Article reviewed: 2013/01/18 | Next review due: 2014/08/06
Mortgages can be a complex subject, with specific words and expressions having their own meaning... We've listed the main words and terms that you may come across, with full descriptions below.
The length of the mortgage.
The amount that is borrowed and therefore needs to be repaid.
The amount that the bank charges you for borrowing the money over.
Base Rate or Bank of England Base Rate or BBR:
This is the basic interest rate that the Bank of England charges other banks. Often an interest rate is quoted as “X% over Base”, “X% over BBR” or “X+B”. As at Summer 2009, Base Rate was 0.5%. Therefore, 1% over Base would have been 1.5%.
Loan to Value (LTV):
This is the amount of money you borrow as a mortgage expressed as a percentage of the value or price of the property (whichever is lower). For example, a £75,000 mortgage on a house valued at £100,000 would mean an LTV of 75%, meaning that you have a 25% deposit.
The difference between the amount you owe on your mortgage and the current value of your property. This is why you hear in the news about people in ‘negative equity’, meaning that their mortgage is more than the property is worth.
Early repayment charge:
A charge you may incur if you pay off all or part of your mortgage earlier than agreed.
You can choose how you wish to repay the mortgage, usually either:
Your mortgage repayments only cover the interest charged to the mortgage. Therefore, if you have a 20 year interest-only mortgage for £200,000 – at the end of the 20years, you will need to pay a lump sum of £200,000.
Repayment or Interest & Capital:
With a repayment mortgage your monthly payments cover both interest and capital at the same time. It is calculated so that at the end of your mortgage term the amount you borrowed including interest is paid in full, provided you make all the repayments as required.
Generally, this describes a mortgage that offers flexibility over how you pay it off, although some early repayment charges may apply. A flexible mortgage could allow you to pay off your mortgage early or make overpayments. It is important never to agree to repay more than you can afford – late-and non-payments can result in the bank repossessing your home.
How the interest rate is set and how interest is calculated can also vary.
Fixed rate mortgage:
Your mortgage interest is fixed for a set period which means your monthly repayments stay the same each month for that period of time.
A tracker mortgage has an interest rate that follows the movement of either the Bank of England's or lender's base rate which can go up or down depending on the decisions of the Bank of England.
Offsetting is a way of managing your money using your current account, savings account and offset mortgage. You can 'offset' the credit balances you have in your current and savings accounts against your mortgage balance. Therefore, if you have a £200,000 mortgage, but £5,000 in savings but don’t want to use it to pay off the house, this amount is ‘offset’ and the interest on the mortgage is calculated for the £195,000 balance and not the full mortgage amount, Using your savings to offset the mortgage, you can either choose to keep the repayments fixed, but having the mortgage paid off more quickly, or keeping the term the same, but having reduced interest payments because of the offset funds.
Finalising the mortgage
The next steps are to agree a mortgage for a property purchase:
Agreement in Principle:
This is an agreement from the bank stating that, as long as the information you have provided them is correct, they would agree to lending you the requested amount. This is NOT and official offer. This can be useful to see what your budget can allow, and will give you scope to make an offer on a property, but you will need an ‘Offer Letter’ to agree a sale.
A service provided by an independent expert to determine the value of any property you might want to buy or sell. There are several different types of valuation and you should ensure you consider each type carefully before deciding which one to proceed with. Valuations can be arranged by your lender.
Letter confirming that the bank has agreed to lend to you. You cannot buy a house without this. The letter includes all the mortgage details such as the amount of the mortgage, the value of the house for which the mortgage is for, the interest rate, repayment amount and structure. An offer letter is usually valid for 6 months.