Mortgage

A mortgage is a loan secured on land or a building, most often used to buy a home. The borrower gets the money to buy the property and repays it over a long term, commonly 25 to 30 years, while the lender holds a legal charge over the property that lets it sell the home if the payments stop.

Strictly, the mortgage is the security itself, the pledge of the property, rather than the money; the word comes from Old French for a "dead pledge", because the pledge ends once the debt is paid. In everyday speech it means the whole home loan. Mortgages are offered by banks, a building society or credit union, and specialist mortgage companies, and they are the biggest debt most households ever take on.

Buying a house with a mortgage is a bit like buying it with a partner who pays most of the price up front. You put in a slice of your own money, the deposit, and the lender puts in the rest. You live in the house straight away, and each month you pay the lender back a little, plus a charge for using its money.

The lender's protection is a claim on the house itself. As long as you keep paying, the house is yours to live in and, in the end, to own outright. If you stop paying for a long time, the lender can take the house and sell it to get its money back. That claim is why mortgages are cheaper than most other loans.

The buyer usually pays a deposit, and the mortgage covers the rest. The lender values the property, checks the borrower's income and credit score through underwriting, and registers a charge or lien against the title. The size of the loan compared with the property's value is the loan-to-value (LTV) ratio:

Here the loan amount is the mortgage borrowed and the property value is the lender's valuation or the price paid, whichever is lower. For example, a buyer purchasing a 200,000 home with a 40,000 deposit borrows 160,000, so the LTV is $160{,}000 \div 200{,}000 \times 100 = 80\%$. A lower LTV means a bigger cushion for the lender if prices fall, so it usually earns a lower interest rate. Lenders also cap how much they lend as a multiple of income or as a share of monthly earnings.

• Repayment (capital and interest). Each monthly payment covers interest and part of the principal, so the debt falls to zero by the end of the term. Early payments are mostly interest; later ones mostly principal.
• Interest-only. The borrower pays only the interest each month and repays the whole principal at the end, from savings, an investment or the sale of the home. Payments are lower, but the debt does not shrink, and regulators require lenders to check that a credible repayment plan exists.

Overpaying a repayment mortgage cuts the balance and saves interest, though many fixed-rate deals charge an early repayment fee above a set allowance.

A fixed-rate mortgage keeps the interest rate the same for a set period. In the United States the 30-year fixed-rate loan is the standard product; in the United Kingdom fixes usually last two to five years, after which the loan moves to the lender's standard variable rate unless the borrower remortgages. A variable or tracker mortgage moves with a benchmark, such as a central bank's policy rate, so payments rise and fall with market interest. Fixed rates give certainty; variable rates can be cheaper when rates fall but expose the household to rising costs, which many borrowers felt when rates climbed in 2022 and 2023.

If payments are missed, the lender can begin foreclosure in the US or repossession in the UK after a legal process. Lending to borrowers who could not afford their loans, through sub-prime mortgages, helped cause the 2007–2008 financial crisis when those loans, bundled through securitization into products such as collateralized debt obligations (CDOs), went bad. Since then, regulators in many countries require affordability checks, limit high-LTV lending as part of macroprudential policy, and act against predatory lending. The total cost of a mortgage, including fees, is disclosed as an Annual Percentage Rate (APR).

Because conventional mortgages charge interest, Islamic banking offers home finance in other forms. The most common is musharakah mutanaqisah (diminishing partnership): the bank and the customer buy the home together, the customer rents the bank's share and buys it out unit by unit until owning the whole property. Banks also use ijarah (lease-to-own) and murabaha (cost-plus sale) structures.

• Consumer Financial Protection Bureau: Buying a house
• Financial Conduct Authority: Consumers