Mortgage Types Jargon Busting
Will Binks breaks down the most common mortgage jargon.
What is a Fixed Rate Mortgage?
This type of mortgage product is popular for residential and Buy to Let properties.
It’s where your interest rate is fixed for a certain period – so no matter whether national interest rates go up or come down, your payments remain the same for the period you have fixed for.
What is a Variable Rate Mortgage?
A variable rate can vary on a monthly basis – so your mortgage payments could go up or down depending on the interest rate set by the lender. You wouldn’t have the same ability to budget month to month as you would on a fixed rate.
What is a Tracker Rate Mortgage?
This is a form of variable rate, where you can fix a rate at a set level above the Bank of England base rate. It tracks that base rate – which has been increasing at a fairly steady rate recently with everything going on in the world. So if the base rate rises, so will your payment rate.
What is a Discounted Rate Mortgage?
This is where your initial rate may be slightly discounted compared with a lender’s standard rate, but then it will catch up as time progresses.
What is an Offset Rate Mortgage?
Some lenders offer what’s called an offset facility. Let’s say for instance your mortgage balance is £100,000 but you’ve got £20,000 in savings. What they would do is charge the interest based on £80,000 – because you’ve got £20,000 offsetting that interest rate in your savings account.
What’s the difference between Capital Repayment and Interest Only?
Let’s say you take out a £100,000 mortgage over 25 years on a capital repayment mortgage. If you keep making your mortgage payments on time and in full over those 25 years, you would have a zero balance at the end. You own the house completely.
If you were to take out an interest only mortgage, you would just be paying the interest for those 25 years and you would still owe the original balance at the end.
What is APRC?
This is something you might come across as you get ready to apply for a mortgage. It’s the Annual Percentage Rate of Charge – which essentially is the overall cost of the loan shown as a percentage. Let’s say for instance that you took a fixed rate of 2%, but the APRC is showing 4%. There’s no need to worry – that’s not your interest rate, it’s the total cost of the loan shown as a percentage.
What is Equity?
If you compare the value of your property with the balance left outstanding on the mortgage, the difference between them is your equity. It’s the amount you would keep if you sold your house and paid off the mortgage.
What is Conveyancing?
Conveyancing is essentially the legal work that goes on when you’re buying a property or remortgaging. A conveyancer is the person who looks after that for you. They would carry out searches to check on various things – that there’s not going to be any major roadworks near the property that you’re looking to purchase, or any major redevelopments planned in the area.
What is an Agreement in Principle?
This is also called a decision in principle. It’s a check to make sure that the lender is potentially happy to lend you the money before we put in a full mortgage application. It’s based on a soft search on your credit file which won’t affect your credit score.
What is a Flexible Mortgage and how do they work?
All mortgages are flexible to a degree in that we can choose a product to suit your circumstances and situation – whether you’re remortgaging, buying a new property or an additional property. But there are certain parts of the mortgage product that may be beneficial to you – things like cashback, underpayments, payment holidays, interest calculated daily, to switching your mortgage for instance.
When you remortgage, some lenders may offer a free legal service for you – but sometimes that’s not as good as going direct to your own conveyancer. So instead of that free legal service, some lenders offer cashback to help towards conveyancing or any other costs.
Overpayments are another key area. Many lenders will allow you to make overpayments on your mortgage up to 10% of the mortgage balance per year. Meanwhile if you were to pay your mortgage off early, there is usually an early repayment charge. But certain lenders are more flexible – they may allow larger overpayments or zero early repayment fees.
Another feature of some mortgages is the opportunity to ‘port’. Imagine a scenario where you move into a property, are tied into a five-year fixed rate deal and after 12 months you decide to move. Some lenders will allow you to port your existing product to a new property, avoiding those early repayment charges.
How does the Help to Buy Equity Loan scheme work?
This is currently for First Time Buyers only, and the scheme is set to end in March 2023 so we’re expecting applications to close at the end of 2022.
How it works is that, provided you’ve got a 5% deposit, the government will lend you a further 20% deposit – or up to 40% deposit if you’re in London. The loan is interest free for five years. After that you pay interest. If circumstances allow, you could potentially remortgage the property to repay the loan. You will need enough equity to do that.
What is a Joint Borrower Sole Proprietor Mortgage?
This is the modern-day version of the guarantor mortgage. Imagine a young couple buying a property with a joint mortgage. They’re both on the title deeds – they’re both the proprietors.
Then perhaps a second young couple may not be earning as much as the first couple. They need some help from a family member to boost their affordability. Let’s say Mum and Dad are helping out. With Joint Borrower Sole Proprietor the parents wouldn’t go on to the title deeds for the property. However, if there was any shortfall in the mortgage payments they would be liable.
What is Shared Ownership?
This is another great scheme to get people on the housing ladder, and it’s not just for First Time Buyers. What you do is purchase a portion of the property. Let’s say you were going to buy a property priced at £200,000, you could buy potentially a 50% share of that property. You would get a mortgage for £100,000 and pay rent on the rest. We’d need to work out costs and affordability based on your specific circumstances.
What is Right to Buy and Right to Acquire?
If you’re living in a council or Housing Association property, you may be offered the opportunity to buy that property. You need to have lived there for a certain amount of time. Sometimes the property is discounted as well, which is also linked to how long you’ve lived there.
What’s the role of a Mortgage Broker?
If you’re thinking about buying a home or remortgaging, we’re here to help. There are lots of schemes available currently as well as different types of mortgage to meet your needs. Here at The Mortgage Store we will always do our best – even if we can’t help you immediately, we’ll keep in touch with you so that when your circumstances change we can jump in and help you.
We’re here to support you with all the jargon too – it can definitely be confusing, so never be afraid to ask questions. We’re here to help.
Your property may be repossessed if you do not keep up with your mortgage repayments. The Financial Conduct Authority does not regulate some Buy to Let Mortgages.