What’s the difference between a fixed rate and a standard variable rate? How does freehold compare to leasehold? Who’s a guarantor? Our simple guide has the answers.
The many terms and acronyms surrounding mortgages and homeownership can be confusing. When you’re in the process of buying a property, whether it’s your first home or your fourth, you’ll want to focus on the move without getting bogged down in deciphering mortgage terminology.
That’s why we’ve put together this handy guide to mortgage terms, with the help of new build mortgage experts Threshold Mortgages.
Take a look at the below and familiarise yourself with these phrases and what they mean, so that when the time comes to sign the paperwork, you’ll feel informed and prepared.
An agreement in principle (AIP) is the first step in securing a mortgage. Although it’s not a binding agreement, it gives you a sense of how much you could borrow on a mortgage, and therefore helps you to know what properties are within your budget. Many agents or developers will want to see evidence of an AIP before they put forward an offer. Once you’ve had an offer on a property accepted you will have to formally apply for a full mortgage offer from the lender.
This is the first stage of the buying process and a good starting point. Your Mortgage Broker will assess your income and commitments, and advise you of how much a lender will allow you to borrow.
The base rate is a rate of interest set by the Bank of England. This rate can move up and down in response to different events in the country and around the world. When the base rate changes, mortgage rates generally follow. This is the reason we see rates of borrowing fluctuate. It’s also the reason many people choose to lock in or ‘fix’ a mortgage rate for a set period of time.
Conveyancing is the name given to the legal process involved in buying a property. This process is conducted by a qualified conveyancing solicitor who’ll need to appoint when you have an offer accepted on a home.
A deposit is the sum of your own money you intend to put into purchasing a property, or, to put it another way, the amount you’ve managed to save to put towards your new home.
You’ll be asked what your deposit is early on in the mortgage application process, most certainly by your broker who’ll need it to calculate how much you can offer towards a property, but potentially also by estate agents or developers who may ask for your deposit amount when you call up to enquire about viewing a property.
Many lenders will insist on a deposit of at least 5% of the property’s value (or the price you’ve agreed to pay for it). Conversely, if you’re in a position to put down a deposit of at least 25% or higher you may be able to unlock a lender’s lowest rates of interest.
Equity refers to the amount of money or capital you have in your property. Equity is calculated by subtracting the amount of money left to be paid on your mortgage by your property’s current value. If the amount you have to pay is higher than the value of your property (as may be the case if house prices have fallen since you bought your property) this is when you enter what is known as negative equity.
If you take out a fixed rate mortgage, you’re essentially fixing or locking in at a rate of interest that won’t fluctuate (for a fixed period of time). This kind of deal is common, and you can typically find products that allow you to tie in for two, three, five, or even ten years. This means that your mortgage payments will stay the same throughout your fixed-in term, irrespective of what happens to the base rate, inflation, or interest rates.
Once that fixed rate period comes to an end, you’ll be moved onto your lender’s SVR (standard variable rate). This may be higher or lower than your fixed rate and would cause your monthly repayments to either go up or down respectively. You can, however, choose to lock in at another fixed rate once your existing one expires, either with the same lender or a different one. You may do this up to six months before your current fixed rate mortgage ends. Your broker will contact you around this time to discuss your options and what you’d like to do.
If you’re in a fixed rate mortgage and you want to sell your home during that period, you might have to pay early repayment charges to your lender as a penalty for paying back the loan early.
When you’re purchasing a freehold property, you’re not only buying the property itself but also the land it occupies. Freeholds are common with houses in the UK, while most flats tend to be leasehold (meaning you lease the land the property is built on from the freeholder).
A guarantor is someone, usually a parent or guardian, who agrees to step in and pay your mortgage if you can no longer afford the monthly repayments.
A higher lending charge is sometimes charged by a mortgage lender if the amount you want to borrow is more than 75% of the property you’re buying’s value. It offers the lender some protection in case you are unable to pay your mortgage.
The term applied when two people (or more) purchase a property together. This will either be as Joint Tenants, or as Tenants in Common (The individual share of the property for each party is determined at outset).
If a property is listed as leasehold it means you don’t own the land it’s built on, so you have to lease the land from the landowner (also known as the freeholder). Leasehold ownership is typical of flats and apartment blocks in the UK, although some new build houses are also leasehold.
Leasehold properties usually require you to pay an annual ‘ground rent’ to the land owner, which can be anything from £1 to a few hundred pounds a year.
Leases stay with the property and continue to run down each year, so if you buy a leasehold home you will inherit however many years are left on the lease. While this won’t affect you if you’re a cash buyer, lenders typically require at least 70 years+ on a lease to grant you a loan. Similarly, how much the ground rent is per year can also affect your ability to get a mortgage.
Loan to value (LTV) is the size of your mortgage in relation to the value of the property you’re purchasing. It is calculated as a percentage figure. For example, if you’re taking out a mortgage for half of the property’s value your LTV would be 50%.
A qualified intermediary who will act on your behalf to secure the right mortgage for your circumstances.
This is typically a Bank or Building Society, but could also be a Centralised Lender (One that doesn’t have a High Street presence)
Once a lender has reviewed your mortgage application and the mortgage underwriter is happy, the lender will issue a mortgage offer. The mortgage offer will enable you to proceed with your purchase, the first stage of which is exchange of contracts.
Your mortgage term is length of time in years that your mortgage will last for, in other words, how long it’ll take you to pay back the loan. Your mortgage term will depend on factors such as how low you need the monthly repayments to be, and how many years you have left until you reach retirement age.
Most mortgage lenders allow you to overpay on your mortgage by 10% each year without incurring any penalty. You can also make capital sum repayments at a time you won’t incur any Early Repayment charges.
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