Learning about mortgages can seem a complex task. Thankfully, My Big Move has constructed a basic guide for explaining all the popular mortgage terms and financial jargon you’re likely to come across. We make it easy.
A definition is supposed to be clear and explanatory. However, if you go to Google now and type in ‘mortgage definition’ – this is what you get:
‘A legal agreement by which a bank, building society, etc. lends money at interest in exchange for taking the title of the debtor's property, with the condition that the conveyance of title becomes void upon the payment of the debt.’
Not get a word of that? No. Of course not. Far too much legal jargon.
In the simplest terms, a mortgage is a loan that you receive from a bank to pay for a house or other property. So let's break this down, nice and simple.
To get a mortgage, you place a deposit down (£10,000) on a house worth £100,000.
The rest of the money owed to buy the house (£90,000) is paid for by a bank (this is the lender) at the time of purchase.
You would then gradually pay back the bank the rest of this money (£90,000) over an agreed period (e.g. 25 years), with an interest rate added (e.g. 3.5% Annual Percentage Rate – the added amount you pay each year) – so at the end of this period, the bank has made money.
So, let's calculate it out, shall we?
As standard, you would owe £90,000/25 years = £3600 per year.
£3600/12months = £300 per month.
Then there’s the interest on top: 3.5% of 90,000 = £3,150. This would be the added amount you would pay back each year over the 25 years. (£3,150 x 25 years = £78,750. This is the interest you would pay in total and the money that the bank makes at the end of the mortgage).
So, £3150/12months = £262.50p/m.
So, totalled together, you would owe £300 + £262.50 = £562.50p/m.
£90,000 standard + £78,750 interest = £168,750. This is the total amount you would pay after a 25-year mortgage on a £100,000 house.
Mortgage Lender = An organisation (commonly a bank) that lends money for the mortgage.
So, for example, you're likely to approach Nationwide, HSBC, Natwest for them to lend you a mortgage.
Mortgage Broker (Advisor) = These folks help people with securing a mortgage to buy, buy to let, a specialist mortgage or to re-mortgage property.
They are the main point of contact throughout the process. Due to their expertise, they can save you a lot of money in the long-term.
There are different types of Mortgage Brokers, too:
Whole of Market = They can find the best deals from all the mortgages available.
Partially linked = Recommend a few mortgages but are tied to a select few lenders.
Tied = These Advisors are tied to just one mortgage lender. (Potential discount through this method but less reach).
Fixed Rate Mortgage = Fixed rate mortgages are very popular. They’re also great for first-time buyers; the mortgage interest rate is fixed for a set amount of years. (2-5 years but sometimes up to 10).
This means that if mortgage interest rates change (up or down!), you’ll be paying the same amount monthly for that length of time. This can be an advantage as well as a disadvantage: you could be stuck paying a higher rate if other mortgage rates go down.
You can switch out from a fixed-rate, but there’s a high likelihood of an early repayment charge!
Variable Rate Mortgage = Also known as a standard variable rate mortgage (SVR). This is a mortgage that applies the general change in mortgage rates over time.
This can be attributed to the Bank of England’s base rate. However, there are other factors that can affect this, too. The base rate may go down, but you could still be paying more.
Buy-to-Let Mortgage = You might be familiar with these, as it is a huge market. Buy-to-Let mortgages are for those looking to buy a property and then rent it out, rather than live in it themselves.
Due to this, the money you can borrow from the lender (bank) is at least partially based on the amount of rent you expect to receive. It’s highly unlikely that first-time buyers would be granted a buy-to-let mortgage.
Bad Credit Mortgage = A mortgage designed for someone with a bad credit rating. Interest Rates and deposits are usually higher because of the heightened risk.
Credit Rating = The ability of a person or organisation to fulfil their financial commitments (based on past deals).
E.g. If someone failed to pay a previous outstanding loan, they would have a bad credit rating.
Deposit = The amount you’re required to put down towards the total property value.
E.g. putting a £10,000 deposit down towards a £100,000 property. The minimum is usually 5%, but cheaper deals can be found by those who can pay up to 40% deposits, for example.
Re-mortgage = The process of switching to a new mortgage deal, either with the same or different lender.
This is usually popular when there is an opportunity for better terms/deal compared with the current mortgage. Could be liable for early repayment charge when you re-mortgage.
Commission = Within the property industry, a commission is a fee paid to a broker or other financial agent (e.g. estate agents) for negotiating a sale. The fee is based on a percentage of the sale price.
E.g. 1% of total sale. 1% of £400,000 = £4,000 commission.
Interest = Money added on top of money already owed.
For example: 5% interest rate on a £100,000 loan would be £5,000 interest. So overall, you would pay £105,000 in total.
Equity = The amount of the property that you own outright.
I.E. your deposit plus the capital you've paid off on your mortgage. (£10,000 deposit and £6,000 currently paid back = £16,000 equity)
Guarantor = A third-party who is guaranteed to make the monthly repayments if the first-party cannot.
E.g. Usually a parent or guardian.
Early repayment charges = Penalty fees you must pay if you want to leave your mortgage during a specified period, usually the period of the initial deal.
E.g. you pay off your mortgage before your current deal (25 years) ends.
Credit Score = Often used by lenders to determine a payee’s reliability. They use it to evaluate the probability that a person repays their debts.
APR = Annual percentage rate. This is the percentage of the loan/repayment that you would pay over the year.
E.g. Fixed rate £100,000 mortgage, set over 25 years. Interest rate is 3%. Total owed is £103,000. 103,000/25 = 4120. 4120/103,000x100 = 4% APR.
Equity Release = When you’re over 55, you can receive a large payment from your lender, (either a tax-free lump sum or have it sent as a regular income) and effectively get your house re-mortgaged.
The money you receive will not cover the whole value of the property (e.g. you might receive £50,000 for a £100,000 house), but the rule with Equity Release is that when you pass on, the lender then sells the property for its full value. That’s how the lenders make their money.
Help-to-Buy ISAs = Special government-led scheme where they will boost your savings by 25%.
Max bonus you can receive from the government is £3,000 (you’d have saved £12,000 in that case). If you were to open two accounts for you and your partner, you could save up a bonus of £6,000.
Joint Ownership Schemes = This is a mortgage taken out by two or more people. This might be used if you want to buy a house with a partner or friend.
It can also be used by parents who want to help their children buy a property.
Mortgage Valuation = A valuation carried out by an agent appointed by your mortgage lender (bank), of the property that you want to buy.
A Mortgage Valuation is not to be confused with an official property survey.
IFA = An Independent Financial Advisor. Professionals who offer independent advice on financial matters to their clients.
In a lot of cases, these guys are also qualified as Mortgage Advisors because of the financial knowledge they possess.
Loan to Value (LTV) = normally a percentage figure that reflects the percentage of your property that is mortgaged, and the amount that is yours (your equity).
E.g. You own £150,000 of a £200,000 property. This means you have a 75% LTV. Your equity is £50,000.
Stamp Duty = This is a tax you pay when you buy a house. You must pay Stamp Duty Land Tax (SDLT) if you buy property or land over a certain price in England, Wales and Northern Ireland.
Rate of Stamp Duty =
Purchase price of property
Rate of Stamp Duty
Buy to Let/ Additional Home Rate*
£0 - £125,000
£125,001 - £250,000
£250,001 - £925,000
£925,001 - £1.5 million
You must remember, however, that like income tax, stamp duty taxes you fairly on the amount your property is worth in each bracket.
For example, your house is worth £300,000.
£250,000 of that would be taxed 2% (= £5,000).
The other £50,000 would be taxed 5%, as that amount makes the total (£300,000) pass over the second taxable bracket (£125,000 - £250,000) and into the third bracket (£250,00-£925,000).
5% of 5,000 = £250.
So, in total, you pay a total of £5,250 tax on your £300,000 property.
Mortgages: Frequently Asked Questions
What is a mortgage? How do mortgages work?
Essentially, mortgages are a common financial method that gives you the opportunity to afford housing by putting a deposit down on a house, borrowing money from a lender (a bank) to pay the rest, and then pay them back more over a fixed period with interest on top.
How to get a mortgage?
You’ll want to work out your budget before applying for a mortgage. This means that you need to check whether you’ll be able to borrow enough and make all the necessary repayments.
Can I get a mortgage?
Lenders (the banks) will always look at the affordability of your mortgage before granting it. They consider your credit rating and your income. They will assess your budget and provide you with a suitable mortgage depending on whether your finances could comfortably cover it.
E.g. You would struggle to find a mortgage if your income level was low.
Which mortgage lender?
There are always more popular choices than others with lenders. However, the real answer is that the lender you go with depends entirely on your situation, what you can afford, where you need to move to, how long the repayments should cover etc.
Many lenders will offer various rates and different mortgages, which is why it is always best to compare them against one another when searching for the perfect mortgage for you.
Are mortgage payments monthly?
Yes. You will always pay back your mortgage in monthly instalments.
How does mortgage interest work?
This is how the lender (bank) makes their money. They charge you interest on your repayments, usually at a set rate (e.g. 3.5% APR). This is a percentage of the total amount that you owe them that is paid every month, too.
This means you have the time and space to earn the money, pay them back accordingly and live in the property. So, it works out for all parties involved.