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Understanding key mortgage terms: A comprehensive guide

Navigating the mortgage landscape can be daunting, especially with the myriad of terms and jargon involved. Whether you’re a first-time buyer or looking to remortgage, understanding key mortgage terms is crucial. 

This comprehensive guide aims to demystify these terms, making the mortgage process clearer and less intimidating.

General terms

Mortgage

A mortgage is a loan specifically designed for purchasing property or land. Typically, a mortgage runs for 25 years but can be shorter or longer. The loan is secured against the value of your home until it’s paid off. This means if you fail to keep up with repayments, the lender can repossess your home.

Interest rate

The interest rate is the cost of borrowing money, expressed as a percentage of the loan amount. Interest rates can be fixed, meaning they stay the same for a set period, or variable, meaning they can change over time. The rate affects how much you pay each month and over the lifetime of the loan.

Principal

The principal is the amount of money you borrow from the lender to purchase your home. Your monthly mortgage payments typically include repayments of both the principal and the interest on the loan.

Types of mortgages

Fixed-rate mortgage

A fixed-rate mortgage has an interest rate that remains the same for a set period, usually between two and ten years. This type of mortgage provides stability, as your monthly payments won’t change during the fixed-rate period. However, fixed-rate mortgages can sometimes have higher initial rates compared to variable-rate mortgages.

Variable-rate mortgage

A variable-rate mortgage has an interest rate that can fluctuate over time, usually in line with changes to the Bank of England base rate or the lender’s standard variable rate (SVR). Your monthly payments can increase or decrease, making it harder to budget.

Repayment mortgage

With a repayment mortgage, your monthly payments cover both the interest and the principal amount borrowed. By the end of the mortgage term, assuming all payments have been made, you will have paid off the entire loan and own your home outright.

Interest-only mortgage

An interest-only mortgage means you only pay the interest on the loan each month, not the principal. While this results in lower monthly payments, you must have a plan to repay the principal amount at the end of the mortgage term. This could involve investments, savings, or selling the property.

Tracker mortgage

A tracker mortgage has an interest rate that follows the Bank of England base rate plus a set percentage. For example, if the base rate is 0.5% and your tracker mortgage is 1% above this, your interest rate would be 1.5%. Your payments can vary as the base rate changes.

Offset mortgage

An offset mortgage links your savings and mortgage accounts. Instead of earning interest on your savings, they are used to reduce the amount of interest you pay on your mortgage. For example, if you have a £200,000 mortgage and £20,000 in savings, you’ll only pay interest on £180,000.

Key people involved in the process

Lender

The lender is a bank, building society, or other financial institution that provides the mortgage loan. They assess your financial situation, approve the loan, and provide the funds for purchasing your property.

Borrower

The borrower is you – the individual or individuals taking out the mortgage to buy a property. As the borrower, you’re responsible for making monthly repayments to the lender until the loan is fully paid off.

Broker

A mortgage broker acts as an intermediary between you and potential lenders. They can help you find the best mortgage deal based on your financial circumstances and guide you through the application process. Brokers often have access to exclusive deals not available directly from lenders.

Valuer

A valuer is a professional who assesses the value of the property you intend to buy. The lender will use this valuation to determine how much they’re willing to lend you and ensure the property is worth the amount you’re paying.

Mortgage application process

Agreement in principle

An agreement in principle (AIP) is a statement from a lender indicating how much they’re likely to lend you, based on your financial situation. While not a formal offer, it can give you an idea of your budget and show sellers that you’re a serious buyer.

Mortgage application

Once you have an AIP and have found a property, you’ll complete a full mortgage application. This involves providing detailed information about your income, expenses, debts, and the property you’re buying. The lender will use this information to make a final decision.

Credit check

As part of your mortgage application, the lender will conduct a credit check to assess your creditworthiness. This involves examining your credit history to see how well you’ve managed previous debts. A good credit score can improve your chances of approval and help secure a better interest rate.

Valuation survey

The lender will arrange a valuation survey to ensure the property is worth the amount you’re paying. This helps them decide how much to lend and ensures the property provides adequate security for the loan. In addition to the lender’s valuation, you may also want to arrange a more comprehensive survey to check for any potential issues with the property.

Costs and fees

Deposit

The deposit is the amount of money you pay upfront towards the purchase of your property. Typically, you’ll need to put down at least 5% of the property’s value, though larger deposits can help secure better mortgage deals.

Arrangement fee

An arrangement fee, also known as a booking or product fee, is charged by the lender for setting up the mortgage. This fee can vary widely and may be added to the loan amount or paid upfront. Be aware that if you add it to your loan, you’ll pay interest on it over the mortgage term.

Valuation fee

A valuation fee covers the cost of the lender’s valuation survey. The amount varies depending on the property’s value and the type of survey conducted. Some lenders offer free valuations as part of their mortgage deals.

Legal fees

Legal fees cover the cost of hiring a solicitor or conveyancer to handle the legal aspects of buying a property. This includes conducting searches, drafting contracts, and managing the transfer of funds. Legal fees can vary, so it’s worth getting quotes from several solicitors or conveyancers.

Stamp duty

Stamp duty is a tax paid on property purchases over a certain value. The amount you pay depends on the property’s price and your circumstances, such as whether you’re a first-time buyer or purchasing an additional property. The rates and thresholds can change, so it’s essential to check the current rules when buying.

Repayment terms

Term

The term of your mortgage is the length of time you have to repay the loan. Standard terms are 25 years, but they can be shorter or longer depending on your agreement with the lender. Shorter terms result in higher monthly payments but less interest paid overall, while longer terms reduce monthly payments but increase the total interest paid.

Monthly repayments

Monthly repayments are the payments you make each month towards repaying your mortgage. These typically include both the interest and principal, though the exact amount can vary depending on the type of mortgage and interest rate. Ensuring you can afford these payments is crucial when choosing a mortgage.

Overpayment

Overpayment involves paying more than your required monthly repayment. Some mortgages allow for overpayments, either up to a certain amount each year or without any limit. Overpaying can reduce the principal faster, shortening the mortgage term and saving on interest. However, check for any penalties or limits before making overpayments.

Early repayment charge

An early repayment charge (ERC) is a fee some lenders charge if you pay off your mortgage early or overpay beyond the allowed limit. ERCs are more common with fixed-rate mortgages and are usually a percentage of the outstanding loan. Understanding the terms of any ERC is essential when considering overpayments or switching mortgages.

Insurance

Building insurance

Building insurance covers the cost of repairing or rebuilding your home if it’s damaged by events such as fire, floods, or storms. Most lenders require you to have building insurance as a condition of your mortgage. It’s crucial to ensure your policy provides adequate coverage for the full rebuild cost of your property.

Contents insurance

Contents insurance covers the cost of replacing your belongings if they’re damaged, destroyed, or stolen. While not mandatory for a mortgage, it’s a valuable protection for your possessions. Policies can vary, so it’s essential to check what’s covered and consider any additional coverage you might need.

Mortgage protection insurance

Mortgage protection insurance, also known as mortgage payment protection insurance (MPPI), helps cover your mortgage payments if you’re unable to work due to illness, injury, or redundancy. This type of insurance can provide peace of mind, ensuring you can keep up with repayments during challenging times.

Regulatory terms

Loan-to-value (LTV)

Loan-to-value (LTV) is a ratio that compares the amount of your mortgage to the value of the property. It’s expressed as a percentage and helps lenders assess the risk of lending to you. For example, if you have a £150,000 mortgage on a £200,000 property, your LTV is 75%. Lower LTV ratios often qualify for better interest rates.

Annual percentage rate (APR)

The annual percentage rate (APR) represents the total cost of borrowing over a year, including the interest rate and any fees. APR helps you compare the cost of different mortgage deals, as it provides a standardised way to understand the overall cost of a loan.

Affordability assessment

Mortgage offer

A mortgage offer is a formal document from a lender confirming they’re willing to lend you a specified amount under certain terms and conditions. It follows a successful application and credit check, and it’s usually valid for a limited period. Once you receive a mortgage offer, you’re closer to completing your property purchase.

Post-completion

Title deeds

Title deeds are legal documents that prove ownership of a property. After the completion of your property purchase, your solicitor or conveyancer will register the change of ownership with the Land Registry and ensure that you receive the title deeds. These documents are crucial for resolving any future disputes over property ownership.

Equity

Equity is the portion of the property’s value that you own outright, calculated as the difference between the property’s market value and the outstanding mortgage balance. For example, if your home is worth £250,000 and you have £150,000 remaining on your mortgage, your equity is £100,000. Building equity can provide financial security and options for future borrowing, such as remortgaging or taking out a home equity loan.

Remortgaging

Remortgaging involves switching your existing mortgage to a new deal, either with your current lender or a new one. Homeowners typically remortgage to get a better interest rate, access additional funds, or switch to a different type of mortgage. It’s essential to consider any fees and charges associated with remortgaging, such as early repayment charges and arrangement fees.

Sett Mortgages is your mortgage expert

At Sett Mortgages, we understand that navigating the mortgage process can be complex and stressful. Our mission is to make the process as straightforward and stress-free as possible. Whether you’re a first-time buyer, moving home, or looking to remortgage, our team of experts is here to guide you every step of the way.

We take the time to understand your unique financial situation and goals. With Sett Mortgages, you can be confident that you’re making informed decisions.

If you’re ready to take the next step in your property journey or simply want to explore your options, contact Sett Mortgages today. Our friendly and knowledgeable team is here to help you achieve your property goals with confidence and ease.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.