Last updated: April 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. It’s likely to be the biggest financial commitment of your life. Here’s how it all works, in plain English.
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.
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.
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.
Each monthly payment on a repayment mortgage is split between two things: interest on the amount you still owe, and capital (a slice of the loan itself). Early in the term most of the payment is interest. Toward the end, most of it is capital. The balance shifts gradually because each capital payment reduces what you owe, so the next month’s interest charge is a tiny bit smaller.
The standard formula lenders use is the amortisation formula:
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).
Take a typical first-time buyer in 2026: £200,000 borrowed at 4.5% over 25 years on a repayment basis. Plugging the numbers into the formula above gives a monthly payment of about £1,112. Over 25 years that is £333,500 paid back in total: £200,000 capital plus £133,500 of interest.
The split between interest and capital changes month to month. In the very first payment:
By year 10, the balance is around £145,000 and the monthly payment is now £540 interest and £572 capital. By the final year, almost all of the £1,112 is capital. The mortgage is fully paid off at month 300.
This is why overpaying early matters: every extra £1 paid in year one cancels £1 of capital and stops it accruing interest for the next 24 years. Most lenders allow up to 10% overpayment per year without an Early Repayment Charge.
To check whether the standard 4.5x salary multiple actually fits your take-home pay, use the take-home pay calculator alongside.
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.
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.
Base rate decisions, lender rate changes, and housing market shifts, FinanceSimply covers every announcement that affects your mortgage payments, in plain English.
Subscribe free →