How do mortgages work?

A mortgage is a complex financial product which can be difficult to understand, particularly if you’re a first-time buyer. In this blog, we cover how to apply for a mortgage, information about interest rates and payments and how to pick a lender.

How to apply for a mortgage

There are two ways to apply for a mortgage. You can manage the process yourself where you search for and compare mortgages, applying to your chosen lenders. Or you can choose to work with a mortgage broker who will search the market for you and guide you through the process from start to finish. 

Some mortgage brokers charge a fee for their services, while others work on a fee-free basis making their money via commissions from lenders.

Whichever route you choose, the first step is to apply to a lender for a mortgage in principle, also known as a decision in principle or agreement in principle. This tells you how much a lender may be willing to lend you. It’s not a definite decision as the lender will still have to carry out full affordability and credit checks. But it will give you a good idea of how much you’re likely to be approved for which helps when you’re narrowing down property choices.

How long does a mortgage in principle last?

A mortgage in principle generally lasts for between 30 and 90 days depending on the lender. It’s best to apply for one before you put an offer in for a property as it shows the seller that you’re a serious buyer.

If you’re wondering how to get a mortgage in principle, the good news is it’s a really easy process completing a short form on the lender’s website. You’ll be asked some basic questions about your personal details, address history, income and outgoings so the lender can make an in principle decision. The whole process to apply can take as little as ten minutes and you’ll usually get an instant decision.

Once you’ve decided on a lender, you have your decision in principle and you’ve found a property, you can progress to a mortgage application. To make a decision on a mortgage, the lender will carry out a full credit check, assess your income, expenses and personal situation in deeper detail. They’ll also have the property you want to buy surveyed so they can be sure there aren’t any structural issues and that the selling price reflects the value.

Interest rates

Your mortgage interest rate determines how much interest you’ll be charged for your mortgage. Lenders have different interest rate deals on offer for varying amounts of time. Mortgage deals usually last between two and five years but they can be longer. 

When your mortgage deal ends, you can select a new one that’s on offer from your existing lender. Or you could choose to remortgage to a new lender who’s offering a better deal. There can be fees for remortgaging, so check that the potential interest savings outweigh the cost of moving your mortgage.

When you take out your mortgage, the lender will ask you to decide how long you want to repay the whole loan over. This is called the mortgage term. If you take a 25 year mortgage term, this means you’ll most likely have several different mortgage interest rate deals over your entire mortgage.

What is APRC and what does it mean?

Mortgage lenders make their money in two ways. The first is from the interest you pay and the second is from additional application fees (sometimes also called product fees) and administration charges.

The interest rate tells you how much you’ll be charged for the mortgage. The APRC (Annual Percentage Rate of Charge) is also shown as a percentage. It tells you how much you’ll pay for everything relating to the mortgage including all potential fees and charges.

In the same way that interest rates can vary from lender to lender, so can the fees. If lenders have very similar interest rates, checking the APRC can help you understand which may be more expensive in the long run and make it easier to compare mortgages. 

The APRC makes the assumption that you’ll stay with the same lender for the entire mortgage term. Many people change lenders to get better deals so although the APRC will help you with your research, it shouldn’t be the only factor you base your decision on.

Do mortgage payments decrease over time?

Unlike a credit card, your mortgage payments don’t decrease as you pay off the loan, unless you make additional lump sum payments or take a lower interest rate deal.

A mortgage lender calculates a payment schedule that takes into account the mortgage loan and the interest you’ll be charged. To start with, mortgage repayments mainly cover the interest. As time and payments progress, more of your monthly payment is used to repay the loan. 

How do you pick a mortgage lender?

The interest rate deals on offer from lenders tell you how much you’ll be paying each month. But they don’t tell you what it’s like to be a customer. When you’re trying to decide between different lenders offering very similar deals, reading mortgage reviews from other customers complements your wider research. 

As the UK’s dedicated financial services review site, our community of Smart Money People reviewers have shared their honest feedback about the mortgage lenders they love and who they think could do better. Research the lenders you’re considering and see what it’s really like to be a customer. If you’ve had a mortgage before, you can also leave your own review and help other people with their mortgage research.