What is a mortgage?
A mortgage is a long-term loan secured against your home. It's the most significant financial product for most individuals.
Key concepts
Lenders assess your income, outgoings, and credit file against your potential mortgage size.
LTV
Loan-to-Value (LTV) is the size of your mortgage as a percentage of your property value.
Mortgage types
Fixed rate
The interest rate is locked for a set term, usually 2-5 years.
Tracker/Variable rate
Interest rates change based on the Bank of England Base Rate.
Are you ready?
Mortgages are suitable if you have:
- 1
Deposit
Usually at least 5-10% of the property value.
- 2
Stable income
Sufficient to pass rigorous affordability stress tests.
Affordability tests
Lenders look for:
Stress testing: They check if you can still afford the payments if rates increase sharply.
How to compare deals
Follow these steps to make an informed choice:
- 1
Check total cost
Include initial product fees in your comparison.
- 2
Rate duration
Balance the cost of a longer fixed rate with future market expectations.
Pros and Cons
Pros
- Essential for home ownership
- Lower rates than unsecured credit
- Security of tenure
Cons
- High initial costs
- Long-term commitment
- Risk of repossession if payments missed
Why choose carefully?
A mortgage is the largest debt you'll likely ever have. Small rate differences make massive differences in long-term cost.
Potential risks
Engaging with mortgages requires care to ensure you don't overpay or miss critical protections.
For energy, failing to switch or manage your smart meter can lead to higher costs. For finance, errors on your report can lead to loan rejections.
Always use verified, independent sources like Ofgem or regulated financial services to compare options.
Alternatives
Options for home ownership:
Shared ownership
Buying a share of a home and renting the rest.
FAQs
About this guide
Written and reviewed by the Grow Your Business team, and kept up to date as rates, rules and provider terms change.
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