Mortgage Jargon

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February 20, 2020

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Not only is the home buying process confusing in itself, there are so many words you may hear being thrown around that will confuse you anymore which may make the whole process a lot scarier that what it is.

Often professionals will assume you know what you are talking about, if you aren’t sure don’t be scared to ask them to explain themselves. That is their job of course.

At Smarter Mortgages we thought it would be useful to give you guide – just to give you a little kick start into the mortgage market. If you are looking to learn a bit more about mortgages we are currently working on a knowledge base which should be released soon, if you have any questions in the meantime please feel free to give us a call!

We will start with the acronyms – there is nothing worse than someone using an acronym and you having no idea what they said. Hopefully the below will help.

LTV: Loan to Value

This is the percentage of the loan amount in comparison to the property value. For example, a mortgage amount £75,000 on a property value of £100,000 is a LTV of 75%. The LTV will affect the rates available to you and with some lenders the amount you can borrow.

APRC: Annual Percentage Rate of Change

This is the annual total that the mortgage will cost including all interest, fees and charges. This is a good way to compare different mortgages as it shows the true cost.

BOE Base Rate: Bank of England Base Rate

The interest rate set by the Monetary Policy Committee (MPC) of the Bank of England. This is the rate that many lenders use to base their Variable and Tracker rates on, which means if the BOE Base Rate changes, so does a Variable or Tracker rate.

SDLT: Stamp Duty Land Tax

The government imposes tax when you buy a property, this is called SDLT and the amount payable depends on the purchase price of the property. Please find a SDLT calculator here. Rules have recently changed whereby First Time Buyers don’t need to pay SDLT on properties up to £300,000.

AIP/DIP: Agreement in Principle/Decision in Principle

These are provided by the lender and shows how much they are willing to lend you subject to further information. These are used by Estate Agents as evidence as to how much you can borrow before you put an offer on a property. If you are looking to put an offer on a property, contact one of our brokers today or fill out an enquiry form on the right and we can get you an AIP the same day.

The above are the main abbreviations used in the mortgage world, with these under your belt you won’t be so bamboozled when other people are talking about mortgages. Below you will find terms often mentioned throughout the whole mortgage process:

Freehold/leasehold property 

With a freehold property you own the building along with the land that it stands on with no time limit over the ownership, a freehold property will usually be a house but beware of freehold flats! With a leasehold you own the building but not the land (usually flats) and there is a time limit over the ownership, with the period being defined by the lease, this can be anywhere up to 999 years. Leasehold properties with less than 70 years remaining on the lease are harder to gain a mortgage on.

Ground Rent and Service Charge

These relate to a Leasehold property and are charges payable to the freeholder or managing agents. Ground Rent is to cover the rent to the landlord or freeholder and is paid annually. The service charge is to cover the upkeep of the common areas that you are not responsible such as communal gardens, lifts, corridors etc.

EPC (Energy Performance Certificate)

Details how energy efficient the property is ranking from most efficient (A) to least efficient (G). This is a legal requirement to provide this when selling or renting your property.

NHBC (National House Building Council) Scheme

A scheme offered on most New Build properties whereby you are covered for any structural defects that occur within the property during a period of time.

Credit Check

Once you have found a property you would like to put an offer on, you would then get an AIP to provide to the estate agents. When lenders provide a decision they will carry out a credit check, we will only go ahead with an AIP with your permission to pass your details onto the lender and for them to carry out a credit check. This credit check is to determine how you have managed your finances in the past.

When carrying out the credit checks some lenders will leave a soft footprint on your credit file (only visibly to you) whereas some lenders will leave a hard footprint (visible to to other lenders and lending institutions). Having a lot of hard footprints on your credit file may impact your ability when it comes to obtaining a mortgage.

Mortgage Rates

Type of rates available to you:

  • Fixed Rate – your mortgage payments will stay the same throughout the term of the fixed rate. A shorter term fixed rate will have a lower interest rate than a longer fixed rate term. The terms can vary from 2 years up to 10 years or even longer and will usually have Early Repayment Charges if you were to repay the mortgage within the fixed term.
  • Variable Rate – your mortgage payments may vary throughout the term at any time and this is at the decision of the lender.
  • Tracker Rate – like a Variable Rate, your mortgage payments may vary throughout the term but are linked to an external index such as the BOE Base Rate.

Mortgage Term

In regards to the length of the mortgage this can now go up to 40 years, with many lenders using a maximum age of 70 at the end of the term. There are a few lenders that will lend up to the age of 75 if you can evidence pension contributions on your payslips. As you would expect a longer term will reduce the monthly payments but you will be paying interest for a longer period of time. For more information about the maximum mortgage term click here.

Repayment Methods

  • Capital and Interest (repayment) Mortgage – each month you will be paying the interest along with some of the loan and will therefore reduce your balance of the term.
  • Interest only – each monthly payment will just include the interest of the loan, and lenders will require a credible repayment strategy. This repayment method is usually only used for Buy To Let mortgages or for low risk clients (borrowers with a lot of equity in their property and on a large income).

Lenders do have the option of a part interest part repayment mortgage.

Guarantor

Some lenders will allow you to include a guarantor on your mortgage, this will be requred by some lenders to add extra security to the loan. This is usually a family member. To find out how a guarantor mortgage can be beneficial for you, see our post here.

Conveyancer

Also known as the solicitor, they specialise in the legal aspect of buying and selling properties.

Exchange of Contracts

In the past, this meant the physical exchange of the mortgage contracts in the chain. These days there is no physical exchange of contracts but the concept still stands and at this point you are legally bound to complete with the purchase or sale.

Completion

This is when the legal process is complete and your new lender will release the mortgage money to the conveyancer who then passes it along the chain. This is when you can pick up the keys to your new property.

We hope this little post has helped you understand mortgages a little bit more – if you have anything else you wish to ask please contact us.

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