How a mortgage payment works
Every monthly mortgage payment has two components: principal (repaying the original loan) and interest (the cost of borrowing). In the early years, the vast majority of each payment is interest — a £1,500 monthly payment on a new 25-year mortgage might be £1,200 interest and only £300 principal. As the loan balance falls, the interest portion shrinks and the principal portion grows. This structure is called amortisation, and it explains why overpaying early has such a dramatic effect on total interest paid.
Types of mortgage
| Type | Rate | Best for |
|---|---|---|
| Fixed rate | Set for 2, 5, or 10 years | Certainty; rate-rise protection |
| Variable/tracker | Moves with base rate | Benefit if rates fall; risky if they rise |
| Offset | Savings offset loan balance | High earners with large savings |
| Interest-only | Pay interest only; capital at end | Buy-to-let investors (mainly) |
The deposit and loan-to-value
Lenders assess risk through the loan-to-value (LTV) ratio: the mortgage amount as a percentage of the property value. A £240,000 mortgage on a £300,000 property is 80% LTV. Higher deposits (lower LTV) unlock better rates — a 40% deposit (60% LTV) typically accesses rates 0.5–1.5% lower than a 5% deposit (95% LTV). This rate difference compounds over 25 years into tens of thousands of pounds. A 5% deposit allows you to get on the property ladder sooner; a 20%+ deposit gives you materially cheaper borrowing.
"A mortgage is the largest financial commitment most people ever make — and the interest rate difference between a good and bad deal can cost more than a new car."
What this means for you
Shop for mortgages using a broker — they access the whole market and typically cost nothing (paid by the lender). Compare the true cost over the deal period, not just the headline rate (account for arrangement fees, which can add £1,000–£2,000). Overpay whenever possible: on a 25-year mortgage, overpaying £100 per month from day one can cut five years off the term and save £15,000+ in interest. When your fixed rate ends, don't drift onto the lender's standard variable rate (usually the worst rate they offer) — always remortgage.