First mortgage jargon buster

First mortgage jargon buster

Applying for your first mortgage can be intimidating. Advisors and experts seem to have their own language of percentages and numbers. Our mortgage Jargon Buster will help break down these technical terms so you can understand what you’re being told. We’ve broken them down into four simple sections to help you get started: The basics, Types of mortgages, Repayment rates and Mortgage fees.

 

The basics

Interest rate

The interest rate is the cost of borrowing your money. This is given as a percentage of the amount you are borrowing.

 

Annual percentage rate (APR)

The APR tells how much your mortgage will cost over an entire year as a percentage of the amount you borrow. This figure also includes any fees or charges from the lender.

 

Bank of England base rate

The Base Rate is the set cost of borrowing money as set by the Bank of England. Your mortgage will normally be linked in some way, with a margin for the lender.

 

Loan to value (LTV)

This is the percentage of the total value of the house you need to borrow. For example: if you’re borrowing £160,000 to buy a £200,000 house your LTV will be 80%.

 

Mortgage term

The term of a mortgage is the length of your agreement. This can be anything from 1 to normally 25 years.

 

Mortgage deposit

This is the amount of money you will need as an up-front payment when you buy your house. This will normally be at least 5% of the value of the property. For example, if you’re buying a house worth £200,000 you will need to save at least £10,000.

 

Equity

This is the difference between the properties actual value and the mortgage on that house. For example if you own a house worth £200,000 but you owe £150,000, you have £50,000 of equity.

 

Types of mortgage 

Interest only mortgage

Your payments only cover the interest charged on the money you originally borrowed. This means you are not actually buying your house so you will need to make other arrangements to pay of the money you originally borrowed.

 

Capital repayment mortgage

This gradually pays off the entire amount you borrowed along with the interest. With a capital repayment mortgage you will be paying off the entire loan and you will eventually own your home.

 

Offset mortgage

If you have a bank account or credit card with the same company as your mortgage, you can ‘offset’ your savings against your mortgage and pay interest on the difference. For example, if you have a mortgage worth £225,000 and savings worth £25,000 your interest would be calculated on the £200,000.

 

Repayment rates

Fixed rate mortgage

As the name suggests, the interest rate is fixed at specific rate for a certain period of time. This means that your repayments will not change until a certain date.

 

Variable rate mortgage

On a variable rate mortgage the interest rate is not fixed. This means that your repayments will go up and down throughout the term of your mortgage. These are broken into three types:

 

Tracker mortgage

Interest rates on a Tracker Rate Mortgage are set at a percentage above the Bank of England (BoE) base rate. This means that your repayments will rise and fall in line with changes base rate changes.

 

Standard variable rate (SVR) mortgage

A standard variable rate mortgage is not set by Bank of England base rate. Instead your lender has the freedom to change the interest on your mortgage at any time. However it will most likely be at the same time as the BoE.

 

Discount mortgage

The rate on a discount mortgage will be set at a ‘discount’ below the standard variable rate for a set period of time.

 

Mortgage fees

Booking fee

Booking fees or Application fees are charged when you ‘reserve’ your mortgage. Some lenders will charge this fee as a percentage of the loan which can hurt if you’re borrowing a large amounts.

Paid: Up Front

Cost: £0-£200

 

Arrangement fee

This is a fee you pay to the lender for arranging the mortgage. If you do choose not to pay the few up-front it can be added to the mortgage. This will mean paying interest on it.

Paid: Up front or added to the mortgage

Cost: £400-£3,000

 

Valuation fee

This pays for your lender to survey the house you’re looking to buy and make sure it is adequate security for your loan.

Paid: Up front

Cost: Usually less than £1,000 but can vary from lender to lender

 

Conveyancing fee

You will need a solicitor to do the paperwork. These are normally charged as a percentage of the mortgage cost.

 

Stamp duty

Stamp Duty Land Tax or SDLT is paid to the government on all residential properties over £125,000. The rate goes up with the price of the property in portions:

 

Property Value

SDLT rate

Up to £125,000

0%

The next £125,000

2%

The next £675,000

5%

The next £575,000

10%

Above £1.5 million

12%

 

For example, if you’re buying a house for £300,000 you will have to pay:

 

0% on the first £125,000

£0  

2% on the next £125,000

£2,500

5% on the final £50,000

£2,500

Total

£5,000

 

Higher lending charges

These are charged by lenders when your loan-to-value ratio is higher than their standard rates. Normally this will apply to loans of over 90% of the property value. This is usually charged as percentage of the loan and is refundable if you choose not to go ahead.

Paid: Up front or added to the mortgage

Cost: 6-10% of the loan

 

Early repayment charges (ERC)

Some lenders will make you pay if you choose to pay of your mortgage early.

Paid: If you pay off your mortgage early

Cost: 2-5% of the loan

 

Closure fee

This is an administrative fee that covers the costs of closing your mortgage once it’s fully paid off.

Paid: When you pay off your mortgage

Cost: £200-£600


 

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