Do you know your LTV from your SVR? What about your ERC? We're cutting out the jargon and explaining all those need-to-know terms that you'll encounter on your mortgage journey
We've teamed up with money maestro Andrew Hagger to help you get to grips with these particularly complicated terms. He really knows his stuff when it comes to finance, having spent over 30 years working with some of the biggest names in the industry before turning his hand to writing. Over to him.
Whether you’re buying your first home, switching to a different mortgage or moving somewhere new, it can seem a complicated process.
Unless you’re a financial whizz it’s difficult to know where to start with all the mortgage jargon, but don’t worry – we’ve put together this simple guide to help you get to grips with the terminology. You’ll be an expert in all things mortgages in no time.
This is the sum of money you put towards the purchase of your home – it may be from your own savings, a gift from a family member or perhaps a mixture of both.
This is simply another term for the loan from your bank or building society which you use to help buy your home. The mortgage is secured which means the lender has the power to repossess and sell your property if you fail to keep up the monthly repayments.
One of many mortgage acronyms, this stands for Loan to Value (LTV). It's a measure which shows what percentage of the property value you are borrowing via your mortgage vs what percentage you own outright (via your deposit).
For example, if you were buying a home costing £100,000 and you had a £25k deposit, your mortgage would be for £75,000 which means your LTV would be 75%. If you borrow £100,000 to buy a property costing £200,000 the LTV would now be 50%.
The lower the LTV the cheaper the interest rate you will be offered, as lower LTV mortgages are considered less risky by banks and building societies.
Choosing the right mortgage
A mortgage advisor is a qualified professional with expert knowledge of the mortgage market, who can help you choose the best home loan for your specific circumstances.
Your mortgage term is the amount of time you take your mortgage out for. Typically it is 25 to 30 years but some lenders may allow longer.
Bear in mind that the shorter your mortgage term is, the higher your monthly repayments will be. But the upside is that by paying it off sooner means your interest charges will be lower.
A mortgage where the interest rate remains the same for a set period. Even if the Bank of England increases or decreases the bank base rate during that time, your monthly payments will stay the same.
Fixed rate mortgages are usually for a term of between 2 and 5 years but some lenders will allow you to fix your rate for 10 years.
A type of mortgage where the interest rate and monthly repayments on your mortgage can rise or fall in line with changes in the Bank of England base rate. The amount it changes will typically be in line with chaqnges to the base rate, but it's ultimately up to the bank.
Every lender has a Standard Variable Rate (SVR). It’s their default rate that is charged after your fixed rate or discounted variable rate deal comes to an end.
A tracker rate mortgage is usually directly linked to movements in the Bank of England Base rate. The rate is usually set at a margin above or below base rate – for example, it may be set at the base rate plus 0.25% or the base rate plus 1%.
This is an arrangment where the interest rate charged by your mortgage lender will never be more than a pre-agreed maximum, no matter how much the Bank of England base rate increases.
Getting your mortgage approved
This is where your lender checks whether you can afford the monthly mortgage repayments.
Your lender will ask you for details of your income and expenditure plus information regarding any other credit commitments you may have, such as credit cards, store cards or personal loans.
Debt to income ratio
This is a measure showing how much of your monthly income goes towards repaying any outstanding debts you may have. Some lenders may not lend to you if your debt repayments are already greater than 45% of your total monthly income.
For example, if your monthly income is £2,500 a lender would expect your total monthly debt repayments not to exceed £1125 (that is, 45% of £2,500).
Once you’ve found the property you wish to buy, your mortgage provider will require a valuation to be carried out by a surveyor. They'll check the condition of the property and whether it is worth the amount you are intending to pay for it.
Once your mortgage is up and running
A portable mortgage gives you the flexibility to transfer your borrowing from one property to another without incurring any early repayment fees – not all mortgages are portable so check with your lender.
This is where you voluntarily pay extra money off your mortgage balance – either by a one-off lump sum or paying more than required on your monthly standing order.
If you have a Standard Variable Rate mortgage you may be able to make unlimited overpayments. However, if you have a fixed rate mortgage you will find that your lender may restrict how much you can overpay without incurring an early repayment charge. It’s usually around 10% of your mortgage balance per year but it can vary so speak to your lender first.
Fees and charges
This is an upfront cost you are asked to pay on a particular mortgage deal. It's sometimes called an arrangement fee, a booking fee or reservation fee.
Some mortgages come without a product fee and are known as ‘fee-free’, whereas those that do charge can range from around £500 to as much as £1500 in some cases.
Early Repayment Charge (ERC)
If you have agreed a fixed rate, capped rate or discounted rate mortgage with your lender it will be for a specific period – normally somewhere between 2 and 5 years.
If you wish to repay your mortgage ahead of the agreed term you may be charged an ERC. The ERC is usually a percentage of your mortgage balance and can work out to be thousands of pounds.