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Mortgage jargon made easy

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Everyone knows what a mortgage is, but the more we get into the subject, the more difficult, incomprehensible and complex the terms become. At Extend Finance, we try to explain all the issues in the simplest possible language, but there’s nothing stopping you from learning some of the vocabulary you’re bound to face at the property buying stage. This article will not only make it easier for you to understand the banks’ offers, but it will also simply take you less time to read the contracts. We warmly invite you to read on!

mortgage jargon made easy- Extend Finance
Mortgage jargon made easy

Mortgage types

Let’s start with the classification of mortgages. This is a very interesting issue because there are really a lot of variants of these financial products in the UK, which makes it a bit easier to match the best offer to your individual needs. On the other hand, it’s very difficult to point to a single, one-size-fits-all mortgage.

Capital repayment classification

  • Repayment mortgage: Repayment mortgage: This is the most typical form of mortgage. When you choose this solution, you pay back a portion of the borrowed amount plus interest to the bank every month. In return for a fairly high instalment, at the end of the borrowing period you become the sole owner of the property and the bank no longer has any control over it. This is the most common choice of our clients.
  • Interest only mortgage: In this variant, you only pay interest on the amount you have borrowed and, consequently, your debt does not change. In some cases, after a few years, repayment of the capital begins and the said facility starts to resemble a “normal” one, but there are also variants in which the capital is never repaid. In such a situation, at the end of the mortgage term you either have to buy the property back for cash or take out another loan to finance this buyback.

Other types of mortgages

  • Pension mortgage: A pension mortgage is also a mortgage, but the bank pays you, rather than you paying it. In practice, in return for receiving your property when you die, the bank pays you a set amount each month as additional income to your pension. UK law treats a pension mortgage as an investment and the money from it is tax-free.
  • Buy to let mortgageA Buy to Let facility is only provided if the property being purchased is to be rented out. Such financial products are quite specific: the interest rate and deposit will be slightly higher, and the instalments will depend on the projected rental income. Important: a property covered by a regular mortgage cannot be rented out.
  • Cashback mortgage – Some banks try to persuade customers to take out mortgages with financial bonuses. In practice, this is between £200 and £1000, while sometimes the cashback is based on the value of the property. Unfortunately, there is nothing for free – the interest rates on such products are often higher and it is worth calculating well whether such a cashback is worthwhile in any way.

You can find out more about special offers of financial products on the government’s Moneyhelper website

Interest rates

Interest rates are probably the most important criteria when deciding on a mortgage. They also have the biggest impact on the overall cost of borrowing (APRC) and determine whether a specific facility is expensive or cheap.

  • Reference rate- the base rate of interest that is set by the Bank of England. Although it is essentially the most important economic indicator, the reference rate does not reflect the actual interest rate on loans.
  • Base rate – This is the reference rate plus a percentage. This is known as the cost of money, as the base rate is the interest rate on loans that banks make to each other. Examples of base rates are LIBOR, WIBOR and EURIBOR. When the base rate is low and the risk of it rising is low, tracker mortgages are very attractive.

Interest rates on mortgages

  • Variable Rate- if the facility has a variable interest rate, the amount of the installment fluctuates smoothly. The interest rate depends, among other things, on the current base rate. For more information on variable rate and fixed rate mortgages, see our article Fixed vs. variable rate.
  • Fixed Rate – in this situation, the interest rate stays the same for 2, 3 or 5 years. After this time, the rate reverts to what is known as the standard variable rate (SVR). In the UK, fixed rate mortgages are by far the most common. However, greater security is not free – the interest rate at the time of origination will be higher than for a variable rate mortgage, and the longer you want to freeze the interest rate, the more you will come to pay.
  • Tracker rate – This is the base rate plus a percentage. The tracker interest rate follows the base rate as it fluctuates. When the base rate is low, as it has been for several years, tracker mortgages are an excellent alternative.
  • Standard Variable Rate (SVR) – The standard variable rate is the interest rate on loans at the end of a fixed, variable or discounted rate contract. The SVR is usually quite high, so if possible, it is worth considering remortgaging when your preferential mortgage comes to an end.
  • Discount Rate – the discount interest rate is set lower than the standard variable rate (SVR) and is at the bank’s discretion. In principle, this is a cost-effective option, but it offers less certainty than fixed loans. The installments paid can vary each month, although usually, changes occur much less frequently.

Fees and charges

It’s important to remember that the cost of a borrowing is not just the interest and capital repaid in instalments. When taking out a mortgage, you need to be prepared for a number of additional expenses and it’s worth bearing these in mind so you don’t get disappointed later. The most important ones include:

  • Arrangement/product/booking fee- this is the amount charged by the lender for providing you with a mortgage. This fee is usually due when you complete your application and can be added to the amount you pay back by installments.
  • Early repayment charge– if you decide to repay your debt early, for example after receiving a large inheritance or after winning the lottery, you can of course do so. However, you must bear in mind that every contract provides an overpayment limit – you can give up, for example, 10% of the total value of the loan without any commission. If you want to pay more, the bank will charge a fee, usually between 1 and 5% of the amount you deposit, although some lenders do not charge it at all. It is worth taking this detail into account at the property purchase stage and asking your adviser for details.
  • Survey/Valuation fee- in order to lend you money, the bank needs to be sure that the price of the property is in line with current realities. To do this, a specialist is called in to estimate the value of the house and issue a report accordingly. In some cases, the lender does not charge this fee, but it is worth bearing in mind.
  • Broker’s fees – the fees payable to the broker for their services in helping you find a suitable mortgage. Their amount depends on the company you use, the value of the property and the number of things that need to be taken care of.

It is only possible to determine the exact fees and commissions if we analyse the specific case. Nevertheless, we encourage you to read our articles- we describe property buing costs on our blog.

Other Key Terms

  • Stamp Duty land tax (SDLT) – is a tax on the purchase of property in England and Wales, the amount of which depends on the price you end up paying for your home. As this is quite a complex issue, we encourage you to read our article: Stamp duty land tax- calculator and rate table.
  • Loan to Value (LTV)- the loan to value ratio measures the value of the loan against the value of the property. For example, if you buy a house for £200,000 and borrow £150,000, 75% of the purchase amount comes from the bank, so the LTV is 75%. The maximum LTV is currently 95%.
  • Deposit (own contribution) – no bank will give you a mortgage for 100% of the value of the property. If you want to buy a house, you need to prepare a certain amount of money, a minimum of 5%. In most cases, the deposit is between 10 and 15%.
  • Remortgage – remortgaging is the process by which we take out a mortgage to pay off our current commitment. We can do a remortgage with either the same or a new lender. Why is such an operation carried out? For example, to release some of the capital from our property, to consolidate debts, or to reduce the instalment by changing our current mortgage to one with a lower interest rate. For more information, see our article Remortgage, what it’s all about.
  • Negative equity- if the value of your loan is higher than the value of the property, there is what is known as negative equity. This is most often the result of a fall in the price of the property.
  • Mortgage deed- a legally binding document that lists the terms of the mortgage and shows the transfer of ownership. It states that the person who owns the house transfers ownership to the lender as security for the mortgage.

We hope you found our article useful. When you buy a house or apartment you are taking on a large and long-term commitment, so it is worth preparing yourself solidly. By having a sound knowledge and a good broker, you will avoid many mistakes that could be very costly for you.

Are you planning to take out a mortgage or wondering if it is possible to reduce the instalment of your current commitment? Write to us and arrange an initial consultation! Our advisors can do a lot and, as a whole-of-market broker, Extend Finance offers its clients access to virtually all bank offers. To arrange an interview, simply use the contact form 🙂

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Think carefully about securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it. Conveyancing services and some forms of Buy to Let mortgages are not regulated by the Financial Conduct Authority.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts
secured on it.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it. Conveyancing services are not regulated by the Financial Conduct Authority.

Extend Finance nor The Right Mortgage Limited can’t provide advice regarding Personal Pensions, Pension planning or investment planning advice. You must seek independent financial advice from a suitably qualified professional financial adviser who may charge you for advice.

Wills, Will writing, Trusts and Trust planning are not regulated by the Financial Conduct Authority.

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