Mortgage Terms Explained
The ‘standard’ term for a new mortgage is 25 years, but you can choose a different term to suit your circumstances. With a repayment mortgage the longer the term, the lower the monthly payments, although you will pay more in total. Beware of making financial commitments that continue past your retirement age unless you’re sure you’ll be able to afford the payments.
You should always review your mortgage whenever the period of a special deal - for example, a fixed or discounted interest rate - comes to an end, as well as annually when your lender sends you a statement. This is a good opportunity to check your mortgage and consider any changes. Gone are the days when you took out a mortgage and kept the same one for 25 years. Nowadays, it’s common to shop around every few years to make sure you are getting a good deal. Switching can cut your monthly payments but you’ll need to weigh up these monthly savings or other benefits against the up-front costs of making the switch.
Bank of England Base Rate
The Bank of England sets an interest rate at which it lends to financial institutions. This interest rate then affects the whole range of interest rates set by commercial banks, building societies and other institutions for their own savers and borrowers. It also tends to affect the price of financial assets, such as bonds and shares, and the exchange rate, which affect consumer and business demand in a variety of ways. Lowering or raising interest rates affects spending in the economy.
This is a loan that is usually taken out in circumstances where short term cash is required, for example when someone wants to buy another house before they've sold their own. Bridging loans are expensive and should only be used as a last resort and if it is a “short term” measure.
A Mortgage Decision in Principle (DIP)
By giving the lender a shortened application form, they will give an early indication whether a mortgage is likely to be offered. The DIP will be subject to the information supplied being verified and a full application being made. This is often useful for First time buyers or when purchasing a property and negotiating when there are more than one party interested in the property.
Standard Variable Rate (SVR)
The Bank of England sets a base rate (BBR). The mortgage lender then sets their own SVR which is generally higher than the BBR. If the BBR rises then SVR’s are likely to rise as well. Each lender has a different SVR and they can vary quite significantly.
This means that the value of the property has fallen below the amount of loan that you have on it (i.e. if you sold it you would not be able to repay the whole of the debt)
Mortgage Indemnity Guarantee (MIG)
The Mortgage Indemnity Guarantee Premium is a payment often demanded by a lender in order for them to lend. This is particularly the case where the lender is lending a high loan to value (LTV) usually 90-100% but in some cases can be charged at a lower LTV such as 80%. It protects the lender from problems should you default on the loan and be repossessed. The insurer will settle with the lender and then turn back to you for the shortfall. The premium varies from lender to lender but in the majority of cases the premium must be paid by you, the borrower, although sometimes this can be added to the loan.
Loan to Value (LTV)
This is basically the amount of loan you are taking out compared to the value of the property. For example: If the purchase price / value of property is £100,000 you have a Deposit of £25,000 and therefore need a Loan of £75,000 the calculation for the Loan to value is as follows- loan (75,000) divided by (/) value of property (100,000) x 100 = 75 Therefore Loan to value LTV is 75%
This is a mandatory* charge levied by the government on house purchases the rates payable are as follows:- £0 - £125,000 = nil £125,001 - £250,000 = 2%, £250,001 - £925,000 = 5%, £925,001- £1.5 million, £1.5 million & over = 12%
Tie in (penalty period)
This is the amount of time that you have to stay with a particular lender without having to pay an Early Redemption Penalty to either pay off your mortgage or move to another lender. Generally for example the period of a fixed or discounted rate. i.e a 3 year fixed product is likely to have a 3 year tie in.
Tie in Overhang
This is slightly different to the normal tie in period whereas after the fixed or discounted period you are generally tied in for an additional amount of time and you will be paying the lenders Standard Variable Rate.
Early Redemption Penalty (ERP)
This is the charge that you will have to pay to your lender if you choose to either pay off or move your mortgage whilst you are still within a tie in period.
Costs involved (Fees)
More often than not when taking out a mortgage you will incur fees of some sort, be it a new purchase or a remortgage. The fees you are likely to incur are as follows: Solicitors fees, arrangement / booking fee, valuation fee, mortgage indemnity guarantee, stamp duty. All of these fees are variable and will be detailed on your Key Facts Illustration. Some of the fees are payable in advance, some at the start of the mortgage and many of which can be added to the loan.
What is a keyfacts document?
When giving you mortgage advice & quotes we must give you a Key Facts Illustration . It sumarises the important features of the mortgage and must be clear, fair and not misleading and will be presented in a standard way, so you can easily check the cost and terms of the mortgage and compare it with other similar mortgages.