How do mortgages work?

Joint picture frame and a piggybank

What is a mortgage?

A mortgage is a way of borrowing money (a type of loan) to buy or refinance a property. These loans are generally repaid over relatively long periods, often 25 years or more, to spread out the large cost of buying a home.

  • Mortgages are generally available from banks and other financial institutions, known as 'lenders'. These lenders charge 'interest' and sometimes other fees, on top of the amount borrowed.
  • The lender will also secure or guarantee the repayment of the loan, interest and fees by placing a 'charge' or 'security' on the title to property. This would allow the lender to sell the property in the event that the mortgage cannot be repaid.

How to get a mortgage

Getting a mortgage can be a daunting prospect, particularly if you're a first time buyer, but there's lots of information available and helpful tools you can use along the way.

  1. 01

    The first place most people start is a mortgage calculator. This helps you get a quick indication of how much you may be able to borrow and gives you an idea of what different borrowing amounts and terms might cost you.

  2. 02

    You also need to consider a mortgage deposit at this point. You'll need a deposit of at least 5% (a 95% LTV mortgage) of the purchase price to be potentially eligible for one of our mortgages. However, the higher your deposit, the less money you will need to borrow, so you may also want consider a 90% LTV mortgage or higher

  3. 03

    Once you're house-hunting, or looking to remortgage, the next step is to get an Agreement in Principle. This is a personalised indication of what a bank may be able to lend to you. It can be used with sellers and estate agents to demonstrate you may be in a financial position to purchase a property.

    Agreement in Principle

    You can find out more about an Agreement in Principle (sometimes known as a Mortgage in Principle or Decision in Principle), what they're for and how you can get one.

  4. 04

    Once you have your Agreement in Principle, found a property and the seller has accepted your offer, it's time to apply for your mortgage. Find out more about what you'll need to apply for a mortgage and applying for a mortgage with NatWest.

  5. 05

    If your mortgage is approved, you will generally work with a conveyancer, estate agents and other relevant third parties towards a 'completion date' or 'settlement date', when legal ownership of the property is transferred to you.

    At this point your conveyancer will 'drawdown' the money you are borrowing to complete the transaction.

What does 'drawdown' mean?

Drawdown is when your mortgage provider provides the funds to your legal representative to pay a seller of a property and effectively completes the purchase. After drawdown, you will be obliged to repay the money borrowed together with any interest and fees charged. You will need to comply with the terms of your mortgage agreement.

How does Stamp Duty work?

Stamp Duty is a type of tax you pay when buying a property (or land) in the UK. In England and Northern Ireland it’s called ‘Stamp Duty Land Tax’, in Scotland ‘Land and Buildings Transaction Tax’ and in Wales ‘Land Transaction Tax’.

Joint picture frame and a piggybank

What does remortgaging mean?

Remortgaging is the process of moving your mortgage to another lender. You would enter into a new mortgage contract with the new lender. Many people choose to do this at the end of a mortgage deal.

Mortgages often have an introductory interest rate for the first 2-5 years, which then expires, and then your mortgage would move to the 'Standard Variable Rate'.

However, there are other reasons and scenarios where remortgaging could be a good idea. You can learn more on our remortgaging reasons and stories page.

Other common questions about mortgages

How do mortgage payments work?

After your mortgage is drawn down with a lender, you will be provided with a breakdown of how much the monthly payments will be. This will stay the same after the first payment for a fixed period of time for a fixed rate mortgage or will vary as base rate changes if you have a tracker mortgage. Once the initial fixed or variable rate ends, you will move onto a Standard Variable Rate unless you move to a new fixed or tracker rate mortgage.

At NatWest, our mortgage customers need to set up a Direct Debit, providing us permission to take monthly payments out of their bank accounts on an agreed date in the month.

How long will I have to pay off a mortgage?

When you take out a mortgage, you will agree a mortgage term with your lender. This is the period of time between drawdown of the mortgage and expiry of the mortgage terms, when the capital must be repaid. 

  • If you have taken out a repayment mortgage (most mortgages are repayment mortgages), the capital will be paid back to the lender by the end of the mortgage term (assuming you keep your payments up to date during the term of the mortgage).
  • If the mortgage is an interest-only mortgage, your monthly payments only cover the interest on the amount you borrowed, meaning you pay the full amount back at the end of the mortgage term in one lump sum.

It's important to consider the mortgage term carefully. A longer mortgage term may be more affordable on a monthly basis (as you're spreading the cost across a longer period, your monthly payment is lower), but this would also mean the total cost of your mortgage is greater, as you would pay additional interest.

Do I need a good credit score to get a mortgage?

A mortgage lender will assess your credit score as part of your mortgage application. A good credit score could have a positive impact on the likelihood of an application being accepted (subject to satisfying all other criteria). A poorer score doesn't necessarily mean you won't be able to get a mortgage.

You can see lots more useful information about your credit score and applying for a mortgage.

More helpful mortgage questions

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