Buying a home could be the one of the most important purchases you’re likely to make and we know the terminology can often be confusing. So, what’s next? We've broken down the jargon and put it in plain English to help you navigate through the mortgage maze.
What is an agreement in principle?
An agreement in principle (AIP), also known as a decision in principle, is the first step to getting a mortgage. A lender will provide an estimate of how much you can borrow based on your income, spending and your credit score. The amount you can borrow can sometimes change slightly when you get your official mortgage offer.
A mortgage in principle is similar but we’ll explain the difference further on in this glossary and we have a separate guide that discusses all three if you'd like to take a deeper dive.
What does Annual Percentage Rate of Charge (APRC) mean?
An APRC is just a percentage that explains the average annual cost of your mortgage as a percentage. It includes interest charged over the full term of your loan, not just the initial deal period, as well as any other fees you may need to pay, such as an arrangement fee. A lender will always show an APRC on your mortgage illustration to help you when comparing different lenders.
What does base rate mean?
The base rate is set by the Bank of England for lending to other banks and building societies. The base rate influences the interest rates offered by lenders, so if the base rate goes up, expect your mortgage rate to increase, depending on the type of mortgage you’re on. Some mortgages track the Bank of England base rate and will change automatically if the base rate moves.
What are booking and arrangement fees?
Booking and arrangement fees are simply lender’s admin charges for setting up the mortgage.
- A booking fee is usually applicable to a fixed rate and is payable upfront at application to secure the rate. This isn’t usually refundable if you decide not to go ahead with the mortgage.
- An arrangement fee is usually charged when you take out a mortgage or your mortgage is drawn down (when you decide to take equity out of your home) and can be paid separately or added to the mortgage loan.
What’s a mortgage adviser or an intermediary?
A mortgage adviser, or intermediary, is an impartial person or company that arranges a mortgage between you and a lender. They’ll take care of a lot of the paperwork, will recommend the right mortgage for your needs based on what you’ve told them and will be able to justify that recommendation.
What’s a buy to let mortgage?
A buy-to-let mortgage is specifically for property owners who want to buy property to rent out and become a landlord.
What are cashback mortgages?
Cashback mortgages are where you’d receive a cash lump sum on completion of a mortgage. This offers a potential solution to people needing money in the early days after buying a property.
What are deeds?
Deeds, or title deeds, are documents which detail the chain of ownership for land and property.
What’s a deposit?
A deposit is a sum of money that goes towards the cost of the property that is being purchased. Generally, you’ll need at least a 10% deposit to buy a house although there are some lenders who only ask for a 5% deposit.
What are discount rate mortgages?
A discount mortgage has an interest rate fixed at a set percentage below the lender's standard variable rate (SVR). If your lender changes the SVR, your interest rate will change as well, so the amount you pay could change.
What’s an early repayment charge (ERC)?
Some mortgage products will charge an early repayment charge if you decide to repay some or all your mortgage within a certain period, or if you decide to move house and get a new mortgage before your term is up. This is usually either a percentage of the loan repaid or several days interest and covers the lenders admin and borrowing costs of you ending your mortgage deal earlier than agreed. ERCs will vary across different lenders and between different products and will be explained on your mortgage documents.
For example, you may need to pay 1% of the loan repaid for the first two years of your two-year fixed mortgage (basically for the period you are guaranteed a low rate for). Many lenders will allow you to overpay an amount each year without paying an ERC, often 10%.
The equity you have in your home is the value of your home minus your outstanding mortgage. In other words, it is the amount of your home that you actually own, and you will get back from selling your home if you ignore the costs of selling minus the mortgage you’d repay.
What’s an exit fee?
An exit fee may be applied by your lender when you repay your mortgage in full or move to another lender.
What’s a fixed rate mortgage?
A fixed rate mortgage has a fixed interest rate for a set time, so your mortgage payments won't change during that period even if the Bank of England base rate changes. Two, three- and five-year fixed rate mortgages are most common. After this time the mortgage will revert to either a rate that tracks the bank base rate or the lenders’ standard rate for the remaining duration of the mortgage, which is likely to be higher than your fixed rate and it’ll probably be variable so it could be changed in the future by your lender.
What does Help to Buy mean?
There is a Help to Buy Government scheme which we will explain more about below, but you might have also heard of the Help to Buy: ISA which isn’t available to open anymore.
Purchasing a property as a first-time buyer with help from the Government's Help to Buy scheme means you only need a 5% cash deposit for a new build home. The Government will lend you up to 20% of the cost and you will need a 75% mortgage to make up the rest. The benefit of this is that you won’t be charged loan fees on the 20% loan for the first five years of owning your home.
With the newest scheme started on April 1st, 2021, and will run for two years.
The Help to Buy equity loan is interest-free for five years.
You’ll need to have enough income to fund at least 80% of the purchase through a combination of a deposit and mortgage, as well as being able to pass lenders’ affordability tests.
This version is only open to first-time buyers while earlier Help to Buy schemes were available for all buyers of new build homes.
This new Help to Buy initiative also has new regional price limits where buyers cannot buy a home costings more than 1.5 times the average first-time buyer property price in their location. These price caps range from £186,100 in the North East to £437,600 in the South East and £600,000 in London.
|Region||Price cap for Help to Buy 2021|
|Yorkshire and The Humber||£228,100|
|East of England||£407,400|
What’s a higher lending charge?
A higher lending charge is a fee that a lender may apply when you borrow a high proportion of your property’s value, normally over 90% LTV. Find out more about LTV below.
What’s an interest only mortgage?
An interest only mortgage allows borrowers to only pay the interest charged for the term of the loan. As you're not paying any of the capital of the mortgage, you will need to have another repayment method to pay back the amount borrowed at the end of the term of the mortgage. Your mortgage lender will want details of how you are intending to repay the mortgage.
What’s an interest rate?
A mortgage interest rate is the percentage of the loan that you will be charged for borrowing money from your mortgage lender. The amount of interest you pay will affect how much your monthly repayments will be. Read more about mortgage interest rates in our guide.
What’s let to buy?
A let to buy mortgage is for borrowers looking to let out their current home so they can buy a new property. These types of mortgages can allow you to release some equity from your current home and put it down as a deposit on your new one.
What does loan to value mean?
Your loan to value (LTV) is the size of your mortgage relative as a percentage of the value of your house. A lower LTV normally means a lower interest rate as the mortgage won't be as risky for a lender.
What’s a maturity date?
If your mortgage has a period when your interest rate is fixed, or has a fixed discount, then your product maturity date is the end of that period. All mortgages will also have maturity date which is the end of your mortgage term when you’ll have repaid your mortgage or need to repay the mortgage if you have an interest-only mortgage.
What’s a monthly repayment?
The amount you pay each month depends on your interest rate, your loan size and, for capital repayment mortgages, the term of your mortgage. If you are paying interest only, the monthly payment will be the interest charged on the mortgage that month.
What’s a capital repayment mortgage?
A capital repayment mortgage means your monthly payments will pay off the capital and all interest by the end of the term. So, at the end of this mortgage, you will own your home.
What’s a mortgage illustration?
A mortgage illustration, or ESIS (European Standard Information Sheet), is a document that will explain the key features of a mortgage. This will include the monthly payment, interest rate details and any fees that will be chargeable at both the start and the end of the mortgage.
What’s a mortgage in principle?
A mortgage in principle is like an agreement or decision in principle but it won’t involve a hard credit check and comes from a mortgage adviser as opposed to the lender.
It’s a number usually based on a multiple of your income and outgoings which would be reached without a credit check and can be printed off for you by your mortgage adviser or emailed over to you.
What’s an outstanding balance?
An outstanding balance will inform you how much you still have left to pay on your mortgage.
What’s a mortgage overpayment?
A mortgage overpayment allows you to pay more off your mortgage than is contractually agreed with the lender. By overpaying you could save money on your interest payments and pay off your mortgage sooner.
Most mortgages allow you to pay more into your mortgage than your monthly mortgage payment. This reduces the interest you are charged and allows you to pay off your mortgage sooner or reduce your monthly mortgage payment.
Some mortgages have early repayment charges for partial or full repayments of the mortgage above a certain level.
What does remortgaging mean?
Remortgaging is either:
- Where you switch your current mortgage to a new deal either with your existing lender or a new lender. Find out more in our guide to remortgaging.
- You take another mortgage out against your equity. For example, the value of your property may have increased significantly since you bought it, or you may have paid off a decent chunk of your mortgage and want to borrow further to make some home improvements.
What’s a retirement interest only mortgage?
A retirement interest only (RIO) mortgage allows older customers to borrow money on an interest only basis without a fixed term. Instead, the mortgage is repayable from the sale of your home if you die, move into long term care, or sell the house.
What’s shared ownership?
A shared ownership scheme allows you to buy a share in a property, usually 25% to 75%, while paying rent on the rest. The schemes are targeted at helping first-time buyers and lower income households and are usually run by housing associations who own the remaining share.
What’s Stamp Duty?
Stamp Duty is called, for its full name, Stamp Duty Land Tax (SDLT) and it’s a tax paid to the Government when you buy a property. The amount you pay will depend on what type of buyer you are (e.g., first time) and how much your property is. The latest rates can be found here.
What’s a standard variable rate mortgage?
A standard variable rate (SVR) is the variable rate set by your lender; your lender may have a different name for it. Most rates with an initial fixed rate or a short-term tracker rate move onto an SVR once the first period has finished.
What’s a tracker rate mortgage?
Tracker rate mortgages usually follow the Bank of England's base rate to set what the interest rate will be. This type of mortgage is variable so the amount you pay could change.
What’s a mortgage term?
A mortgage term is the length of time, usually in years, that you have to pay the loan off over. Your payments are calculated so that your payments are spread out over the entirety of this term – so the longer your term, the longer you’ll be paying your mortgage off over and the more interest you’re likely to pay too.
What’s a variable rate mortgage?
A variable rate mortgage is a rate that can change, meaning that the amount you pay each month can change. Discount and tracker rates are types of variable rate mortgages.