How Does a Mortgage Work? A Step-by-Step Journey From Preapproval to Payoff

Last reviewed: October 2026 · By the MortgageCompass Editorial Team · How we research

A mortgage is a loan to buy a home, where the home itself is the security. You borrow most of the price from a lender, pay the rest as a deposit or down payment, and repay the loan with interest in regular instalments, usually over 25 to 30 years. If you stop paying, the lender has the right to sell the home to recover what it is owed. The basic idea is the same in the US, the UK, Canada and Australia, although the words and some of the rules differ.

The five building blocks

Principal is the amount you borrow. Interest is what the lender charges for lending it, set by your rate. The term is how long you have to repay; in Canada and the UK the rate is usually fixed for a shorter period within it, which Canadians call the term while the full repayment period is the amortization. The deposit, or down payment, is the part you pay yourself, and the loan as a share of the property’s value is the loan to value. Finally, the security is the legal charge or lien the lender registers on your home until the loan is repaid.

A bigger deposit means a lower loan to value, which usually gets you a lower rate and avoids mortgage insurance. Our guide to how much house you can afford shows how lenders in each country decide how much to lend.

Follow a mortgage from start to finish

How your monthly payment is worked out

Most mortgages are repayment mortgages, also called amortizing loans: the payment stays the same, but its make-up changes over time. Illustrative example: on a $300,000 loan at 7% over 30 years, the payment is about $1,996 a month. In the first month, $1,750 of that is interest and only about $246 reduces the balance. Over the full 30 years you would pay about $419,000 in interest, more than the amount you borrowed.

That is why extra payments early on, a shorter term or a lower rate make such a difference. Our amortization guide includes a full schedule and an extra payment simulator, and our guide to 30-year vs 15-year mortgages compares terms side by side.

Fixed or variable?

With a fixed rate, your rate and payment stay the same for a set period, which might be the whole loan in the US or two to five years in the UK, Canada and Australia. With a variable or tracker rate, your rate moves with the central bank or the lender’s own rate, so payments can rise or fall. Fixed rates give certainty; variable rates can be cheaper and more flexible but carry the risk of increases. See the current rates for the US, UK, Canada and Australia.

What can go wrong

• Payment shock. When a fixed deal ends or a variable rate rises, payments can jump. Lenders in Canada and Australia test you at a higher rate for this reason; see our guide to the Canadian stress test.
• Negative equity. If prices fall, you can owe more than the home is worth, which makes it hard to sell or refinance.
• Missed payments. These damage your credit and, if they continue, can lead to the home being repossessed or foreclosed. If you are struggling, contact your lender early, because there are usually more options before arrears build up.
• Hidden costs. Closing costs, mortgage insurance, property tax, insurance and maintenance all come on top of the mortgage payment.

Questions people ask

Do I own my home if I have a mortgage? Yes. You are the legal owner, but the lender holds a charge or lien until the loan is repaid, so you cannot sell without paying it off from the proceeds.

Can I pay my mortgage off early? Usually, but some fixed-rate loans charge a fee for repaying early or limit how much extra you can pay each year. Check your loan terms before you overpay.

What happens if rates fall after I fix? You keep paying your fixed rate. You may be able to refinance, but early repayment charges can make that expensive; our guide on whether to refinance shows how to check.

Sources

• Consumer Financial Protection Bureau: Buying a House (US)
• Financial Consumer Agency of Canada: Mortgage prepayment penalties

This guide is for informational purposes only and is not financial advice. Processes, timings and rules vary by country, state and lender. Your home may be repossessed if you do not keep up repayments on your mortgage. Speak to a licensed adviser before you borrow.