If you’ve not been through the mortgage process before, or even if you have, there are probably a lot of terms that you will hear us use but not fully understand. So we’ve compiled a list of them here, each with a brief explanation, so that you hopefully have a better understanding of some of the things we’ll talk about!
Mortgage in Principle - also known as Decision in Principle or Agreement in Principle
This is a pre-agreement with a lender to borrow a certain amount of money based on your circumstances. This is commonly requested by estate agents or developers when you are viewing and offering on properties. It is typically valid for 3 months and it does require a credit check. We suggest that our clients obtain a MIP before looking seriously at properties so that they are in a good position to make an offer.
Early Repayment Charge (ERC)
Usually when you choose a fixed-rate mortgage, it will come with an ERC which is a fee for repaying all or part of your mortgage before the term ends. So for example, if you have chosen a 5-year fixed rate product but want to remortgage or sell after 3 years, you will face an ERC. Fees vary but are typically between 1% and 5% of your loan amount.
Loan to Value (LTV)
This is the term used to dictate the percentage the loan is in relation to the property value. For example, if you need a £180k mortgage on a property worth £200k, the LTV is 90%. It’s important to determine the LTV of your purchase/remortgage because lenders will often offer better deals to a lower LTV - this is because they pose less risk to the lender if they had to repossess the property.
Illustration - also known as a Key Fact Illustration or Key Fact Document
This is a document produced by the broker/advisor that outlines the terms of the mortgage product. Key points included are purchase price, loan amount, mortgage term, monthly payment, interest rate, and fees. It’s important to remember that this is not a mortgage offer.
Although your mortgage is likely to have an ERC, majority of mortgage deals these days will include the benefit of overpaying the mortgage without incurring a fee, usually up to 10% of the outstanding mortgage balance per year. For example, if your outstanding balance is £160k, you can overpay £16k that year without being charged. This can be done in one lump sum payment or weekly/monthly overpayments, providing you do not exceed your limit. The benefit of this to you is that you will pay less in interest in the long run.
This is the process that your chosen conveyancer, or solicitor, will carry out in relation to your purchase, sale, or remortgage. They deal with local authority searches, drawing up contracts, land registry, liaising with the other party’s solicitor, and handling the transfer of all funds involved in the process.
This is and always should be an important discussion when arranging a mortgage. Having the right insurance policies in place is important to ensure that all aspects of your life are financially protected. Policies include: building and contents, income protection, critical illness cover, and redundancy protection.
Equity is essentially the difference between the value of your property and the outstanding mortgage balance. For example, if your house is worth £200k and you have £130k left on the mortgage, you have £70k equity in that property. That great thing about equity is that it will always increase along with the value of your home, so the more the value goes up, the more equity you have. Equity release is another term you have probably heard a lot, and this is a scheme that allows you to cash in the equity you have in your property as a tax-free lump sum that you can use to make home improvements, gift to your family, or fund your retirement.
A survey is an assessment carried out by the lender that identifies any problems a property might pose to the prospective buyer. The lender will only require a standard valuation survey, which will just be a basic visual inspection. There are two further options if you want something more in depth: a homebuyer’s report or full structural survey. A homebuyer’s report is a non-intrusive inspection, that looks at all visible structural features. A full structural survey digs a bit deeper, looking at any potential hidden problems, and is usually recommended on older properties.
This refers to how mortgage advisors and lenders calculate how much you can borrow based mainly on your income. They typically use a guide of 4.5 times your gross annual income, but this can vary. Other factors that can affect affordability are things such as length of mortgage term, financial commitments and outstanding debts, dependants, and nature of your income - but this depends entirely on your individual circumstances. Use our affordability calculator to get a rough estimate of what you might be able to borrow.
Buy to Let
This is exactly as it sounds - a property that is bought to be permanently let and that you have no intention of living in (not to be confused with a holiday let). Buy to Let mortgages differ slightly from residential mortgages, in that they normally require a minimum 25% deposit. Also, the amount you can borrow is calculated on the monthly rental figure, rather than your personal income, because that figure is likely going to be paying the mortgage.
Debt consolidation is where you raise money from your mortgage to clear/settle debts such as credit cards and loans to reduce your overall monthly payments. Every scenario is very different when it comes to debt consolidation so it is worth speaking to an advisor about your specific situation, but with in the right circumstances, debt consolidation can be very beneficial and save you a lot of money.
Equity is the difference between what you owe on your mortgage and the value of your property. For example, if your property is worth £200,000 and your outstanding mortgage balance is £150,000, then you have £50,000 equity in the property. Equity will always increase with value, so finding ways to add value to your home is a great way to increase equity. Overpaying your mortgage (if you have the option to do so) is another great way to increase equity.
A mortgage offer is confirmation that a mortgage application has been approved and the lender is happy to loan the amount that was applied for. It will include full property details, an outline of all of the terms of the mortgage (loan amount, term, interest rate, early repayment charge, fees, etc.), and all terms and conditions of the loan.
Stamp Duty is the tax you might have to pay if you buy a property of a certain price. The amount to be paid depends on a variety of factors, such as whether or not the purchasers are first-time buyers, what the price of the property is, and currently, what date the purchase is taking place.
Shared ownership is a housing scheme aimed mainly at first time buyers that combines owning and renting a property to make it more affordable to those who otherwise wouldn’t be able to buy a house on the open market. The purchaser buys 25%-75% of the property and pays a mortgage on that share, and then pays rent to a housing association on the remaining share. It is also known as “part rent/part buy.”
Right To Buy
Right to Buy is a government scheme designed to allow those living in public sector housing to buy their home at a discount (up to £84,600 or £112,800 in London). Public sector refers to any local council, housing association, or other government department. The size of the discount depends on the amount of time spent in the house in question, the type of property, and the value of the property. In order to qualify, the purchaser must have lived in public sector housing for a minimum of 3-5 years, but not necessarily in the same property and no consecutively.