25 Jan 2022
Mortgage Jargon Debunked – What all the Fancy Words Mean
Navigating the property market and its sky-high prices can be tough enough, but add on all the different terms, jargon and variables that the process of getting a mortgage has and it can feel impossible.
You might feel as though you don’t know enough, and when a new term that you don’t understand is thrown into the ring it can be a confusing or frustrating experience. With a decision as important and expensive as buying a house and getting a mortgage, you’ll want to know everything you can to make sure you’re getting the best deal for your money.
Here’s a list of terms you may run into and what they mean, so you can cut through the jargon and equip yourself with all the mortgage knowledge you need.
Okay, let’s get the obvious one out of the way first. A mortgage is a legal agreement in which a bank, building society or other lender, lends money at interest to a borrower (you) to enable you to buy or refinance a home without paying the entirety of the house price upfront.
For an extra piece of trivia, the word originates from the French term “morgage”, which translates from “mort” meaning “dead” and “gage” meaning “pledge” - to then mean dead pledge. This refers to the fact that the deal dies when the debt is paid fully or when someone fails to make payments and the property is taken through foreclosure.
Following on from mortgages, let’s look at the complete opposite or when it goes wrong, which is incredibly rare, but useful to know - repossessions count for 1% of sales (and these statistics come from 2020). There are other options before this happens.
Foreclosure is what happens when you fail to make or stop paying the monthly repayments (aka going into arrears). It is a legal process in which the lender attempts to recover the balance of the loan by forcing the sale of the property.
A mortgage deposit is the amount you initially put down towards the total price of the property, the current lowest percentage of payment is 5% thanks to the UK government’s introduction of the 95% mortgage scheme.
This scheme was introduced in April 2021 to encourage lenders to reintroduce 5% deposits as they had disappeared during the uncertain times of the pandemic’s peak. 5% deposits were originally intended for first time buyers, with the regular minimum being 10% and some lenders expecting more.
The higher the deposit you can pay the lower the monthly repayments and interest rates.
Monthly repayments refer to the amount you pay your lender each month, the payment covers a percentage of your mortgage plus interest. This monthly amount is determined by the percentage of the deposit you initially pay.
A mortgage term refers to how long you agree to repay the loan over. The standard mortgage term in the UK is 25 years, but terms of up to 30 or 40 years are becoming more common. The shortest terms are around 5 years.
A joint mortgage is when a mortgage is taken out by two or more people. You might decide to buy a house with a partner or friends. A parent can also help their children buy a property by entering into a joint mortgage with them.
One thing to note, if you buy with a partner but they pass away, the ownership of the mortgage reverts to you, the surviving person.
Similar to how a parent can enter into a joint mortgage to help their child. A guarantor refers to a third party who agrees to meet the monthly mortgage repayment if for some reason, you are unable to. A guarantor is usually a parent, guardian or other family member.
Loan to value refers to the size of your mortgage as a percentage of the property’s value. For example, if you have a £60,000 mortgage and your property is worth £120,000, your LTV will be 50%.
Remortgaging is when you change your mortgage without moving house. This is done for a number of reasons, you could save money by changing to a different type of mortgage, they might have a better interest rate. You can use the other mortgage to repay the original one.
A mortgage broker or adviser is a professional who can help you find a mortgage suited to you, for example…us!
Conveyancing is the legal process of transferring the title of a property from one person to another. This includes getting a mortgage. The typical conveyancing process has two phases, the exchanging of contracts and completion. This process can be done by a conveyancer.
A conveyancer is a professional that deals with legal aspects of buying or selling property and land.
They can be:
- A specialist conveyancing solicitor who is fully trained in legal services but specialises in conveyancing.
- A general solicitor that is trained in conveyancing but not as extensively as the specialist.
- A licensed conveyancer who is an expert in conveyancing but doesn’t have any additional legal training for issues further down the line, so will need to refer you to a solicitor if these issues do arise. They often work within a legal firm.
It is generally recommended to employ a solicitor or conveyancer; in fact most mortgage lenders will insist on doing so in order to protect their interests.
Equity refers to the amount of your property that you own outright, meaning the deposit and the mortgage payments so far. The value of this is assessed compared to what you’ve paid and what you still have to pay off on the mortgage loan.
This happens when the value of a property falls and becomes less than the mortgage taken out on it. Having negative equity could make remortgaging or moving house difficult.
A fixed rate mortgage means that the interest rate will stay the same for the first few years (this could be anything from 1 year to 10 years), even if the base rate of interest changes (determined by the Bank of England).
These are handy as they allow you to make sure you know exactly what your payments will be each month.
A flexible mortgage means you are not limited to paying a fixed amount monthly. For example, some months you can choose to pay more, and other months you can choose to pay less and even take a payment holiday. If you’re in a position to, it means you’ll be able to pay off your mortgage early, saving you money on interest. However, flexible mortgages tend to be more expensive than regular ones.
The freehold refers to the building and the land it stands on. So if you own this, you have control of both.
This means you own the property but not the land it’s built on, until a specific number of years have passed. A good example would be flats, these are usually owned under a leasehold basis. The shorter the leasehold term the more expensive it will be.
A buy-to-let property is bought by landlords with the intention of letting/renting it out to tenants. A lot of mortgage lenders offer special deals for these.
Gazumping happens when a seller accepts an offer on a property but then, before contracts are exchanged, a different buyer makes a higher offer which the seller then accepts. The buyer who made the first offer will have to either make an even higher offer or lose the purchase.
Once you’ve exchanged contracts, you take on the responsibility of organising insurance for the property. This protects the structure of your home from fires, floods and vandalism. It’s also a requirement of your mortgage agreement to make sure you have at least the minimum level of buildings insurance.
Don’t Be Afraid to Ask for Help
There are a lot of aspects to the mortgage process, so never be afraid to ask what something means. To learn even more about these mortgage terms and get professional advice, contact us today.