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Mortgage jargon buster – Part 1
The world of mortgages can be a confusing place, but we’re here to help with our mortgage jargon buster guides. We want to help you make sense of terminology like booking fees, decision in principles and discount mortgages. Take a look at the first thirteen phases/terms below and then make sure you come back to read part 2 and part 3 for the rest.
Please remember that your home may be repossessed if you don’t keep up repayments on your mortgage.
A - F
Additional borrowing/Further advance
This is when you borrow extra money against the same property so you are increasing your total mortgage amount but without changing lender. You may be doing this to fund an extension, loft conversion or other home improvement.
Before a mortgage provider will approve you for a mortgage they will undertake a series of affordability checks on you to make sure that you will be able to keep up with your payments long term. They will look at your income and your outgoings as part of the process.
Annual Percentage Rate (APR)
To compare the cost of different mortgages you should look at the different APRs. An APR is the total cost of a mortgage (including fees) over the full length of the mortgage (e.g. 25 years) expressed as an interest rate.
If you fall behind on your mortgage these are the payments you’ve missed along with any charges that may build up.
Bank of England base rate
This is the base rate of interest set by the Bank of England and is currently 0.5% (at time of writing 13/7/2015). The rate can move up and down. Some mortgage rate – such as trackers are set in relation to the Bank of England base rate (such as 3% above the base rate), so if the Bank’s rate changes the tracker rate will move by the same amount. Other mortgage rates such as lenders’ Standard Variable Rate may be more loosely linked to the base rate.
When you want to apply for a mortgage you may be charged a non-refundable fee. Some mortgage providers will include it as part of the arrangement fee, others will charge for it separately.
When you apply for a mortgage your mortgage provider will perform a credit search by examining the information that a credit reference agency holds on you. They will look at your payment history for loans, credit cards, mortgage, utility bills and other credit agreements. As well as checking that the information you have provided on your mortgage application form is correct they’ll be able to see that you’ve made your payments on time – or any missed or late payments.
Decision in Principle
Once a mortgage provider has done an initial credit search and is happy with what they discover, they will give you a decision in principle, stating that they should be able to offer you a mortgage. You can then start searching for a property and put an offer in. A decision in principle is no guarantee that they will give you as much as you need, as they will perform more detailed checks once you have found the property you wish to buy.
In the vast majority of cases your mortgage lender won’t lend you all the money you need to buy a home (known as a 100% mortgage). You’ll be expected to put up some money (perhaps 10-25% of the property’s value) yourself towards the purchase of your chosen property. If you find saving for your deposit difficult why not investigate the government’s Help to Buy schemes? The new Help to Buy ISA* in particular is well worth checking out if you’re hoping to take your first step onto the property ladder.
Discount rate mortgage
This is a type of variable mortgage. The interest rate is linked to the lender’s standard variable rate (SVR) so can go up as well as down, even when the Bank of England’s base rate doesn’t. Normally discount mortgages last for 1 – 5 years before the interest rate reverts to the lender’s SVR. There may be early repayment charges if you wish to leave before your discounted interest rate period ends.
Early Repayment Charge (ERC)
If you decide to pay off your mortgage or switch to a different mortgage provider/deal during the initial (fixed or discounted) rate period then you may be charged a penalty fee for this – which can amount to thousands of pounds. For more details check your mortgage contract.
This is the value of your property after you take away your mortgage. For instance, if your property is worth £250,000 and your mortgage is £150,000 then your equity will be £100,000.
Fixed rate mortgage
With a fixed rate mortgage the interest rate, and therefore the repayments you have to make, is fixed for a set period (typically 2, 3 or 5 years but can be up to 10 years or more). If you choose this type of mortgage you will know the exact amount that will be coming out each month for a set period of time so this will help you budget. If you wish to leave before your fixed rate ends then you may face a hefty early repayment charge.
*It was reported in August 2016 that the government bonus on Help to Buy ISAs cannot be included in the initial deposit on a home, but is paid once the sale has completed. Find out more here.