If you’re new to the property ladder, chances are you’re new to mortgage jargon too. And let’s face it, it can all be a bit confusing; making it harder for you to work out what you can get and what it’s going to cost you.
To help simplify things a bit, we’ve compiled a list of the most common terminology you’re likely to encounter and summed up what it actually means.
Agreement in principle
Sometimes known as a decision in principle or a mortgage in principle, this is a certificate or statement from a lender to say that – following a satisfactory credit check – ‘in principle’ they would lend a certain amount to you.
Some people will demand that you have an agreement in principle in place before they accept your offer on their house and it can also give you some peace of mind that you are able to get a mortgage as long as the decision isn’t overturned due to problems along the way.
This stands for annual percentage rate of charge, which is basically the same as APR but for mortgages. APRC covers the interest you’ll pay on what you borrow over a year, any fees and the follow-on rate (the standard variable rate a mortgage lender offers once the term of your initial rate ends).
An arrangement fee is a sum mortgage lenders may ask for to set up your mortgage. It can be added to the amount you pay back on your mortgage, so you don’t have to pay it up-front. However, if you do this you will have to pay interest on it.
This is a term used for missed payments. If you miss a mortgage payment, this can negatively affect your credit score and you could find yourself falling into debt.
The Bank of England set a rate of interest known as a base rate. This is what tracker mortgages and standard variable rate mortgages usually follow.
This is pretty self-explanatory – insurance that covers you for structural damage to your home – but you might not know that lenders require you to have this before you take out a mortgage.
How much you borrow to buy a property.
Some mortgages have a top rate of interest that the lender will never exceed, no matter what happens with the base rate. So, essentially, your interest is ‘capped’.
This is a type of mortgage that will see your lender give you cash once you’ve either finished paying it off or upfront when the mortgage completes. However, you need to think carefully about whether you’re getting a good rate on the mortgage for its entire term, rather than being seduced by the promise of a cash back, as restrictions normally apply.
This is the opposite of a capped rate. A collar is a rate of interest on your mortgage that a lender will not go below. Be wary of collars, because it means that if the base rate goes low, you won’t reap the benefits on your mortgage.
The name used for the legal part of buying a house, such as contracts.
The amount of money you put down towards your property outside of your mortgage. Learn about how much deposit you need here.
Early repayment charges
If you want to pay all or part of your mortgage off early, you may be charged by the lender. You should pay particular attention to this when choosing a mortgage, because you could find that you’re charged an early repayment charge if you want to move to a different lender or product to get a better rate.
This refers to the amount of your property that you own outright.
An administration fee paid by you when you repay your mortgage. Some lenders require this administration fee, so it worth checking to see if you have one as part of your mortgage agreement to avoid a nasty surprise at the end.
Extended tie in period
Your lender may demand that you stay with them for a certain amount of time, before you are able to move your mortgage elsewhere to get a better deal. This is known as an extended tie in period. However, you may still be able to move your mortgage during this time, but you will be charged a fee to do so.
Family offset mortgage
If you’re a first-time buyer, this may be an option for you, as it allows your parents or another family member to use their savings to reduce the overall mortgage balance. You then pay interest on the remaining balance, thereby lowering your monthly repayments. However, you still have to pay back the full mortgage balance – your family’s savings won’t pay it off for you if you use a family offset mortgage. These types of mortgages normally have higher interest charges.
A fee saver mortgage means you’ll have no arrangement fee or completion fee.
This is when you take out a mortgage that has a fixed rate of interest for a set period. During this period, your interest rate won’t go up or down.
With a flexible mortgage you can overpay or underpay without any early repayment charges. You might also be able to take a ‘payment holiday’ – when you don’t make your monthly repayments for a period of time, subject to the lenders terms and conditions. A flexible mortgage is ideal if you want to pay off your mortgage early but be prepared to pay more for this type of mortgage than others.
If you buy a freehold property, you will own the building and the land it stands on.
When you make an offer on a property and it is accepted, you could still lose it if someone else comes in with a higher offer and it’s accepted before you sign contracts. This is called gazumping.
If you have a low credit score or you’re a first-time buyer, you may be asked to provide a guarantor, which is a person who agrees to make your mortgage repayments if you aren’t able to for any reason. It essentially provides lenders with an extra level of security in case you default.
Help to Buy
This is the umbrella name for a series of initiatives launched by the government to help people get on the property ladder. This includes the Help to Buy ISA. To learn more, click here.
Higher lending charge
If you’re borrowing more than 75% of a property’s value you may face a charge. This is to give the lender more security.
Interest only mortgage
You pay the interest on your mortgage each month and pay the capital off in a lump sum at the end of the term. However, if you’re doing this, you need to have a plan to get the money together to pay off the capital when it’s due, perhaps by investing in stocks and shares or selling another property. This type of mortgage is not suitable for those who want to guarantee that their mortgage is paid off at the end of the mortgage term.
When a mortgage is taken out by two or more people. If you take a mortgage out with your partner, for example, this is classed as a joint mortgage.
Leasehold is when you only own the property for a fixed term and you do not own the land. This is common if you’re buying a flat.
Loan to value
This is the term used to describe the value of your mortgage as a percentage of your property’s value. So, if you put down 10% of your home’s value as a deposit, your loan to value ratio will be 90%.
Lump sum payment
When you make a one-off payment to reduce your outstanding mortgage balance.
This is a person who can help you understand the mortgage process and will look for mortgages for you.
This is the contract between you and your lender. It lets you know your rights and obligations, so make sure you read it properly.
The length of time you choose to repay your mortgage over.
You might hear this term bandied about when people talk about the housing market crash. Negative equity is when the value of your home is less than what you owe on it.
Often referred to as a current account mortgage, this is often a more expensive type of mortgage. It allows your credit balances to offset your mortgage amount , so you only have to pay interest on the difference.
The ability to move your mortgage from one property to another with the same lender without having to pay penalties.
You might encounter this when getting your home insurance ahead of your mortgage. It refers to the cost of rebuilding your home if, for some reason, it is destroyed.
This is a common type of mortgage and it’s when you pay off the capital of your mortgage and the interest each month. If you keep up your repayments your mortgage will be repaid at the end of the term.
If you choose a shared ownership property, you pay part of the value of the property and pay rent on the rest, often to a local housing association.
This is a land tax that you’ll pay once the purchase of your house has gone through. Learn more and see what you might have to pay here.
Standard valuation report
Once you’ve had an offer accepted, this will be done to help the lender to check the current market value of the home and, therefore, how much they are happy to ultimately lend you.
Standard variable rate
If you’ve taken out a fixed term mortgage, the standard variable rate is the rate of interest you’ll pay once the initial term is over.
Starter home initiative
This is another government scheme to help first-time buyers get on the property ladder. Thousands of new home have been created and will be sold at a minimum discount of 20%. Learn more here.
If you have a low credit score and cannot improve it quickly enough, you may want to apply for a sub-prime mortgage, as these are designed for people who don’t have a great credit history.
Tracker rate mortgage
If you have a tracker mortgage, the interest rate you pay will depend on the Bank of England base rate. A lender will commit to keeping their interest rate at a fixed percentage either above or below the base rate and this is what you’ll pay.
This is a mortgage where the interest rate you pay depends on what the lender’s variable rate is. As a result, it can go up or down whenever, making it slightly less predictable for you.
Article credit: noddle.co.uk