Mortgages in plain terms

The three numbers everything else hangs on

The principal is the amount borrowed. The rate is the price of borrowing it, expressed per year. The term is how long you have to repay. Change any one and the monthly payment changes, but they do not trade off symmetrically: a longer term reduces the monthly figure noticeably and increases the total paid considerably.

Amortisation, or why early payments feel wasted

On a repayment loan, each payment covers the interest accrued since the last one and puts whatever remains against the principal. Early on, interest takes most of the payment because the balance is large. As the balance falls, more of each identical payment goes to principal, and the balance falls faster.

The consequence is that progress is slow at first and then accelerates, and that overpayments made early remove far more total interest than the same amount paid late.

Interest-only, and what it does not do

An interest-only loan pays the price of borrowing but never reduces the debt, which remains due in full at the end of the term. It lowers the monthly figure by transferring the problem to a single future date, and it requires a credible plan for that date.

Fixed and variable

A fixed rate holds the rate for a defined period, giving certainty and, usually, a penalty for leaving early. A variable rate moves, either by tracking a reference rate or at the lender's discretion. Neither is safer in the abstract: fixing removes the risk of rises and removes the benefit of falls.

Most fixed periods are much shorter than the loan term, so a borrower should expect to reach the end of the fixed period and face whatever conditions exist at that moment. Planning around that date matters more than the small differences between comparable products at the outset.

Loan to value

Loan to value is the loan expressed as a percentage of the property's value. It is the single strongest influence on the rate offered, because it measures how much cushion the lender has if values fall. Pricing tends to step at round thresholds rather than improve smoothly, so a small additional deposit can matter far more than its size suggests if it crosses a band.

Affordability testing

Lenders assess income and committed spending, then check whether the payment would still be manageable at a higher rate than the one being offered. This is why an applicant can be refused an amount that looks affordable at today's payment: the test is not about today.

The costs that are not the rate

Costs that attach to a home loan and a purchase

Cost	What it is
Arrangement fee	Charged by the lender for the product, sometimes added to the loan, where it then accrues interest
Valuation	The lender's assessment of the security, paid by the borrower in many cases
Legal costs	The conveyancing work, searches and registration of the transfer
Transaction tax	Whatever purchase tax applies in the jurisdiction, usually stepped by price
Early repayment charge	A penalty for leaving a fixed or discounted deal before it ends
Buildings insurance	Required from exchange in most purchases, and a continuing cost of ownership

A note on what this page is not

Loan decisions depend on individual circumstances, on the rules of a particular jurisdiction and on products that change constantly. This page is written to make the vocabulary usable in a conversation with a qualified adviser or lender, not to replace one.