Mortgage jargon buster: a full guide to key mortgage terms
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.
Key mortgage terms
Agreement in Principle/Decision in Principle
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.
Affordability Check
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.
Base Rate
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
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.
Deposit
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
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.
Fixed Rate
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.
Freehold
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).
Guarantor
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.
HLC
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.
Joint 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).
Leasehold
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.
LTV
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%.
Mortgage Broker
A qualified intermediary who will act on your behalf to secure the right mortgage for your circumstances.
Mortgage lender
This is typically a Bank or Building Society, but could also be a Centralised Lender (One that doesn’t have a High Street presence)
Mortgage Offer
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.
Mortgage Term
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.
Overpayment
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.
Own New Rate Reducer
This is a purchase assistance scheme, which allows a Developer incentive to be used to reduce your mortgage rate for the initial period of your mortgage, typically 2 or 5 years. Find out more here.
Porting
If your mortgage is portable, it means that you can transfer it, usually without incurring any fees, if you decide to buy another property, even if you’re still within your fixed rate term.
Product Fee
A lender offers mortgage rates with and without a product fee. If the product you choose has a product fee this will reduce the mortgage rate compared to a product without a fee. The product fee can either be paid upfront or added to the loan.
Remortgage
This is the term applied to borrowers who move their mortgage from one lender to another, often to secure a more favourable rate.
Shared Equity
Where available Shared Equity allows a third party to own part of your property in conjunction with yourself. Help to Buy is a good example of this where the Government provided a loan of 20% or 40% to assist with your purchase. As the phrase suggests you “share” the equity, therefore you will benefit from any growth on the portion you own and the third party similarly on their share.
Shared Ownership
Shared Ownership is aimed at buyers with a low deposit and/or a low income. The scheme is designed to help those struggling to afford a property on the open market to get onto the property ladder by buying a stake – or percentage share – in a home.
The minimum share you can usually own in a shared ownership property is 25% and the maximum is 75%, although some schemes do allow you to purchase up to 100% of your home over time (a process known as staircasing).
With shared ownership, you pay rent on the proportion on the property you don’t own and mortgage on the share you do. If the property is leasehold (as is common with a flat) you may also have to pay service charges and ground rent too.
Find out about Staircase, our very own Shared Ownership scheme, here.
Stamp Duty
Stamp duty is a type of property tax that applies to some purchases in England and Northern Ireland. Your conveyancer will be able to tell you if stamp duty applies to your property purchase and, if so, how much. You can also check this using the stamp duty calculator on Threshold’s website.
Standard Variable Rate
This is the rate of interest that you will automatically default to once any initial fixed rate deal you locked into with your mortgage lender ends. Unlike a fixed rate, an SVR rate of interest is subject to go up and down and may be higher than the rate you were paying.
Tie-in Period
Being in a tie-in period means that you are locked into your mortgage for a set length of time, and would be charged an early repayment fee by your lender if you were to move the loan elsewhere or pay it back in full.
Tracker Rate Mortgage
Having a tracker mortgage means that the rate of interest you pay on your loan can go up and down, typically in line with the Bank of England base rate.
Variable Rate
A variable rate mortgage means that the interest rate applied to your loan can go up or down, in accordance with your lender’s standard variable rate.
Hopefully this guide has answered some of your questions around mortgages and the jargon that comes with them.
When the time comes to buy your ideal new home, our friendly sales advisors will be on hand to answer any other questions you might have.
