How does a mortgage work?

Buying a home is an exciting moment in your life and you’re likely to need a mortgage to do it.

There's a few stages to getting a mortgage and some jargon to understand before you do. Interest rates, deposits and contracts – there’s quite a lot to get your head around. 

Discover all you need to know to feel more confident before you start house hunting.   

1. Know your budget

Before you apply for a mortgage, you’re going to need to know what you can borrow. This will help you know what value property you might be able to afford.

Try our mortgage calculator to get an idea of the value of property you might be able to afford. You’ll also get an estimate on what the monthly repayments could be.

2. Saving up a deposit

Probably one of the most difficult parts of getting a mortgage is saving up for the deposit.

The more you can put down as a deposit, the less you will be borrowing. A higher deposit will also lower your loan to value ratio (LTV).

This could increase your chances of being accepted for a mortgage, as well as getting a lower interest rate.

Whether you’re buying alone or with a partner, try setting a monthly saving budget to build up your deposit fund.

3. Getting a decision in principle

Before you start searching for a home, you'll need to know how much you might be able to borrow. You can do this by applying for a mortgage Agreement in Principle.

Applying involves soft credit checks on you and anyone you’re looking to buy with, as well as looking at your financial position and commitments. Learn more about how credit checks work.

This isn’t an official mortgage offer, but more an indication of how much the lender may be willing to lend you. After you’ve got an Agreement in Principle, you can start house hunting.

Once you’ve been received an Agreement in Principle, the next step is to speak to a mortgage adviser.

A mortgage adviser will be able to discuss with you what you can afford and the different types of mortgages available.

4. Applying for a mortgage

Once you have found the house you want to buy and had an offer accepted, it’s time to apply for your mortgage.

At this point, you’ll need to think about what kind of mortgage you want. There are lots of different mortgage types to pick from, including:

• Repayment mortgages – the most common type of mortgage, you’ll pay a deposit then make monthly repayments.
• Interest-only mortgages – you’ll only pay the interest each month, not the capital. You’ll pay off the capital at the end of the mortgage term.
  
• Tracker mortgages – your interest rate changes based on the Bank of England’s base rate. It could be set at a percentage above the base rate, or below it. Your monthly repayments could go up and down during the term of your mortgage.
  
• Offset mortgages – your savings are offset against the mortgage amount. This means the overall interest you pay can generally be lower.
  
• Fixed-rate mortgages – the interest rate you pay won’t change for a set period. You’ll arrange how long this period is with your lender.
  

This is also the time when the lender will dig a little deeper into your finances, running a hard credit check to allow them to decide whether to accept your mortgage application.

5. Getting a home valuation

Your lender will need to carry out an independent valuation of the property you want to buy. This is to make sure the house is worth what you are offering to pay for it and this valuation will be used to calculate your Loan to Value ratio.

It protects them if you were unable to pay your mortgage, the property was repossessed and they had to sell it.

6. Receiving your mortgage offer

If all is well with the valuation and your application has gone smoothly, you’ll receive a mortgage offer at this stage. This offer will confirm that the lender is happy to lend you the money and shows the repayment terms.

7. Completing the deal

If you’re happy with your mortgage deal, you’re on the home straight. At this point, all that’s left to do is bring in a conveyancer, who will complete the various checks so you know what you are buying.

The conveyancer will draw up contracts and handle the exchange of these with the seller’s representative, as well as the payment of your deposit. You can use our Halifax conveyancing service to compare quotes for your legal costs from our panel of up to 200 conveyancers.

At that point, you should receive a completion date, after which you will be free to start looking forward to moving into your dream home.