How does the interest on a mortgage work?

The amount of interest you will pay on a mortgage depends on the mortgage deal you select. If, for example, you choose a fixed-rate mortgage for a set period of time, then during this period the amount of interest you pay will remain the same every month.

When the fixed-rate period ends, you will usually be automatically transferred onto your lender’s standard variable rate (SVR), which will typically be higher than any special deal you have been on. At this point you will see your interest payments increase. However, you will then be free to remortgage to a new mortgage deal, which may help to keep your payments down.

If mortgage rates increase however, then borrowing costs become steeper for lenders, and these higher costs are typically passed on to homeowners. In this instance, your monthly payments would increase. This is why many homebuyers opt for fixed rates to provide peace of mind that their interest rate and monthly payments will not change.

In the early years of your mortgage, a larger proportion of your monthly payment goes towards paying off your interest, and a smaller amount towards your capital. Over time, you will start to pay off more of your capital as your debt gradually reduces.

How do mortgages work when you are selling or moving house?

When you sell your property or move house, you will usually have various different mortgage options available.

Many mortgages allow you to ‘port’ them to a new property, so you may have the option to move your existing mortgage across to your next property. However, you will essentially have to apply for your mortgage again, so it is required that you satisfy the lender that your monthly payments remain affordable. It remains for the lender to decide if they are happy to allow you to transfer your current deal over to your new property. Bear in mind that there may be fees to pay for moving your mortgage.

If you require a bigger mortgage to move to a new home, you may decide to move your existing deal across and then ask your lender if you are able to borrow the additional funds. Do proceed with caution as any extra borrowing may be at a different rate.

If you are not tied into your current mortgage deal and there are not any early repayment charges to pay if you leave it, you could remortgage with a different lender for the amount you need for your new property.

Remember that you will have to be certain you can afford your new mortgage before you apply. Lending criteria is more stringent now than it was a few years ago, and lenders will want to go through your finances closely to check you can manage the monthly payments before they offer you a mortgage.

If there will be a gap between the sale of your home and the purchase of your new property, some people are able to apply for what is referred to as a ‘bridging loan’ to bridge this gap. This type of loan means you can move into your new property before you have solved your home. However, these should only be considered as a last resort as they usually have very high interest rates and fees. Seek professional advice if you are uncertain, and if you are considering this type of loan you must feel comfortable with the risks involved as you will essentially own two properties for a period of time.