Mortgage Jargon Explained
Getting your head around mortgage jargon is never easy. However, fear not, carry on reading and we’ll translate some of these mortgage terms for you!
Trying to understand mortgage interest rates, mortgage applications and which lender you should go for can be an overwhelming experience. With so many mortgage terms and mortgage definitions to digest, it can often feel like you’re staring into a bottomless pit of words you’ll never be able to understand.
But we’re here to change all that! These phrases don’t have to be difficult to grasp. We’re going to handpick a few phrases that we feel you should know and simplify them for you!
Mortgage Term
We’ll start with a mortgage definition that is easy to grasp. Basically, when you take out your mortgage you can choose how long the period that you have to finish your repayment. This period is your mortgage term. While for conventional mortgages this normally lasts around 30 years, this can vary depending on a number of factors. For example, this can depend on age at application, your type of employment & your anticipated retirement age. Also, the lender that you have gone with can have an influence.
Just remember that the longer that you have your mortgage term the lower your monthly payment but the more you will have to pay in interest over the term. So, we recommend that you decide the length of your mortgage term wisely! That said, you can very your mortgage term every time you remortgage.
Agreement in Principle
This is basically a statement from your lender which says that they will lend an amount to a borrower based on their affordability assessment (later discussed). This will likely be conducted by your lender prior to your mortgage application being carried out and will allow them to work out the amount that they are willing to let you borrow. Basically, the lender is saying, now we've run a credit search, if you can prove what you have told us then we'll give you the money
Affordability Assessment
This is another easy mortgage term for you to understand. Affordability assessments are conducted by mortgage lenders to see if you are capable of paying back the capital that you borrow from the lender plus interest. This will take into account looking at your credit score, income and your financial outgoings.
Fixed Rate Mortgage
With mortgage interest rates in a constant state of flux, this can be a popular option for all. This mortgage type brings consistency to buyers’ monthly repayments by fixing the rate of interest that is charged on your property. While fixed-rate mortgages don’t tend to last for the whole mortgage term, the terms vary from lender to lender. It is then after this period that you will move onto another mortgage type. A fixed rate mortgage does exactly what it says on the tin. Your monthly payments remain fixed for the period of your fixed rate deal, often two years or five years.
Tracker Mortgage
Tracker mortgages are another mortgage type that many will start their term on. This mortgage interest rate follows the base rate set by the Bank of England. When the base rate rises or decreases so will your mortgage interest rate & by exactly the same amount because they ‘track’ the base rate. Again, the period that you’ll remain on a tracker rate mortgage for, varies from lender to lender. If the bank of England increases the base rate by 0.25% then the interest charged on your monthly mortgage payment will increase by 0.25%. Tracker mortgages are popular in times of stability but, as the economy becomes more volatile then so more people opt for a fixed rate mortgage.
For a rundown of 3 Mortgage Types, click the link to see our full article.
Early Repayment Charge
This one might be slightly trickier to understand. After all, if you’re paying money that you owe ahead of schedule then you’re just being really organised, right? Wrong…
If you repay your monthly mortgage repayments too early or pay more than the amount that you and your lender have agreed on then you will be liable for an early repayment charge. This is because the lender won’t earn as much in interest as they were expected to after you had finalised your mortgage contract with them.
We recommend that you speak to your lender about this, as the penalty that you pay will vary between lenders depending on the mortgage interest rate that you are on and a number of other factors.
Help-to-Buy Mortgage
This can be another great option for first-time buyers. The government has created help-to-buy ISAs where they will contribute a cash bonus towards the purchase of your first home. This comes at a rate of 25%. For example, for every £200 that you put into your help-to-buy ISA the government will give you £50 until you reach the limit of £3,000. So, if you’re looking to buy first time then definitely give this some consideration!
Home Equity
Home equity is the portion of your home that you own outright. You can work this out by getting the total mortgage sum and then taking away the outstanding mortgage amount.
Basically, the more of your mortgage that you have paid off then the more of your home you own and thus the more home equity you have.
Remortgaging
Remortgaging often gets a bad name, mainly because of the connotations it holds with financial instability. Before we nip this notion in the bud, it’s just as important to add that remortgaging can be a smart option for any homeowner wanting to increase their savings.
Think of this in another context, credit cards. You've got a great two-year introductory offer of 0% on your new credit card but after two-years, the interest charged jumps to 20%. Are you likely to stay with your new credit card after the two years are up or are you going to switch to a new card with a better offer. Basically, a mortgage is the same. You get a great introductory offer of say Fixed for two-year at 2% but, after two years your mortgage reverts to the lenders "standard variable rate" of say 4.5%. Are you going to stay with the 4.5% or REMORTGAGE to a new introductory rate, either with your current lender or a new lender. Yes, there's paperwork & fees involved but, when you are saving say 2% on a loan of £200,000 the savings to be made make it all worthwhile.
But what is a remortgage? It’s basically where you pay off one mortgage with the money from a new mortgage where you’d use the same property as collateral. What this means is that you can look for a new mortgage deal either with your current lender or with another lender.
While there are pros and cons for whether you stick or twist, if you’re ever unsure on which option to go for check out some of the other articles on our site!
At Mortgages Online we offer impartial advice that distinguishes us from a lot of other mortgage advisors. Have a look through some of the articles on our site or contact one of our mortgage experts. What’s more is that we won’t charge you a penny - no credit card required. So, you’ve got no reason not to drop us a message!
For loads more information on mortgage rates, types mortgages and more, check out our Articles section.
