Taking out a mortgage is a huge financial commitment, and so you’ll want to feel you’re clear on what you have to do and when – and exactly what you’re getting.
When you start looking at and applying for mortgages, there seems to be a whole world of jargon to get your head around, some of the words and phrases you won’t have heard in any other situation – from arrears to valuations – here we take a look at the vocabulary you’ll need to understand.
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Mortgage terms explained
This is a set-up fee for your mortgage. Most mortgage lenders will let you add this fee to the loan, but this means you’ll be paying interest on it for the whole mortgage term.
An account is said to be in arrears if monthly payments aren’t kept up to date with. When this happens, the mortgage company is likely to apply extra charges on top of their monthly payments – and the fact that your account has gone into arrears could be noted on your credit file.
The base rate is the rate the Bank of England charges other banks and lenders when they borrow money. This influences the interest rates that many lenders charge for mortgages, loans and other credit they offer customers
A booking fee is charged up front and pays for ‘booking’ in the loan while your application goes through. It’s sometimes also known as an ‘application’ or ‘reservation’ fee. This fee can’t be refunded if you end up not taking the mortgage out.
A mortgage broker is a financial adviser who specialises in offering advice on mortgages. They can help by saving you time and stress when applying for a mortgage, because as they’re doing this day in day out, they know which mortgage lender might give you the best deal, based on your individual situation. They can also help you a great deal with the application process itself.
This is a (usually compulsory) policy that covers damage to the structure of your home such as the walls, roof and floors, and it usually covers damage to fixtures and fittings too. So if you’ve got a fitted kitchen for instance, your insurance is likely to pay for any repairs needed.
These mortgages are especially for landlords who want to buy a property to rent it out. The rules around buy-to-let mortgages are similar to those around regular mortgages, but there are some key differences which a good broker would be able to help you to understand.
The final stage of the conveyancing process after exchange of contracts – when keys change hands and the mortgage is officially started.
Early repayment charge
Although you may be able to move house and/or remortgage at any time with some lenders, an early repayment charge will be incurred if you repay the capital within the early repayment period – the repayment period will be stated on your contract.
Exchange of contracts
The point at which signed contracts are exchanged by the legal representatives (usually the solicitors) of the buyers and sellers in the process. At this point, the contracts are legally binding, the deposit is paid and in general everyone can rest assured the move is going to happen.
Fixed rate mortgage
With a fixed rate mortgage, your mortgage repayments stay the same for the time period (the term) of the mortgage deal. This has the advantage that you know exactly what you’ll be paying each month, however the disadvantage that if the Bank of England Base Rate changes, you won’t reap any potential rewards either.
Getting a guarantor to help support your mortgage application could help you buy a property when you have a small deposit, or low income. You’ll need a relative or friend who is willing to be named on the mortgage with you and make any payments you miss.
Like with most loans, as well as paying back the capital you borrow, you will also have to pay interest on your mortgage – i.e. extra money on top of the capital divided into monthly repayments. This may be calculated on a daily or annual basis, depending on the specific terms and conditions of the mortgage – all of which should be explained in your mortgage agreement.
Interest only mortgages
As the name suggests, with an interest only mortgage, you’ll only pay back the value of the interest each month, rather than paying off the actual property value itself. So, with this mortgage your monthly payments should be lower than with a regular mortgage, but at the end of the term you’ll still owe the original loan amount.
A mortgage that’s taken out with two or more people named on the contract. All people named have responsibility for meeting the repayments.
The loan-to-value ratio is how much you’ve borrowed with a mortgage compared to the value of your property – so this depends on how much of a deposit you can afford to put down. It’s calculated as a percentage, and typically, the lower your LTV, the better chance you have of getting a lower interest rate.
This kind of insurance usually pays a tax-free lump sum of money in the event of your death within the policy term, which can be used to pay off your mortgage. This is a tax-free sum, that’s usually decided on at the time of applying for the policy.
This is the length of time you have to repay your mortgage. The typical mortgage term is 25 years when you take it on, but they can be much shorter or longer depending on factors such as your age, and how many years you’ve had a mortgage for before.
When a property is in negative equity it is worth less than the mortgage secured on it, this is usually caused by falling property prices.
This is when the homeowner pays off one mortgage with a new mortgage using the same property as security. People choose to remortgage for various reasons, but usually it’s to bring down the overall monthly mortgage payment amounts.
Stamp duty – a tax that’s paid when buying a property – it’s paid by the buyers. It is paid at the point of completion, and the amount is related to the price being paid for the property.
Tracker mortgages are a type of variable rate mortgage. What makes them different from other variable rate mortgages is that they follow movements of another rate. Usually, the rate they track (follow) is the Bank of England Base Rate.
Variable rate mortgage
Here your mortgage rate will move up and down over the time you have it, meaning that your mortgage repayments won’t always stay the same. The main cause for this is the UK economy. If you’re using a mortgage broker, they might be able to offer their opinion on whether it’s a good time for a variable rate mortgage
Before agreeing to provide a mortgage, the lender will arrange for a valuer to look over the property to check how much it’s worth and assess its suitability for the mortgage amount that’s being taken out.