Buying a home is one of THE biggest financial commitments of our lives yet when it comes to granular detail, borrowers can be at a disadvantage by not truly understanding the terminology in their mortgage agreements. And if we don't fully understand something, how can we make informed decisions to know that something is right for us?
Mortgage terminology can be tricky to understand, and it's no surprise that there is still a lot of jargon used in the industry that is misunderstood. If you don't know an ERC from LTV, here's an A to Z of the most common misunderstood mortgage terms and what they mean (brace yourselves).
APR
An annual percentage rate (APR) is a broader measure of the cost of borrowing money than the interest rate. The APR reflects the interest rate, mortgage product fees, and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate.
BASE RATE
Lenders use this rate, set by the Bank of England, as a basis for setting some tracker rates, usually by adding a certain percentage on top.
CONVEYANCING
The legal bit! Where a solicitor or licensed conveyancer handles a range of legal paperwork as part of your mortgage application, such as transfer of property deeds.
DEFAULT
Failure to meet the legal obligations (or conditions) of a loan, usually from missed payments.
EQUITY
The share of the value of your property that you actually own.
ERC
An early repayment charge is a fee to your mortgage lender, which you might be asked to pay if you want to leave your existing product prior to the end date.
FREEHOLD
A type of property ownership, where a person or organisation has outright ownership, forever, of a property and the land on which it is built
INTEREST RATE
The cost you will pay each year to borrow the money, expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan.
LEASEHOLD
A type of property ownership where a property is leased from a freeholder (sometimes called the landlord).
LTV
Loan-to-value is the ratio between the value of the loan you take out and the value of the property as a whole, expressed as a percentage.
MORTGAGE IN PRINCIPLE
Following some basic credit checks, a lender will make a temporary mortgage offer so you know what you can afford when purchasing a property. Also known in the industry as an Agreement in Principle (AIP) or Decision in Principle (DIP).
OFFSET MORTGAGE
This type of mortgage lets you link your mortgage to your savings. The savings balance is used to reduce the amount of interest charged on the mortgage.
PORTABILITY
A portable mortgage is one that can be transferred from your current property to your onward purchase.
REMORTGAGE
When you apply for a new mortgage with a different lender, for your existing property.
SVR
Standard Variable Rate is the default interest rate that mortgage clients are moved onto when their initial fixed term deal ends.
TRACKER
A type of variable rate mortgage which "tracks" the Bank of England's base rate which is currently 0.1 per cent (at the time of publishing) plus a certain percentage decided by the bank.
VARIABLE RATE MORTGAGE
A mortgage product where the interest rate can be varied by the lender, either up or down.
So there you have it, just some of the key phrases you'd expect to hear during the mortgage application process.
There are indeed many more terms out there, and whilst some of you may turn to Google for the answers, it's important you seek professional help when deciding what mortgage is right for your situation. Most brokers will offer initial calls at no cost, so this is your opportunity to ask all the questions about those complicated terms and tap into their expert knowledge, completely free of charge.
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