What are the most important mortgage loan terms I need to know?
Each sector of the financial industry has its own financial jargon and for most of us the terminology can be confusing. The mortgage and lending sector have various terms that are used frequently and it’s important to know what is actually being said.
Taking on a loan or mortgage is a big financial commitment, so rather than letting the technical terms stump you, here is a glossary of important acronyms and terms. There are many more, but these should get you started and give you some confidence when chatting to your broker. If you have any jargon to add for others, then feel free to comment at the end of the article!
1. Annual Percentage Rate of Charge (APRC)
The APRC shows how much your mortgage will cost you (as a percentage) per year, assuming you keep it for the entire term. This rate will include all the fees and charges and is useful for comparing the market for different loans.
2. Agreement in Principle (AIP)
An AIP will be provided from your lender based on basic information about yourself. Your AIP does not guarantee the mortgage as you will still need to go through a full credit search and affordability check. This agreement is a written estimate from a lender giving you an indication of what you can borrow.
3. Arrangement Fee
An Arrangement fee may also be called a ‘completion fee’ and is what your lender may charge for providing you with a mortgage. Some lenders require this upfront but usually the fee is paid upon completion.
4. Annual Percentage Rate (APR)
This rate can be used to compare what other lenders are offering and describes the cost of the loan amount over a year. A fast way to compare the market is through reputable online brokers, who can scan the different options available based on different APRs and your needs.
5. Bank of England Base Rate
The official rate of interest is set by the Bank of England. If the base rate goes up, your interest rate may do as well. This will be determined by the type of mortgage rate you take. A good broker will offer financial advice on what the different types of mortgages are in regard to different interest plans.
Brokers can make this complicated process a lot simpler. They often have financial expertise, industry contacts and can tailor a loan or mortgage based on your personal circumstances. Look for a broker who can save you time by scanning the market and assisting from start to finish. There are reputable companies such as loan.co.uk that offer free advice, quotes and no upfront fees.
As the name suggests, this is the day you will become the legal owner of your property and your mortgage repayments will cease!
8. Capital Gains Tax (CGT)
CGT is the tax on any profit that may have been made in the increase of a property’s value. CGT is not payable on any profit made on your main (residential) property. However, you may be liable for this tax after selling a ‘Buy to Let’ property.
9. Early Repayment Charge
If you repay your entire mortgage early you may be liable for a fee. Ask your broker about this before you sign on the dotted line. This charge will usually be a percentage of the amount remaining.
10. Fixed Rate Mortgage
This type of mortgage means your interest rate will remain fixed — meaning you will pay the same amount every month.
A guarantor will be a person you nominate to make your repayments should you be unable to pay on time. This is usually a close family member or trusted friend. There are Guarantor loans available whereby you can borrow money based on some of the risk falling to your nominated Guarantor. This can be helpful if you do not meet credit requirements and need an unsecured loan.
12. Higher Lending Charge (HLC)
This charge may be applied by a lender if you are borrowing a high amount in relation to your property’s worth. This is obviously a higher risk for the lender so they may apply an HLC to protect themselves.
13. Interest Only Mortgage
These mortgages mean your monthly repayments may be lower as you are only covering the interest owed. However, you will need a plan as to how pay the full loan amount back at the end of the repayment period.
14. Loan to Value (LTV)
Loan to Value is calculated as a percentage and is worked out according to how much you borrow compared to the value of your property. For example, if you take out a mortgage for £90,000 and the property is worth £100,000 then the LTV would be 90%.
Often a misunderstood term, re-mortgaging means you want to change your current mortgage, either with your current lender or to a different one.
16. Stamp Duty
When you purchase a property, you will usually have to pay Stamp Duty Land Tax. The amount you have to pay will be dependent on the price of your property and is paid to the Government.
17. Standard Variable Rate (SVR)
Often lenders will offer a promotional interest rate period to attract new customers. Once this promotional period ends you will usually be put on the SRV. This amount will be the mortgage lenders default rate.
18. Secured Loan
Also known as a second charge mortgage or homeowner loan. This type of mortgage allows you to purchase another home by using your current property to secure the loan.
19. Tracker Rate Mortgage
Your mortgage interest rate will follow the Bank of England base rate. This means that your interest rate could change during the mortgage term (See point 5 ).
20. Variable Rate Mortgage
With this mortgage the interest rate is not fixed and may change over time.
This list of mortgage jargon will help to decipher the sometimes-confusing loan terminology. If you have any other terms that you think are “need-to-know” for consumers then add them into the comments. Remember to ask your broker questions about anything you don’t understand, and for a longer list of terms take a look at this site for even more help.