Understanding mortgages

1. The deposit

The deposit is the initial amount you pay towards the house price, usually expressed as a percentage. Most lenders require a minimum deposit of 5%, though higher deposits often result in lower interest rates. For instance, if you’re buying a house priced at £250,000, a £50,000 deposit (20%) would leave £200,000 to be financed through a mortgage.

2. The loan amount

This is the sum you borrow from the lender to cover the remaining cost of the house after the deposit. In the above example, the mortgage would cover the remaining £200,000 of the house price.

3. The mortgage term

The term is the duration over which you agree to repay the loan. Most mortgage terms range between 20 and 35 years, giving buyers flexibility based on their financial circumstances.

4. The interest rate

The interest rate determines how much you’re charged for borrowing the money. Most mortgages are repayment mortgages, meaning each monthly payment covers both the loan amount (principal) and the interest charged.

Renegotiating your mortgage deal

While the house price is fixed, you can typically renegotiate your mortgage terms every 3–5 years. This could allow you to adjust the interest rate, term, and monthly payment amount to suit your changing financial needs.

• Positives: Low interest rates, long repayment terms, potential for property price to grow.
• Negatives: Requires a deposit, can involve significant long-term financial commitment, risk of losing the property if payments are missed.

Repaying your mortgage early

As mortgages are repaid over a long period of time, interest usually makes up a large part of payments over the term of the mortgage. Making overpayments on your mortgage can result in significant savings on interest because overpayments usually come straight off the outstanding balance, meaning you’ll pay les interest as your borrowing less money.

Depending on your lenders terms, you can usually either make monthly overpayments or one off overpayments up to a set limit each year.

Example savings

Here’s an example of the savings you could make if you had a £200,000 mortgage with an interest rate of 4% and initial term of 25 years. If you made your standard monthly repayments. You would end up paying £116,570 in interest over the term.

Adding £50 per month could cuts the term to 23 years and 2 months, saving £9787 in interest.

Adding £100 per month could reduce the term to 21 years and 7 months, saving £17,996 in interest.

Adding £250 per month could shortens the term to 17 years and 11 months, saving £36,295 in interest.

As mentioned earlier, most lenders impose limits as to the amount you can overpay each year. Before making overpayments, check with your lender how much you could overpay before incurring any penalties.