A mortgage is a loan for buying a home, and the home itself is the security for the loan. You borrow a large sum, usually for decades, repay it in monthly instalments, and if you stop paying, the lender can sell the home to recover what it is owed. That is what makes mortgages different from every other loan: the amounts are large, the term is long, and the roof over your head is at stake. For most people it is the largest financial commitment they will ever make. This guide explains what a mortgage is, the difference between fixed and variable rates, what a deposit does, and the costs beyond the monthly payment. It is educational only, not personal financial advice. No interest rate here is a current or guaranteed rate: rates vary by lender, borrower and loan type, and the only rate that matters is the one in your own loan offer.
The basic idea
A mortgage has four moving parts: the principal, the amount you borrow; the interest rate, the price of borrowing it; the term, how many years you take to repay it; and the monthly payment, which covers part of the interest and part of the principal. Early in the loan, most of each payment goes to interest; over time, as the balance falls, more goes to reducing the principal. At the end of the term, if every payment was made, the loan is gone and you own the home outright.
The home is collateral, which is why lenders can offer mortgages at lower rates than unsecured loans: if you default, they can repossess and sell the property. It is also why lenders check your income, debts and credit history so carefully — our guide to what a credit score is and how it is calculated explains what they look at. Missing payments can damage your credit record and, in the worst case, cost you the home.
Fixed rate vs variable rate
The first choice is the type of rate. With a fixed-rate mortgage, the interest rate is set at closing and does not change for the agreed period, so the principal and interest part of your monthly payment stays the same. In the United States the most common form is a fixed-rate loan repaid over 30 years, though 15- and 20-year terms are also common, and a shorter term means higher monthly payments but far less interest overall. The advantage is certainty; the disadvantage is that if rates fall, you stay locked in unless you refinance, which itself costs money.
With an adjustable-rate mortgage — a variable-rate mortgage in the UK and Australia — the rate can go up or down after an introductory period. In the US, an adjustable loan often starts with a low fixed rate for one, three, five, seven or ten years, then resets at set intervals, following an index of market rates plus a margin the lender adds, within caps that limit how far the rate can climb. The early payments may be lower than a fixed-rate loan, but the rate and the payment can increase significantly. The regulator’s warning is worth remembering: do not assume you will be able to sell or refinance before the rate changes. If you cannot afford the higher payment on today’s income, consider another loan. A fixed rate suits a long stay and a tight budget; a variable rate suits a buyer confident they will move or repay before the first reset.
The deposit: what your down payment does
Your deposit, called a down payment in the US and Canada, is the share of the price you pay from your own money; the rest is borrowed. A bigger deposit does three things: it makes the loan smaller, so the monthly payment and the total interest are both lower; it reduces the lender’s risk, which usually means a better interest rate, because lenders price loans in bands; and it can remove the need for mortgage insurance, the extra cost that comes with a small deposit.
In the US, a conventional loan with less than 20% down usually requires private mortgage insurance, or PMI — insurance that protects the lender, not you, if you default. Under the Homeowners Protection Act, you can ask the lender to cancel PMI once the loan balance has been reduced to 80% of the home’s original value, and the lender must cancel it automatically at 78%. Government-backed loans have their own insurance charges: FHA loans can be taken with a 3.5% down payment with a qualifying credit score, but carry their own mortgage insurance premium, which can last for the life of the loan when the down payment is under 10%. Conventional loans can start at 3% down, and VA and USDA loans can require nothing down for those who qualify.
Costs beyond the monthly payment
The monthly payment is only part of the cost of owning a home. In the US, the full monthly figure is often called PITI: principal, interest, taxes and insurance. Property taxes are usually collected monthly through an escrow account and paid to the local authority once or twice a year, and the servicer recalculates the escrow deposit each year — which is why even a fixed-rate payment can change. Homeowners insurance is usually required by the lender and also runs through escrow. Add PMI while it applies, and homeowners association dues where they exist. Together they can add a large sum to the principal-and-interest figure lenders quote first.
Then there are the one-off costs of buying. In the US, closing costs — lender fees, appraisal, title insurance, legal fees and prepaid items — are usually paid at completion, and discount points, where one point equals 1% of the loan amount, can be paid up front to buy a lower rate. Whether points pay off depends on how long you keep the loan: divide the up-front cost by the monthly saving to find the break-even point. Federal rules require the lender to send a Loan Estimate, a three-page form setting out the rate, the fees and the projected payments, within three business days of a complete application. Read it line by line before you sign.
A short note for the UK, Australia and Canada
In the United Kingdom, fixed-rate deals commonly run for a set period of a few years, after which the rate usually moves to the lender’s standard variable rate unless you agree a new deal. Mortgages at 90% and 95% loan-to-value are widely available, so deposits of 5% to 10% are common for first-time buyers, and there is usually no separate mortgage insurance: the cost of a small deposit shows up as a higher interest rate. Stamp duty may also apply, with different rules in England and Northern Ireland, Scotland and Wales.
In Australia, variable-rate home loans are the most common. If your deposit is less than 20% of the property’s value, lenders will usually require lenders mortgage insurance — a one-off premium that protects the lender, not you, and is often added to the loan, so you pay interest on it too. The federal government’s 5% Deposit Scheme can help eligible first home buyers purchase with a 5% deposit and no lenders mortgage insurance. State stamp duty is another significant up-front cost, with concessions for first home buyers.
In Canada, mortgage default insurance is mandatory whenever the down payment is less than 20% of the price, for homes below a price cap of $1,500,000. The premium is a percentage of the mortgage amount, from 0.60% to 4.00% depending on how much you put down, and it is usually added to the loan. The minimum down payment is 5% of the first $500,000 of the price, plus 10% of the rest, and insured mortgages have a maximum amortisation of 25 years — or 30 years for eligible first-time buyers and buyers of newly built homes. The main provider is the Canada Mortgage and Housing Corporation, a federal Crown corporation.
How to compare mortgages fairly
Compare the same things on every offer: the interest rate, the annual percentage rate — which the CFPB describes as the broader measure that also reflects points, broker fees and other charges — the monthly payment including taxes, insurance and mortgage insurance, and the total fees at closing. A low rate with high fees can cost more than a slightly higher rate with low fees, and the APR is designed to expose exactly that. Ask each lender for those figures in writing, on the same loan amount and term, and check your credit reports before you apply — in the US they are free through AnnualCreditReport.com.
Common questions
Why did my monthly payment go up if my rate is fixed? Usually because of escrow: taxes and insurance are recalculated each year, and if either rises, the monthly escrow deposit rises with it, even though the principal and interest part never changes.
Should I save for a deposit in a high-yield savings account? A deposit fund is exactly the kind of short-term goal a high-yield savings account suits — the money stays safe and within reach while it earns interest. Our guide to what a high-yield savings account is explains how those accounts work.
The bottom line
A mortgage is a long-term loan secured on the home you are buying: a fixed rate keeps your principal and interest payment the same for the agreed period, while a variable or adjustable rate can rise or fall after an introductory period, within caps set by the contract. A bigger deposit means a smaller loan, usually a better rate, and — at 20% in the US, Canada and Australia — no mortgage insurance. And the monthly payment is more than principal and interest: taxes, insurance, mortgage insurance and association dues all add to it, alongside closing costs and points at the start. Compare offers on the same figures, read the Loan Estimate before you sign, and never stretch to a payment you could not afford if the rate rose.
This article is educational only and is not personal financial advice. Mortgage rules, limits, premiums and tax treatment vary by country and change over time. Check current terms with your lender and official sources in your country, or speak to a qualified mortgage adviser, before applying.
Sources verified 14 Nov 2026: the FDIC mortgage basics guide — the 30-year fixed as the most common US mortgage, adjustable-rate features, PMI below 20% down, and cancellation at 80% of original value; the fixed-rate and adjustable-rate mortgage guide from Wealthy Habitat — points at 1% of the loan, Homeowners Protection Act PMI rules, and the Loan Estimate within three business days; the mortgage loan types guide from Leevli — FHA 3.5% down with a 580 score, the 2026 conforming loan limit of $832,750, and the CFPB warning on adjustable rates; the CMHC insurance guide from Get a House — Canadian default insurance mandatory below 20% down, premiums of 0.60% to 4.00%, the $1.5 million price cap and 25-year maximum amortisation; and the lenders mortgage insurance guide from Westpac — Australian LMI below a 20% deposit, a one-off premium protecting the lender, and the 5% Deposit Scheme.