all the jargon and terminology used to describe the various elements mortgages
can be confusing for first time buyers, but it’s worth taking a little
time to learn the jargon before you apply.
Here’s a few of the basic terms (thanks to uSwitch) that are typically used when considering a mortgage as well as some of the specific differences that apply to Scotland.
Interest rates usually refer to the cost of the mortgage. This is the rate the lender will charge you for borrowing money. It is usually calculated annually, which is why it is also known as the Annual Percentage Rate. The total is then divided by 12 to give you a monthly repayment figure.
Initial rates and fixed periods
all mortgages will charge an initial rate that is set, often for a fixed period
of two years or five years.
rate can be fixed or variable (see ‘Fixed rate’, ‘Variable rate’ and ‘Tracker
rate’ below) but after the initial period, your interest rate will be set to
the mortgage provider’s ‘Standard Variable Rate’, which is the standard rate of
the initial period on a mortgage, usually lasting two or five years, you can
get your rate fixed. This means the rate does not change during that period,
even if the Bank of England base rate (see more on this below) changes. This
can give you peace of mind and more security during the first few years or your
variable rate is an interest rate on a mortgage that is subject to change. You
can choose to get a discounted variable rate for the initial fixed period on
your mortgage, often lasting for two or five years, but all mortgages after the
initial period are on a variable rate.
is often known as the Standard Variable Rate (SVR). This rate fluctuates
according to the mortgage lender’s own assessments of the market and
competition, as well as according to the Bank of England base rate.
tracker rate is another kind of variable interest rate, but it is directly
linked to the Bank of England base rate. The mortgage lender will have their
own base rate charge, which is added to the Bank of England base rate. When the
base rate goes up or down, so does the mortgage’s tracker rate.
The Bank of England base rate
the UK, the charge placed on banks for lending and savings is set by the Bank
of England. Based on multiple factors in the economy, jobs and housing market,
the Bank of England will decide whether or not to raise or lower the ‘base
the base rate goes up, mortgage lenders’ Standard Variable Rate will also rise.
When the base rate goes down, mortgage lenders’ Standard Variable Rate will go
are several mortgage types and many choices that can affect it, and also make
comparisons confusing. Interest only, capital repayment and offset mortgages
refer to how you pay back the mortgage only.
there are fixed rate, variable rate and tracker rate mortgages that refer to
what kind of interest rate you have to repay. Then there are mortgage types for
those who are struggling to get a large enough deposit together like guarantor
and family assisted mortgages.
Interest only mortgage
only mortgages refer to a form of repayment plan that involves only paying back
the interest portion of your debt. Obviously, the interest is likely to be far
smaller than the capital (the portion you used to actually buy the home),
meaning your monthly repayments will be easier to manage. However, at the end
of the mortgage term, you will need to repay all of the capital owed. These
mortgages are far less common due to the risk involved.
Capital repayment mortgage
capital repayment mortgage is the most common type of repayment plan on a
mortgage. This involves repaying the capital and the interest together every
month until you repay the entire mortgage.
offset mortgage refers to a repayment plan on a mortgage, which uses a savings
account linked to your repayments. Instead of your savings accumulating
interest, the money you earn goes towards paying off your mortgage.
can be useful if savings rates are not that good, as you can make an effort to
‘overpay’ your mortgage every month and save on mortgage interest.
guarantor mortgage is aimed at people who have a poor credit score or who do
not have a big enough deposit to secure a standard mortgage. A trusted family
member or friend will act as a guarantor for your mortgage application and be
required to pay your mortgage if you fail to keep up with repayments.
Family assisted mortgage
are family deposit or family offset mortgages available for homebuyers looking
for assistance. With a family deposit mortgage, a family member puts cash into
a savings account linked to the mortgage. They receive interest on that money
but the lender can take some of it to make a repayment in the event the buyer
a family offset mortgage, the money is placed in a separate account linked to
the mortgage that does not receive interest and is used to offset the cost of
the monthly mortgage repayments. They can also get their money back once 20% or
so of the mortgage has been repaid.
Equity release options
are two equity release options:
you take out a mortgage secured on your property provided it is your main
residence, while retaining ownership. You can choose to ring-fence some of the
value of your property as an inheritance for your family. You can choose to
make repayments or let the interest roll-up. The loan amount and any accrued
interest is paid back when you die or when you move into long-term care.
you sell part or all of your home to a home reversion provider in return for a
lump sum or regular payments. You have the right to continue living in the
property until you die, rent free, but you have to agree to maintain and insure
it. You can ring-fence a percentage of your property for later use, possibly
for inheritance. The percentage you retain will always remain the same
regardless of the change in property values, unless you decide to take further
cash releases. At the end of the plan your property is sold and the sale
proceeds are shared according to the remaining proportions of ownership.
the mortgage and moving is a long process with several stages. Read on to learn
everything you need to know.
valuation survey helps the mortgage lender determine whether the amount you are
asking to borrow matches up with what they think the property is worth. You
should also get your own survey done to check the structural integrity of the
is moving your borrowing from one property to another without paying an
arrangement fee. This is usually done if you are moving home and don’t want to
get a second mortgage. If you plan to do this in the future, check that your
mortgage is portable.
you are moving home then you might choose to get a bridging loan to help cover
the costs of your current property’s debt in the time between you finalise
a new mortgage on your new home.
will need a solicitor specialising in property transactions to
complete the legal aspects of buying or selling a home. The conveyancer will
help transfer the cash and do the necessary dealings with the Land Registry.
you needed to know about the terms related to getting a mortgage.
order to get a mortgage, you will need to pay some cash upfront, known as the
deposit. This should usually be around 20% of the property value, but some
mortgages allow you to pay as little as 5% upfront as a deposit.
Loan to Value (LTV)
LTV is the ratio of what the loan covers against the value of the property. For
example, if the home you wish to buy is £200,000 and you have a deposit of
£50,000, then you only need a mortgage loan of £150,000, making the LTV ratio
mortgage lender has a set of criteria required to be met in order to have the
application approved. The affordability criteria assesses how likely you are to
be able to afford the monthly mortgage repayments and how reliable you will be
even if a sudden unexpected change of circumstances were to negatively impact
credit score is taken off a calculation of the impact of all of your financial
and debt history. Your utility and phone contract bills, credit card debts and
other loans are all recorded in your credit report.
you miss a payment or have a lot of debt, that will give you a lower credit
score, but if you make your payments on time and have a trustworthy record then
you will have a higher credit score. All lenders look at your credit score to
determine your eligibility for their products, including mortgages.
Agreement in principle
you make an offer on a property it is a good idea to get a mortgage agreement
in principle. This is an agreement from the lender stating that, in principle,
they would be happy to lend to you the amount shown.
can help speed up the home buying process as it shows the seller that you will
be able to get a mortgage. An agreement in principle is not a guarantee that
will you be approved for a mortgage though.
are many types of mortgage lenders to choose from.
High street banks
main lenders on the market, such as RBC, Barclays, Lloyds, Santander and HSBC
are generally more likely to have many mortgage products, but they have a
reputation (if a little under-deserved) understanding if your circumstances do
not fit the mainstream criteria for borrowing.
such as Nationwide, Leeds and Skipton are building societies, meaning they are
owned by its members, rather than shareholders. This means they can sometimes
offer lower mortgage rates than the high street lenders.
are several specialist lenders available, each one suited to a different set of
circumstances, such as being self-employed, or having poor credit, or wanting
to buy a home abroad.
credit unions are able to offer mortgages, but usually to customers who have
been members and have had a savings account with them for a while.
paying a large lump sum of cash and having to repay your mortgage every month,
there are still so many other costs to getting a mortgage and buying a home.
order to set up your mortgage, you will likely have to pay an arrangement fee.
This can be added to your mortgage but it will cost a lot more as you will have
to pay it off over the same length of time.
is another type of mortgage set up fee. It’s usually much smaller than the
fee pays for a valuation survey, so that the lender can be sure the mortgage
they give you is good value for the property you are buying.
Telegraphic transfer fee
fee pays for the transfer of the mortgage money to pay the seller.
Mortgage account fee
fee covers the administration cost of closing the mortgage account, but can
also refer to the general administration of keeping the mortgage account open.
Check the terms of your mortgage to see that this is the same as the
‘Exit/Closure fee’ (see below).
you are late on your mortgage payments you could be charged a fee or even
worse, have your home repossessed. If you are unable to make a payment on time,
speak to your lender in advance to see if they can arrange for you to skip a
payment and add it on to the end.
Mortgage broker fee
you use a mortgage broker to help you find a mortgage, they will either get
their fee from you or from the lender. Mortgage brokers have to tell you
upfront if they work on commission from the lender or if they expect to be paid
Higher lending charge
higher lending charge usually applies to mortgages with a Loan to Value ratio
higher than 90%. This is an additional charge added to the mortgage for the
risk of lending a higher amount than usual to the borrower.
Fee for own buildings insurance arrangements
lenders usually offer you a deal to use their recommended buildings insurance
partner. If you refuse to take it, you might be charged a fee. However, this
might work out cheaper as you will be able to compare the best deals to find
your own buildings insurance.
Early repayment charge
mortgage has a repayment term, which is usually around 25 years (see below
‘Repayment period (mortgage term)’. The mortgage has to be paid over this
period, but you are usually allowed to overpay every month by a certain amount.
If you go over this amount or pay your mortgage off too quickly you will be
charged a penalty.
order to close down your account and confirm your mortgage as finished you have
to pay an exit fee, sometimes known as a mortgage account fee.
are a number of terms that you should familiarise yourself with when it comes
to repaying your mortgage, hopefully you’ll never have to deal with arrears or
defaults, but it’s worth understanding what they are.
Repayment period (mortgage term)
mortgage term sets out how long you need to make your repayments for. If your
mortgage is 25 years long, then you will make monthly repayments for 25 years.
repayments are made every month to finish paying off the mortgage.
is when you miss a mortgage repayment.
you have defaulted at least once on your mortgage, then you will go into
arrears. Contact your lender before that happens to find a solution and avoid
getting your home repossessed.
lender has the power to repossess your home as part payment for their costs if
you default too many times and fall into arrears.
a home in Scotland
rule in Scotland. Here, the seller must provide a copy of a Home Report which
includes a survey, valuation, energy report and property questionnaire. Before
you spend unnecessary money on another survey, check the one in the Home
Report. If it’s dated within the last 12 weeks (or if the seller is willing to
get it updated), your lender may accept a retype of the valuation (if the
surveyor is on the lender’s panel they can retype the valuation on to paper
specifically designed for that lender). Outside Scotland, the seller needs to
provide an Energy Performance Certificate — the band it is in (A–G) will go on
the estate agent’s details.
Duty in Scotland
A reform brought in by the Scottish Government in April 2015 means Stamp Duty
is now referred to as ‘Land and Buildings Transaction Tax’. First-time buyers
don’t have to pay the tax on up to £175,000. It’s a remarkably similar system
to the one England and Northern Ireland use, the main difference is the
thresholds it uses are at different rates.
Robson Macintosh & Company Ltd.
15 Manor Place, Edinburgh, Scotland, EH3 7DH
Tel: 0131 226 6700 Email: email@example.com
Registered in Scotland No. - SC232903.
Registered office: 15 Manor Place, Edinburgh, EH3 7DH
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