Mortgage loan: what it is and how it works

A mortgage is a long‑term loan to buy, build or renovate a property, secured by a mortgage on the property. In practice, the bank is entered in the land and mortgage register, which usually allows lower interest than a cash loan. The trade‑off is a more formal process and a stricter creditworthiness assessment.

For a quick comparison of instalments and total costs, use the Mortgage comparison calculator.

This guide explains the basics: how a mortgage works, what the costs include, what conditions must be met and which documents are needed. For concrete instalment calculations, see Mortgage instalment — how to calculate and the Mortgage calculator.

What a mortgage is

A mortgage is a bank loan secured by real estate. Most often it finances the purchase of a flat or house, but it can also cover construction, renovation or refinancing another loan. The mortgage security means that if the borrower defaults, the bank can satisfy its claim from the property.

A key difference from a cash loan is the term and the cost of money. Mortgages are typically granted for 15–30 years, which lowers the monthly instalment but increases the total cost. That is why it is worth comparing not only the instalment, but also APRC and total repayment. Helpful context: How APRC works — rules, limits and examples.

What the total cost includes

For comparing offers and cost impact, see: Mortgage interest rate and Mortgage comparison.

The total mortgage cost typically consists of:

• interest (base rate plus the bank’s margin),
• origination fee,
• insurance required by the bank,
• property valuation cost,
• ancillary fees (for example land‑register entries).

Most offers include equal (annuity) or decreasing instalments. Equal instalments are easier to budget but cost more overall; decreasing instalments are cheaper in total but higher at the beginning. See: Fixed or decreasing instalment and How to calculate a loan instalment.

Who can get a mortgage

The bank assesses creditworthiness, income stability and credit history. Regular income, employment type and the ratio of income to liabilities are key. Different income sources (employment contract, self‑employment, civil contracts) are accepted but require different documentation.

In practice it is worth estimating your capacity first, so you do not apply for an unrealistic amount. Use the Mortgage creditworthiness calculator and the guide: Creditworthiness: rules, documents and examples.

Down payment and collateral

A down payment is the standard mortgage requirement. It is usually 10–20% of the property value and affects LTV, the bank’s margin and the total cost. The higher the down payment, the lower the loan amount and often better terms. Rules and documents are explained here: Mortgage down payment.

In some situations programmes with a lower down payment or additional collateral are possible, but they typically mean higher costs or stricter conditions.

Process steps and documents

The mortgage process usually includes:

• creditworthiness assessment and preliminary decision,
• selecting a property and collecting documents,
• property valuation,
• credit decision,
• signing the agreement and disbursing the loan.

Common documents include income confirmations, account history, property documents, a preliminary sale agreement and certificates from offices or housing cooperatives. The more complete the set, the shorter the process.

What to watch for in the contract

Pay attention to:

• the interest rate type and change rules,
• all extra fees and insurance,
• early repayment conditions,
• the disbursement schedule (for construction or primary market purchases).

It is also smart to keep a buffer in your household budget. Even a small increase in rates can raise the instalment, so a financial cushion helps avoid stress.

Transaction costs beyond the instalment

When buying property, there are notary fees, land‑register entries and sometimes a tax on the transaction. Add them to your budget because they are not part of the instalment but affect the real cost.

Mortgage and affordability

The higher the instalment relative to income, the lower the affordability. Adjust the term and down payment to keep the instalment safe for your budget.

Step‑by‑step mortgage process

A typical path looks like this:

• initial affordability check,
• property selection and preliminary agreement,
• application and document submission,
• property valuation and bank decision,
• contract signing and disbursement,
• entry in the land register and ongoing repayment.

Fixed vs variable basics

Fixed rates offer predictability for a defined period, while variable rates can be cheaper initially but expose you to rate hikes. Check what happens after the fixed period ends and whether you can renegotiate or refinance then. Always compare the total cost, not just the headline rate.