Mortgage Mastery by David Bussey - demystifying mortgage jargon: a beginner's guide to understanding terminology

Welcome back to Mortgage Mastery with me, David Bussey. In this edition, we will be demystifying mortgage jargon. Whether you’re a first-time buyer or just looking for a new place to call home, getting to grips with the plethora of mortgage-related terminology can be overwhelming – so, below is an A-Z of key terminology-related FAQ’s that you may ask yourself when researching mortgages. Knowing the answers will empower you to make informed decisions when it comes to one of the biggest financial commitments of your life. So, let’s get started!

What is an Agreement in Principle?

An Agreement in Principle (AIP), also known as a Mortgage in Principle or Decision in Principle, gives you an understanding of how much you may be able to borrow towards the purchase or remortgage of a property. It's a document that you can use with an estate agent, or those selling a property, to show that you are in a suitable financial position to purchase it.

All lenders will make a decision on how much a mortgage applicant can borrow by assessing their affordability. This is assessed using the applicants’ income and expenditure.

General income will consist of salary for the employed and net profits for the self-employed, guaranteed overtime, bonus payments, sustainable allowances, benefit income and pension.

General Expenditure will consist of monthly credit commitments, including credit card balances; personal loan repayments; car finance; student loans; childcare costs and all monthly expenses that fall under household costs such as utility bills; Council Tax; food and transport.

The lender will use their own method of calculation so there is no one rule for all. It’s also based on the individuals’ personal circumstances, for example how many dependants they have, their age and the mortgage term.

Most lenders have Affordability Calculators available on their websites which will give you a good idea of the amount that can be borrowed from that lender. Other lenders may offer a higher or lower mortgage facility.

What does APR/APRC stand for?

The annual percentage rate of charge (APRC) is the total cost of the loan expressed as an annual percentage.  The APRC is provided to help you compare different offers.

What is a Broker/Intermediary?

An independent adviser who can help you with mortgages and other financial matters.

What is a Credit Score?

Most banks and mortgage lenders use a credit score to determine your ability to pay back the money you have borrowed (via monthly payments). Your personal credit score is affected by money you are already borrowing, such as credit cards, phone loans, car loans etc, and whether you make payments on time or have a history of missed monthly payments.

Using credit cards as an example, if you miss a payment, your credit score is negatively affected, whereas if you pay your credit card off in full each month, your score is positively affected. The higher your credit score; the more likely you are to get a mortgage because you are seen as financially responsible and low risk. You can keep track of your own personal credit score by visiting a credit referencing agency. The most reliable and mostly used by mortgage lenders are Experian, Equifax and Check My File.

What is Conveyancing?

Conveyancing is the legal process involved when ownership of a property is transferred from the seller to the buyer. It can start when your offer is accepted, up until after the sale is completed.

Purchasing a property is a legal transaction, so your mortgage lender will require you to obtain the services of a qualified solicitor or property Law Conveyancing specialist. This ensures that you are protected and all the legal administrative work is completed correctly.

The conveyancer will manage tasks including:

-handling the contract of exchange – e.g., negotiating any details, if needed

-dealing with the Land Registry

-handling local council searches and other formal enquiries

-reviewing your mortgage offer from the lender

-collecting and transferring money for the property purchase

-arranging for payment of Stamp Duty, Land Tax and other payments

-notifying the freeholder of the sale, if your home is leasehold

-providing legal guidance.

What is a Mortgage Deposit?

The amount you need to pay towards the total purchase price of the property. This varies depending on the product and lender. Some lenders offer as little as a 5% deposit mortgage for first time buyers.

What is an Early Repayment Charge (ERC)?

Some mortgages, such as a fixed rate mortgage, charge a fee if you pay back the loan early. This is known as an ERC. It can vary, so check your original letter of approval or terms and conditions for the amount.  Most lenders, however, will allow overpayments of up to 10% of the mortgage balance in any one year without applying an ERC.

What is a Fixed Rate Mortgage?

A mortgage where the interest rate stays the same for a specific period (e.g. two or five years) even if the base rate changes in the meantime.

What does Freehold mean?

You own both the property and the land it stands on.

What is a Gifted Deposit?

A gifted deposit is when someone else, perhaps a family member, provides the funds for some, or all, of your mortgage deposit. This however must be a genuine gift with NO expectation of it being repaid. The gift donor will have to sign a declaration to this effect and to confirm they will have NO interest in the property.

Did you know that YCP currently have an offer on our starter homes, where if you are gifted money for your deposit, we’ll boost it with an extra £2,000? Find out more about eligibility and terms and conditions here.

What is the Land Registry?

The official body that holds the details of property ownership.

What does Leasehold mean?

You own the property but not the land it is built on, for a specific number of years. Flats are usually owned on a leasehold basis. You may find it hard to get a mortgage if there are fewer than 70 years left on the lease of the property you want to buy. Leases are renegotiable, but the shorter remaining terms, the more expensive it will typically be.

What are Lender Arrangement Fees/Product Fees?

When selecting a mortgage lender, it’s important to be aware of the costs associated with the mortgage products they offer.

As an example, mortgage products will include Fixed Rates, Tracker Rates, and Variable Discounted Rates. So, if you would prefer to fix the rate of interest on your mortgage, the lender may charge an arrangement fee or product fee to secure the rate offered. Generally, this fee is likely to be between £495 to £1,950. In some scenarios, this fee can be added to the mortgage balance, but remember that any fees added will incur interest charges throughout the term of the mortgage. Alternatively, you can make the payment upfront with your application.

What does LTV mean?

LTV means Loan to Value. This is the ratio of what you borrow for your mortgage (presented as a percentage) against the value of your property. For instance, if you have £50,000 mortgage and your home is worth £100,000, your LTV is 50%.

What does Monthly Repayment mean?

The amount you pay to your lender for your mortgage each month.

What is a Mortgage Illustration?

A mortgage illustration should be given to you before you make a mortgage application. It describes the key things you need to know about your mortgage, such as payments and fees. A mortgage broker can guide you through a mortgage illustration, to ensure that you understand each section and are happy with the contents.

What is a Mortgage Offer?

This is your guaranteed offer. Once your mortgage is approved, you'll get a formal offer setting out the terms and conditions.

What is a Mortgage Term?

The amount of time over which you repay your mortgage (e.g. 25 years).

What does Overpayment mean?

This is when you pay extra, over and above your monthly mortgage payment. You could choose to make a one-off lump sum overpayment or regularly on your monthly repayments. Overpayments save you interest and will shorten your mortgage term. Don’t forget about ERC’s though!

What does Portability mean?

This is when an existing mortgage is transferred between properties when you move house.

What is a Payment Holiday?

This is a period during which you make no payments on your mortgage, however, interest will continue to be charged. This feature is usually only available on a flexible mortgage.

What is Stamp Duty Land Tax/SDLT?

This is a tax you pay when you buy a property. You don't have to pay stamp duty on a property purchase of up to £250,000 (/£425 for first time buyers) but will pay a percentage of the price on any amount over this. The rates of stamp duty increase with property price, ranging from 1% to 5% for properties up to £1million.

What is a Standard Variable Rate?

The default mortgage interest rate that your lender will charge you after your initial mortgage deal ends.

What is a Tracker Rate Mortgage?

This is when the mortgage interest rate is set at a fixed percentage above the Bank of England (BoE) base rate. The interest rate payable will rise and fall in line with changes to the BoE base rate.

How important is a Valuation?

Mortgage lenders require a valuation to prove that the property is worth the amount you want to borrow.

What is a Variable Rate?

This means the interest rate can go up or down if your mortgage lender decides to change their standard variable rate.

Now that you’re a mortgage jargon whizz, are you wanting to get the ball rolling with the mortgage process? Keep an eye out for the next edition of Mortgage Mastery, where I will be giving you advice on how to save up for your deposit. Coming soon!

I hope this guide has clarified some of the tricky terminology that relates to mortgages. If you’re still unsure about anything or have come across terminology that is not included in this guide, then get in touch with me, David Bussey, for a no-obligation chat on 07973 501882. I am an independent mortgage broker/adviser and can provide personalised mortgage guidance and expert advice to help you take the first step towards homeownership.