Understanding all the jargon and terminology used to describe the various elements mortgages can be confusing for first time buyers, but it's worth taking a little time to learn the jargon before you apply.
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We've put together a mortgage glossary to help even the experienced homeowner get to grips with all of the important terminology, including everything relating to interest rates, mortgage types, getting a mortgage and moving home.
- Mortgage interest rates - interest rate is how the cost of your there are several different types of rate, we take a closer look
- Mortgage types - we explain what capital repayment, interest only, offset mortgages and more mean
- Moving home terminology - we look at what you need to know about conveyancing, surveying, porting and bridging
- Getting a mortgage - deposits, LTV, affordability criteria and much more
- Mortgage lenders - there are a few different types of company that will lend money for a mortgage
- Fees - a comprehensive explanation of the fees you may face when applying for a mortgage
- Paying your mortgage - the terms related to payments for your mortgage
Interest rates usually refer to the cost of the mortgage (see 'APR and APRC' below). This is the rate the lender will charge you for borrowing money. It is usually calculated annually, which is why it is also known as the Annual Percentage Rate.
Initial rates and fixed periods
Almost all mortgages will charge an initial rate that is set, often for a fixed period of two years or five years.
This rate can be fixed or variable (see 'Fixed rate', 'Variable rate' and 'Tracker rate' below) but after the initial period, your interest rate will be set to the mortgage provider's 'Standard Variable Rate', which is the standard rate of interest charged.
APR and APRC
The APR is the Annual Percentage Rate, and the APRC is the Annual Percentage Rate of Charge. Both are used to help make a comparison between mortgages as they show you the cost of the interest rate on the mortgage. APR has been the standard and is still commonly used to compare mortgages, but this only compares the cost of the initial fixed period.
APRC is the overall cost of the mortgage if you were to continue paying it for the entire term. Most people remortgage after the initial period ends, but the APRC is useful to understand the full cost if you were to pay off that mortgage over a 25 year period or so.
During the initial period on a mortgage, usually lasting two or five years, you can get your rate fixed. This means the rate does not change during that period, even if the Bank of England base rate (see more on this below) changes. This can give you peace of mind and more security during the first few years or your mortgage repayments.
Compare fixed rate mortgages
Look at mortgages where your mortgage rate will remain at fixed rate for a set period of years.
A variable rate is an interest rate on a mortgage that is subject to change. You can choose to get a discounted variable rate for the initial fixed period on your mortgage, often lasting for two or five years, but all mortgages after the initial period are on a variable rate.
This is often known as the Standard Variable Rate (SVR). This rate fluctuates according to the mortgage lender's own assessments of the market and competition, as well as according to the Bank of England base rate.
Compare variable mortgages
Look at mortgages where your rate will vary at the discretion of your bank and move with the market.
The tracker rate is another kind of variable interest rate, but it is directly linked to the Bank of England base rate. The mortgage lender will have their own base rate charge, which is added to the Bank of England base rate. When the base rate goes up or down, so does the mortgage's tracker rate.
Compare tracker mortgages
Look at mortgages where your rate will follow the base rate set by the Bank of England.
The Bank of England base rate
In the UK, the charge placed on banks for lending and savings is set by the Bank of England. Based on multiple factors in the economy, jobs and housing market, the Bank of England will decide whether or not to raise or lower the 'base rate'.
When the base rate goes up, mortgage lenders' Standard Variable Rate will also rise. When the base rate goes down, mortgage lenders' Standard Variable Rate will go down too.
There are several mortgage types and many choices that can affect it, and also make comparisons confusing. Interest only, capital repayment and offset mortgages refer to how you pay back the mortgage only.
Then there are fixed rate, variable rate and tracker rate mortgages that refer to what kind of interest rate you have to repay. Then there are mortgage types for those who are struggling to get a large enough deposit together like guarantor and family assisted mortgages.
Interest only mortgage
Interest only mortgages refer to a form of repayment plan that involves only paying back the interest portion of your debt. Obviously, the interest is likely to be far smaller than the capital (the portion you used to actually buy the home), meaning your monthly repayments will be easier to manage. However, at the end of the mortgage term, you will need to repay all of the capital owed. These mortgages are far less common due to the risk involved.
Compare interest only mortgages
Look at mortgages where you will will only pay interest on the amount you've borrowed, but not the total debt.
Capital repayment mortgage
A capital repayment mortgage is the most common type of repayment plan on a mortgage. This involves repaying the capital and the interest together every month until you repay the entire mortgage.
Compare capital repayment mortgages
Look at mortgages where you will pay off the amount you have borrowed in full at the end of the term.
An offset mortgage refers to a repayment plan on a mortgage, which uses a savings account linked to your repayments. Instead of your savings accumulating interest, the money you earn goes towards paying off your mortgage.
This can be useful if savings rates are not that good, as you can make an effort to 'overpay' your mortgage every month and save on mortgage interest.
Compare offset mortgages
Look at mortgages that have an offsetting facility included
A guarantor mortgage is aimed at people who have a poor credit score or who do not have a big enough deposit to secure a standard mortgage. A trusted family member or friend will act as a guarantor for your mortgage application and be required to pay your mortgage if you fail to keep up with repayments.
Family assisted mortgage
There are family deposit or family offset mortgages available for homebuyers looking for assistance. With a family deposit mortgage, a family member puts cash into a savings account linked to the mortgage. They receive interest on that money but the lender can take some of it to make a repayment in the event the buyer defaults.
With a family offset mortgage, the money is placed in a separate account linked to the mortgage that does not receive interest and is used to offset the cost of the monthly mortgage repayments. They can also get their money back once 20% or so of the mortgage has been repaid.
Finalising the mortgage and moving is a long process with several stages. Read on to learn everything you need to know.
The valuation survey helps the mortgage lender determine whether the amount you are asking to borrow matches up with what they think the property is worth. You should also get your own survey done to check the structural integrity of the property.
Porting is moving your borrowing from one property to another without paying an arrangement fee. This is usually done if you are moving home and don't want to get a second mortgage. If you plan to do this in the future, check that your mortgage is portable.
If you are moving home then you might choose to get a bridging loan to help cover the costs of your current property's debt in the time between you finalise a new mortgage on your new home.
You will need a solicitor specialising in property transactions to complete the legal aspects of buying or selling a home. The conveyancer will help transfer the cash and do the necessary dealings with the Land Registry.
Everything you needed to know about the terms related to getting a mortgage.
In order to get a mortgage, you will need to pay some cash upfront, known as the deposit. This should usually be around 20% of the property value, but some mortgages allow you to pay as little as 5% upfront as a deposit.
Loan to Value (LTV)
The LTV is the ratio of what the loan covers against the value of the property. For example, if the home you wish to buy is £200,000 and you have a deposit of £50,000, then you only need a mortgage loan of £150,000, making the LTV ratio 75%.
Every mortgage lender has a set of criteria required to be met in order to have the application approved. The affordability criteria assesses how likely you are to be able to afford the monthly mortgage repayments and how reliable you will be even if a sudden unexpected change of circumstances were to negatively impact your finances.
Your credit score is taken off a calculation of the impact of all of your financial and debt history. Your utility and phone contract bills, credit card debts and other loans are all recorded in your credit report.
If you miss a payment or have a lot of debt, that will give you a lower credit score, but if you make your payments on time and have a trustworthy record then you will have a higher credit score. All lenders look at your credit score to determine your eligibility for their products, including mortgages.
Agreement in principle
Before you make an offer on a property it is a good idea to get a mortgage agreement in principle. This is an agreement from the lender stating that, in principle, they would be happy to lend to you the amount shown.
This can help speed up the home buying process as it shows the seller that you will be able to get a mortgage. An agreement in principle is not a guarantee that will you be approved for a mortgage though.
There are many types of mortgage lenders to choose from.
High street banks
The main lenders on the market, such as RBC, Barclays, Lloyds, Santander and HSBC are generally more likely to have many mortgage products, but they have a reputation (if a little under-deserved) understanding if your circumstances do not fit the mainstream criteria for borrowing.
Lenders such as Nationwide, Leeds and Skipton are building societies, meaning they are owned by its members, rather than shareholders. This means they can sometimes offer lower mortgage rates than the high street lenders.
There are several specialist lenders available, each one suited to a different set of circumstances, such as being self-employed, or having poor credit, or wanting to buy a home abroad.
Many credit unions are able to offer mortgages, but usually to customers who have been members and have had a savings account with them for a while.
Despite paying a large lump sum of cash and having to repay your mortgage every month, there are still so many other costs to getting a mortgage and buying a home.
In order to set up your mortgage, you will likely have to pay an arrangement fee. This can be added to your mortgage but it will cost a lot more as you will have to pay it off over the same length of time.
This is another type of mortgage set up fee. It's usually much smaller than the arrangement fee.
This fee pays for a valuation survey, so that the lender can be sure the mortgage they give you is good value for the property you are buying.
Telegraphic transfer fee
This fee pays for the transfer of the mortgage money to pay the seller.
Mortgage account fee
This fee covers the administration cost of closing the mortgage account, but can also refer to the general administration of keeping the mortgage account open. Check the terms of your mortgage to see that this is the same as the 'Exit/Closure fee' (see below).
If you are late on your mortgage payments you could be charged a fee or even worse, have your home repossessed. If you are unable to make a payment on time, speak to your lender in advance to see if they can arrange for you to skip a payment and add it on to the end.
Mortgage broker fee
If you use a mortgage broker to help you find a mortgage, they will either get their fee from you or from the lender. Mortgage brokers have to tell you upfront if they work on commission from the lender or if they expect to be paid by you.
Higher lending charge
A higher lending charge usually applies to mortgages with a Loan to Value ratio higher than 90%. This is an additional charge added to the mortgage for the risk of lending a higher amount than usual to the borrower.
Fee for own buildings insurance arrangements
Mortgage lenders usually offer you a deal to use their recommended buildings insurance partner. If you refuse to take it, you might be charged a fee. However, this might work out cheaper as you will be able to compare the best deals to find your own buildings insurance.
Early repayment charge
Every mortgage has a repayment term, which is usually around 25 years (see below 'Repayment period (mortgage term)'. The mortgage has to be paid over this period, but you are usually allowed to overpay every month by a certain amount. If you go over this amount or pay your mortgage off too quickly you will be charged a penalty.
In order to close down your account and confirm your mortgage as finished you have to pay an exit fee, sometimes known as a mortgage account fee.
There are a number of terms that you should familiarise yourself with when it comes to repaying your mortgage, hopefully you'll never have to deal with arrears or defaults, but it's worth understanding what they are.
Repayment period (mortgage term)
The mortgage term sets out how long you need to make your repayments for. If your mortgage is 25 years long, then you will make monthly repayments for 25 years.
Debt repayments are made every month to finish paying off the mortgage.
This is when you miss a mortgage repayment.
If you have defaulted at least once on your mortgage, then you will go into arrears. Contact your lender before that happens to find a solution and avoid getting your home repossessed.
The lender has the power to repossess your home as part payment for their costs if you default too many times and fall into arrears.