If you're applying for a mortgage then you will no doubt have to battle with the jargon that comes with it. We've explained some of the most common terms in plain English.
In fact, right now the pressure on homebuyers is even greater, as a widely predicted interest rate rise has added a sense of urgency of the situation. To help you out, we’ve created this at-a-glance overview of 10 of the mortgage-related terms that repeatedly confuse people.
Annual percentage rate
The Annual Percentage Rate, or APR, is used to compare one mortgage with another. It is the interest rate you will be charged on a particular loan (or mortgage) over the course of an average year. Lenders must display the APR to allow borrowers to make better-informed choices between one mortgage and another.
Bank of England base rate
The Bank of England’s base rate is the UK’s official rate of interest. It influences the rates of interest charged by different types of lenders. The Bank of England’s job is to keep the economy stable and the base rate, which the bank can increase or drop, is one of the tools it uses to do this.
Your deposit is the amount of money you have ready to put towards buying your new home. The higher your deposit, the less you will need to borrow. Therefore, the higher your deposit, the less you will need to pay to borrow.
Interest only mortgage
An interest only mortgage is one where you don’t pay off the loan itself, only the interest on it. At the end of the loan period, borrowers are still required to pay off the loan, whether by using the equity from a property that has increased in value or by other means.
The interest rate is essentially the percentage rate you pay for the privilege of borrowing money.
Fixed rate mortgage
Fixed rate mortgages protect homebuyers from fluctuations in the interest rate by guaranteeing a fixed, unchanging rate for a set and extended period. However, they also prevent homebuyers from benefiting from a fall in interest rates.
Loan to Value (LTV)
Loan to Value (LTV) is the ratio of the value of your loan (mortgage) against the value of the property you want to buy. If you want to buy a £100,000 house and you need to borrow £80,000 to top up a £20,000 deposit, then you’re asking to borrow 80% of the property value, which makes your LTV 80%.
The monthly repayment is the amount you will be required to pay off on your mortgage every month. This amount can change as interest rates rise or fall, depending on the type of mortgage you have.
The mortgage term is the number of years the mortgage is taken out over. First-time mortgages are typically taken out over 25 to 30 years.
Tracker rate mortgage
A tracker rate mortgage tracks the Bank of England’s base rate, although it doesn’t necessarily match it. It just rises and falls by the same amount. If the base rate is 2% but then rises to 3%, a tracker rate mortgage at 4% will rise to 5%.
Identifying the right mortgage for your circumstances and securing it in order to buy your dream home doesn’t have to be a confusing process. If you take your time, digest the information available and consult with financial advisors, you’ll soon find you’re on the right road to home ownership.