We hate jargon but the mortgage sector loves it! There is a host of new words and phrases that buyers like you may not be familiar with. Many of these are legal terms that any savvy buyer should know to make sure that they understand what it is they are agreeing to.
This isn’t a comprehensive list, but it should be enough to get you started. And don’t forget that your Oakwood adviser is always on hand to go over any of the terms listed or any others that you
APRC: This indicates the overall cost of borrowing across the whole term of the mortgage, provided the interest rate doesn’t change. But more often than not, the rate will change – either because you have a variable or tracker rate, or because it makes sense to remortgage.
Arrangement fee: An arrangement fee is the cost of setting up your mortgage and it may include things such as booking fees. Generally this can be added to the mortgage if you wish.
These are important to consider when picking your mortgage as they can amount to thousands of pounds.
Arrears: If you are in arrears with your mortgage, it means you have missed at least one payment. Continually falling into arrears can put you at risk of losing your home.
Base rate: Also known as the ‘bank rate’ (BBR), the base rate is the rate of interest set by the Bank of England which influences most interest rates.
Certain mortgage deals, such as trackers, are directly affected by the base rate. Similarly, lenders’ SVRs (standard variable rates), while not directly linked to BBR, can sometimes be adjusted as the Bank of England moves its rate.
Booking fee: A fee paid at application to secure a specific mortgage product. Often non-refundable.
Buy-to-let: A buy-to-let property is one that has been bought purely for the purpose of renting it out to tenants. Mortgage lenders offer specific buy-to-let mortgages to suit these types of buyers. Often, these are at higher rates than standard mortgages.
Capital: This refers to the amount that you borrow through a mortgage in order to buy a property.
Credit score: You may be familiar with a credit score. This is the score that everyone who borrows money (from mortgages to a mobile phone contract) has and it is used to see how suitable you are for lending to. There are several different credit reference agencies that can tell you your credit score. However, some lenders will have their own scoring system to assess suitability.
A low, or poor, credit score is generally a sign of previous missed payments and will make you less appealing to lenders.
Early Repayment Charge (ERC): Sometimes a mortgage deal sets an early repayment charge if you pay some or all of your mortgage off ahead of the end of your mortgage term, or if you transfer to another rate before the end of the product period. Speak to an adviser or broker for guidance on whether or not this will affect you.
Equity: Equity is the total value of the property excluding the amount that you owe on the mortgage.
ESIS: This is a document that clearly sets out all of the details of a mortgage that the borrower will need to know.
Fixed rate mortgage: This type of mortgage deal agrees that, within a set period (usually between two and five years), the interest rate for the mortgage will remain the same provided you keep up your monthly payments.
Guarantor: A guarantor is a person – such as a parent – who legally agrees to make the mortgage payments if the borrower finds themselves unable or unwilling to meet repayments.
Higher Lending Charge: This is a fee that is occasionally charged by lenders if you borrow a particularly high percentage of the value of the house (usually 90% or higher). These fees are less common than they once were.
Interest-only mortgage: An interest-only mortgage allows the borrower to only pay the interest portion of the sum total borrowed. However, this means both that your mortgage balance doesn’t reduce and that you will not be building equity in the property as you make payments. The full mortgage amount will still be due at the end of the mortgage term.
Key facts illustration (KFI): This is a document that clearly sets out all of the details of a mortgage that the borrower will need to know.
Loan to value (LTV): The LTV, usually expressed as a percentage, is the proportion of the property price that you borrow when you get a mortgage. If, for example, the property is valued at £100,000 and you borrow £80,000, this is an LTV of 80%.
Mortgage Exit Fee: This is a fee paid when leaving a lender to remove their charge against your property. It is sometimes mentioned in the KFI.
Mortgage term: The mortgage term is the length of time in which you agree to pay off the mortgage. Generally, this is 25 years, but it can be longer or shorter than this.
Negative equity: If you owe the mortgage lender more than the value of your property then
you have negative equity in the home. This can be particularly troublesome when you are looking to move house.
Offset mortgage: This type of mortgage allows borrowers to use their savings to ‘offset’ their mortgage debt. For example, if you have borrowed £80,000 through an offset mortgage and you have £20,000 in a dedicated savings account, you will only have to pay interest on £60,000 of the mortgage.
Overpayments: An overpayment is any payment toward your mortgage that you make over the agreed amount. Generally, lenders allow up to 10% overpayments per year on your mortgage without resulting in Early Repayment Charges, even if you are tied into a deal. Overpaying can result in paying less interest overall and shortening the time it takes to clear the full mortgage sum.
Redemption: This is when you pay off your mortgage with your current lender by either selling your property or remortgaging to another lender.
Remortgaging: Remortgaging describes the act of arranging a new mortgage on your current home. There can be multiple reasons to remortgage and these should be addressed with an adviser.
Repayment mortgage: This kind of mortgage is the typical mortgage that you think of, in which you make payments toward both the interest and the capital borrowed with the goal of no longer owing anything by the end of your mortgage term. Also referred to as a Capital and Interest mortgage.
Repossession: This occurs when a borrower has defaulted on their mortgage and the court has awarded possession of the property back to the lender to recoup the outstanding mortgage balance and any other financial losses.
Tracker mortgage: Tracker mortgages are deals that are linked to the base rate set by the
Bank of England. They will ‘track’ this rate and rise or fall based on that information to set your
Valuation report: This is a basic inspection of the property that will determine its value. There are many different kinds of valuation reports, but your broker can help you through these in greater detail.