative is interest-only, where the payment covers the interest alone and the full original loan is still owed at the end of the term.
Interest first, capital second. The lender calculates the interest owed on the balance you currently have, deducts it from your payment, and puts whatever is left towards reducing the debt. Because the balance is largest at the start, the interest share is largest at the start. On a £200,000 repayment mortgage at 4.5% over 25 years, the first £1,112 payment is roughly £750 interest and £362 capital, so only about a third goes on the debt itself. From there the interest share falls every month and the capital share rises by the same amount, which keeps the total payment level.
Because interest is charged on the balance still outstanding, and that balance is at its highest on day one. Whatever is left after the interest has been taken goes on capital, which is why the capital slice starts small and grows. On the £200,000 at 4.5% over 25 years example, it takes until month 116, around nine years and eight months in, before more of the monthly payment goes on capital than on interest. That is a feature of how interest on a reducing balance works rather than a fee or a penalty.
Base rate decisions, lender rate changes, and housing market shifts, Kvanta covers every announcement that affects your mortgage payments, in plain English.
Subscribe free →