How Do UK Mortgages Work? A Complete 2026 Guide

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A UK mortgage is a long-term loan secured against a property. The lender registers a charge over the title at HM Land Registry; if the borrower defaults, the lender can repossess and sell the property to recover the debt. Most UK mortgages are repayment (capital and interest) over 25 to 35 years, with the rate fixed for an initial 2-, 5- or 10-year period before reverting to the lender's standard variable rate.

The structure: capital, interest, and term

Every mortgage has three numbers: how much you borrow (the capital), the rate you pay (the interest), and how long you have to repay it (the term). On a standard repayment mortgage, monthly payments are calculated so that the loan reaches zero by the end of the term. Early payments are mostly interest; later payments are mostly capital.

The MoneyHelper guide to what is a mortgage covers the basics in more detail.

The product types you'll be quoted

Lenders bundle the headline rate into a fixed-term "product" — usually 2, 3, 5, or 10 years. After the product period ends, the loan reverts to the lender's Standard Variable Rate (SVR), which is almost always higher. Most borrowers remortgage to a new product before this happens. The MoneyHelper types of mortgage guide breaks down the main categories:

Fixed-rate. The rate is locked for the product period. Repayments are predictable.
Tracker. The rate is the Bank of England Bank Rate plus a fixed margin (e.g. Bank Rate + 0.75%). Moves up and down with the base rate.
Discount. A discount off the lender's SVR for the product period. Variable, but tied to the lender's rate rather than the base rate.
Offset. Savings held with the lender are offset against the mortgage balance, reducing the interest charged. Less common; useful for high-balance savers.

Interest-only vs repayment

On a repayment mortgage, monthly payments cover both interest and capital. By the end of the term, the loan is paid off. On an interest-only mortgage, monthly payments only cover the interest — the full capital is owed as a lump sum at the end. Interest-only is now restricted to borrowers with a credible repayment vehicle (typically a buy-to-let or a high-net-worth borrower with investments), and is rare on residential purchases. The FCA's consumer mortgage guidance covers the difference.

Loan-to-value (LTV): the ratio that sets your rate

LTV is the loan as a percentage of the property's value. A £225,000 loan on a £250,000 property is 90% LTV. Lenders price products in LTV bands — the lower the LTV, the cheaper the rate, because the lender's exposure is smaller. Typical bands:

95% LTV — highest rates; backed by the permanent Mortgage Guarantee Scheme
90% LTV — significantly cheaper than 95%
85% LTV — middle of the market
75% LTV — typically the cheapest mainstream tier
60% LTV — best rates from many lenders

How interest is set: from Bank Rate to your statement

The Bank of England Monetary Policy Committee sets Bank Rate eight times a year. That rate filters into mortgages in two ways:

Trackers and SVR products. Move directly. A 0.25% Bank Rate cut typically passes through within a month.
Fixed-rate products. Priced from swap rates — the wholesale rates lenders pay to fund fixed-rate lending. Swap rates move on Bank Rate expectations, so fixed-rate offers can move before the MPC has acted.

If you're already on a fixed-rate product, your rate doesn't change mid-term. The change only affects you when you remortgage at the end of the product period.

Affordability and stress testing

Under FCA MCOB 11.6, every residential mortgage application must pass an affordability assessment. The lender models your income, committed expenditure (childcare, season tickets, debts), and applies a stress rate above the product rate to confirm you could still afford the loan if rates rose. The Bank of England's loan-to-income flow limit caps lenders at 15% of new lending above 4.5x income, which is why income multiples cluster between 4 and 4.5x.

Fees and the true cost

Product fee — typically £999, sometimes £1,499 or zero. Can usually be added to the loan.
Valuation fee — sometimes free, sometimes £200 to £400.
Broker fee — £0 to £600 depending on the broker.
Early Repayment Charge (ERC) — typically 1% to 5% of the balance if you redeem during the fix.
Exit fee — £50 to £300 when the mortgage is paid off in full.

The APRC (Annual Percentage Rate of Charge) bundles fees into a long-term cost figure, but because most borrowers remortgage rather than sit on the SVR, the initial rate plus the product fee is usually a more useful comparison.

Government schemes that affect your options

The GOV.UK affordable home ownership page lists the active schemes, including First Homes (30-50% discount on selected new-builds for first-time buyers under £80k income, £90k in London), Shared Ownership (buy a share, rent the rest), and the permanent Mortgage Guarantee Scheme that backs many 95% LTV products.

Frequently asked questions

What is the difference between fixed and tracker mortgages?

A fixed-rate mortgage locks the interest rate for an agreed period, typically 2, 3, 5 or 10 years. The repayment stays the same regardless of Bank of England rate moves. A tracker follows the Bank Rate plus a margin, so repayments rise and fall with the base rate. Fixed gives certainty; tracker gives the benefit (and risk) of rate changes.

How does a repayment mortgage work?

On a repayment (capital and interest) mortgage, each monthly payment covers some interest and some of the loan capital. Early payments are mostly interest; later payments are mostly capital. By the end of the term — usually 25 to 35 years — the balance is zero. This is the most common UK mortgage type and the only structure most lenders will offer for residential purchases.

What is APRC and is it useful?

The Annual Percentage Rate of Charge (APRC) is the total cost of borrowing over the full term, including the product fee and the lender's reversion rate after the initial deal ends. Because most borrowers remortgage before the reversion rate kicks in, APRC overstates the real cost. The initial rate plus product fee is usually a better comparison.

How does the Bank of England Bank Rate affect mortgages?

Tracker and standard variable rate (SVR) mortgages move directly with the Bank Rate. Fixed-rate mortgages do not change during the fix, but new fixed deals are priced from swap rates that follow Bank Rate expectations. A surprise rate cut tends to lower new fixed-rate offers within days; a surprise hike pushes them up.

Can I overpay my mortgage?

Most lenders allow overpayments of up to 10% of the outstanding balance per year without an Early Repayment Charge. Overpayments cut the interest paid because they reduce the capital balance the interest is calculated on. Always check the product terms — the 10% allowance is a convention, not a guarantee.