Mortgages explained
Ahhh. Sweet Katie & Jonathan buying their first home in 2016! ❤️
Mortgage* (n) an agreement between you and a lender that gives the lender the right to take your property if you don’t repay the money you’ve borrowed. (thanks, consumerfinance.gov!)
*FUN FACT Mort= French for dead Gage= French for pledge Mortgage = death pledge 👀💀
I don’t know if you know but I used to be a languages teacher…😏
ANYWAY… When I asked friends and family what they would like to read about on this blog, mortgages came up a lot! There is quite a lot to cover with mortgages, so I’m going to tackle this in two parts. In this post I’m going to some jargon-busting and cover the different types of mortgages available. In the follow-up post I will write about how to get a mortgage and how to find the best deal.
So, with no further ado… let’s get busting some mortgage jargon! (Yes, I’m formatting this like a vocab list… the languages teacher in me just can’t help it!)
Mortgage jargon
Agreement in principle- (aka Decision in principle, or Mortgage agreement in principle) When you start house hunting you can get an agreement in principle from most banks online. It gives you an idea of how much money the banks would be willing to lend you and therefore what kind of property you can afford. This is not the same as a mortgage offer. It’s more like a ‘hypothetical’ loan, kind of like getting your hopes up but still having to pass credit checks and all that fun stuff.
APRC (Annual percentage rate of charge) Think of this as the "true cost" of your mortgage. It includes everything—the interest AND any fees. It’s super handy when comparing mortgage deals, helping you choose the best option for your wallet.
Arrears Being in “arrears” means being behind with your mortgage payments. This isn’t a position you want to be in. If you don’t pay your mortgage payments, the banks could repossess your home. They would sell it in order to repay the loan. Not ideal.
Base Rate The Base Rate is set by the Bank of England. Think of the Bank of England as the “boss bank”. The Base Rate is the BOE’s interest rate (the rate at which it lends to other banks) and therefore, it directly affects the rest of the interest rates. If the Base Rate rises, interest rates at the banks will increase and mortgages will get more expensive. If the Base Rate drops, you will get better mortgage rates.
Conveyancing This is the process your solicitor goes through to make sure everything’s legal and above board when you buy or sell. It can cost anywhere from £500 to £2,500, so plan accordingly!
Credit score Think of it like a financial report card (again- apologies for the teacher analogy!) It shows the banks how good you are at borrowing money and paying it back. This is why not having any debt at all is actually not good for your credit score… how do the banks know you will pay the mortgage back if you have never had to borrow money before?
Equity The amount of equity you have is how much of the property you actually own. Eg. If you own a 200k house and have a 100k mortgage, you have 100k equity in that house. (If you sold the house, this is how much you would have in your pocket).
Freehold or leasehold? Freehold = you own the property AND the land. Leasehold = you own the property, but the land is someone else’s. As the lease gets shorter, the property value can drop. But don’t worry, the government is trying to make lease extensions easier!
Guarantor If you’re struggling to afford your mortgage, a guarantor (usually a parent or close relative) can help. They promise to pay your mortgage if you can’t. Sounds good, but make sure you’re both on the same page as it’s a big commitment!
Interest rate The amount the banks charge you for lending you the money. Eg. If you borrow £100,000 at 4% interest rate… you will pay back around* £4000 a year on top of the loan repayments. *Interest is calculated monthly, so the exact amount you pay back will depend on how much of your mortgage you have already paid off.
Intermediary This is me!! 😊 The person or company (like a mortgage broker or financial adviser) who acts as a middleman (or woman 😉) between you and the lender. They can help you find the best deal.
Land Registry The government department that tracks who owns property. When you buy or sell, it gets officially recorded with them.
Loan-to-value (LTV) This percentage shows how much you’re borrowing versus the value of the property. Lower LTV = better mortgage deals. If you’re borrowing a smaller percentage of the property’s value, it’s less risky for the bank.
Market value This is the price a property would likely sell for in normal conditions. But let’s be honest, it’s all a bit of a guess! The market value depends on lots of things—location, condition, supply and demand, and economic conditions. If interest rates go up, house prices might cool off, for example.
Mortgage Payment Protection Insurance (MPPI) This is insurance to protect your mortgage payments if you lose your job or can’t work due to illness or injury. It helps keep you covered so you don’t miss payments during tough times.
Mortgage term How long you have to repay your mortgage. The standard mortgage term is usually 25 years but you can agree on a shorter term if you can afford it, this means you will pay higher monthly payments but less interest overall. Choosing a longer mortgage term will mean lower monthly payments but you will pay more interest by the time you pay off the mortgage.
Porting a mortgage A feature of some mortgages allowing you to swap your mortgage from one property to another. This is a good idea if you think you might want to move home before the end of your tie-in period, otherwise you will need to pay an Early Repayment Charge.
Remortgage When you move from one mortgage deal to another, usually to get a better interest rate or to borrow more. It’s like hitting the reset button on your loan to save some cash.
Stamp Duty That lovely little tax you pay when you buy a property worth over £250k. 🙃 The rate depends on the price of the property. First-time buyers get a break, but everyone else needs to budget for it.
Standard Variable Rate (SVR) This is the interest rate your mortgage lender will revert to when you come to the end of your tie-in period. This is why some people choose to remortgage.
Tie-in period The fixed period at the beginning of your mortgage deal (eg. 2, 5 or 10 years). During this time you must stay with the same lender unless you don’t mind paying the Early Repayment Charges.
Types of Mortgages: What's Right for You?
➡️Single, Joint Tenants or Tenants in Common?
Single Mortgage: Just you, and only you, taking on the mortgage. No sharing.
Joint Tenants: Both owners have equal rights to the property, and if one passes away, the other automatically inherits their share.
Tenants in Common: You each own a specific share of the property. This can be useful if one person paid more into the deposit or if you want to leave your share to someone else in your will.
➡️Repayment vs. interest only
On repayment mortgages your monthly repayments pay the bank their interest but they also pay back the loan itself. By the time you come to the end of your mortgage term, there will be nothing left to pay and you will own the property outright. This is considered the safest option.
With interest-only mortgages the monthly repayments are lower because you are only paying the bank their interest. None of the loan is actually being repaid. It would be your job to pay the loan in full at the end of the mortgage term. To take out an interest-only loan the bank would want to see proof of a ‘repayment vehicle’ (a plan for paying off the loan at the end of the mortgage term.) Examples of repayment vehicles are cashing in on an investment, a savings account you regularly contribute to, or the sale of the property (this is more common with property developers who are buying the property to ‘flip’ and sell for a profit).
➡️What are the different rates available?
A fixed rate mortgage means your interest rate is fixed (won’t move) for the duration of your tie-in period. For example, if you choose a 2 year fixed-rate mortgage at 3%, this means for 2 years you would continue to pay 3% interest even if the interest rates go up. On the other hand, it also means you wouldn’t benefit from lower rates if the interest rates fall.
A variable rate mortgage means your monthly repayments will vary each month depending on what the interest rates are doing. This makes it harder to budget as you won’t know what your mortgage repayments will be each month, and they could also shoot up with hikes in interest rates. The pros are that you will benefit from drops in interest rates and that these mortgages are often more flexible, with lower Early Repayment Charges. Some products also offer lower initial rates than fixed mortgages.
A tracker mortgage is a type of variable rate mortgage which “tracks” (moves in line with) the BOE base rate.
A discount mortgage is another type of variable rate mortgage. It offers a discount on the bank’s Standard Variable Rate. For example. if you choose a mortgage deal of SVR - 1%, if the SVR is 3%, you will pay 2%. The downside is that if the SVR increases, so do your mortgage repayments!
A capped mortgage is yet another type of variable rate mortgage. Interest rates can go up and down, but there is a maximum limit that the interest rates won’t exceed.
➡️What is an offset mortgage?
Your savings account links to your mortgage, reducing the amount of interest you pay. For example, if your mortgage is £150k and you have £30k in savings, you only pay interest on £120k. Just remember, you won’t earn interest on your savings. It’s a trade-off!
➡️Buy-to let mortgages
A buy-to-let mortgage is what you would need if you are buying an investment property with the plan to rent it out. However, it wouldn’t really be advisable to buy a property for rental income unless you were buying it through a ‘Special Purpose Vehicle’ (a limited company set up specifically to buy and manage properties.) You can no longer deduct mortgage interest payments as an expense and with the increased Stamp Duty and Capital Gains Tax on investment properties, it is highly tax-inefficient in terms of an investment.👎
➡️Let-to-buy mortgages (no… I didn’t realise this was a thing either!)
A type of buy-to let mortgage, but you rent out your current home whilst buying a new one.
➡️Lifetime mortgage
A lifetime mortgage is actually a form of Equity Release and could be a whole other blog post on it's own… I’ll dive more into this in a separate post!
Phew, we made it! That was a lot of jargon to cover, but I hope it’s given you a better understanding of the mortgage basics. Keep an eye out for part two, where I’ll guide you through how to actually get a mortgage and better still, get the best deal.
Until next time!
Love,
Katie x