Mortgages are a type of loan provided by a Bank or Building Society. This legal agreement between you and the lender is designed to help you buy property or land and will normally last for 25 years (although the term can be shorter if required). The loan is ‘secured’ against the value of the property until it’s completely paid off. If you can’t make the monthly repayments the lender can repossess (take back) the property and sell it so they get their money back. It is therefore very important to understand what you can afford to pay each month.
Mortgages can be difficult to understand and complicated to arrange and you’ll often by swamped with unfamiliar terms by lenders, agents and mortgage advisors. Here’s a short guide to help you understand the basics of mortgages in the UK.
Mortgage Jargon Buster
APR or Annual Percentage Rate
This part covers not only the interest rate or the cost of borrowing the money but also the fee’s charged by the lender. It’s the total cost of the mortgage.
This is the up front, set-up fee for the mortgage.
This is the interest rate controlled by the Bank of England. If your mortgage is a “tracker” it will adjust based on changes to the BOE base rate.
Capped Rate Mortgage
This sets a maximum interest rate the lender can charge the borrower even if the BOE base rate increases beyond this level. The borrower will never pay more than this amount. Some products have a lower threshold below which the monthly repayments payments won’t fall.
This is a cash reward paid to you when you finish paying off your mortgage.
A deposit is the amount of money the buyer is required to pay up front to secure the mortgage and the property. In the past borrowers were able to pay deposits of 10% or less but these are now more difficult to find. To secure the lowest mortgage rates buyers are expected to provide up to 40% of the value of the property.
With this kind of mortgage, the interest you pay will be less than the standard variable rate for a fixed period of time, usually 2-5 years. If the SVR is 5%, a discount offered of 1% will leave you paying 4% for the agreed period of time.
Early Repayment Charges
Banks and building societies don’t like people paying off their mortgages early as it reduces the amount of interest they can charge during the lifetime of the loan. To make up for this they often impose a penalty charge if you choose to pay your mortgage off early.
A form of interest-only mortgage where you pay the interest charges direct to the lender while the repayment part is paid into an investment fund or endowment. The idea is that this fund will grow during the lifetime of the mortgage and allow you to pay off the loan, in full, at the end of the term.
The agreed interest rate remains fixed for the duration of the deal (usually 2-5 years) so your monthly payments will not change
This is the legal contract between you and the bank or building society. It outlines the legal obligations of both parties and the lenders rights if you fail to keep up with your monthly repayments.
With this type of mortgage you will pay off both the interest and capital on a monthly basis. This means higher monthly payments but at the end of the mortgage you will have built up equity equal to 100% of the property value.
Standard Variable Rate (SVR)
Every bank or building society has a Standard Variable Rate which is the amount they charge borrowers at the end of their discounted period. This is often when borrowers choose to remortgage to avoid these higher monthly rates.
The monthly charges will depend on the lenders SVR which can go up or down, usually based on the movement of the Bank Of England’s Base Rate.