Mortgage Jargon Busting

Mortgage Jargon Busting:

At PAB Wealth Management our mortgage advisers know that there is nothing more frustrating that speaking to someone who talks in industry jargon. We can promise you we won’t do that. Check out our mortgage jargon busting guide below to help you understand more about mortgages. 

What Is A Fixed Rate Mortgage?

A fixed rate mortgage is a contract between the borrower and lender where an agreement is made that the interest rate payable on the mortgage will not change for a specified period of time. A Fixed Rate mortgage will generally run for one, two, three, five or ten years.

During the fixed rate period the borrower benefits from knowing that their mortgage payments will not change. When the fixed rate period ends the borrower will move to the lenders standard variable rate.

What Is A Variable Rate Mortgage? 

Every mortgage lender has their own Standard Variable Rate of interest. This varies from lender to lender and will generally be at a higher rate of interest than a fixed rate, tracker or discounted rate mortgage.

Although you will generally pay a higher rate of interest a variable rate mortgage is more flexible as there are no tie-ins and no penalties if you wish to transfer to a new lender.

The lender can increase or decrease their Standard Variable interest rate at any time.

What Is A Tracker Rate Mortgage?

Tracker rate mortgages will generally be linked to the Bank of England base rate. The governor of the Bank of England and the Monetary Policy Committee decide if the base rate remains the same, is increased or decreased when they meet every six weeks.

With a tracker rate mortgage as it follows the Bank of England base rate if the rate decrease your mortgage payments will go down. If the rate increases your mortgage payments will go up.

What Is A Discounted Rate Mortgage?

A discounted rate mortgage is similar to a tracker rate mortgage. However, a discounted rate mortgage will provide you with a discount from the lenders Standard Variable Rate. If the lenders Standard Variable Rate is 6% and you are getting a discount of 3% off the Standard Variable Rate the interest rate you will be paying is 3%.

The discount rate will be linked to the Standard Variable Rate and will change in line with it. For example if the rate rises to 9% you will still have a 3% discount but the interest rate payable will now be 6%.

What Is An Offset Mortgage?

Offset Mortgages benefit those who currently have a mortgage but also have a savings pot available. By using the balance available in your bank or building society account to offset the mortgage interest that is payable. For example, if you have a mortgage balance of £200,000 and £75,000 in savings your mortgage lender would only charge you interest on £125,000 of your mortgage rather than the full £200,000.

By doing this you can either benefit from cheaper monthly payments or you can continue to pay the mortgage as if there were no interest savings and reduce the balance of your mortgage much quicker.

What Is A Capital Repayment Mortgage?

A Capital Repayment Mortgage is where every monthly mortgage payment pays an element of the original capital borrowed and also pays the interest that has accrued on top. At the start of your mortgage most of your monthly payment will go towards servicing the interest and not much capital will be paid off. However, as you make your way through your mortgage term your balance will reduce and as long as you make all your payments on time at the end of your mortgage term you will own your property with no mortgage balance.

What Is An Interest Only Mortgage?

An Interest-Only Mortgage is where each monthly payment only services the monthly interest that is charged by the mortgage lender and none of the capital is repaid.

This means that when you reach the end of your mortgage term you will still owe the original loan amount. Typically this is used by investors where they can sell the property at the end of the mortgage term to repay the debt in full.

What Is An Overpayment?

An overpayment is where the borrower decides that they wish to pay more to their lender than the stated monthly payment. Most mortgage lenders will allow overpayments of up to 10% of the mortgage balance during a fixed rate period without the borrower incurring any early repayment charges.

Making overpayments will help to ensure that you can pay your mortgage off quicker and thus pay less interest on the amount you have borrowed.

What Is A Flexible Mortgage?

When you have a Flexible Mortgage you can overpay by as much as you want, whenever you want.

Lenders will often charge more for a flexible mortgage rate as they are aware that you could pay the mortgage off more quickly. A flexible mortgage can be beneficial for those who earn regular extra income and want to pay their mortgage off without penalties.

What Is A Repayment Holiday?

A repayment holiday is when your mortgage lender allows you not to make your monthly mortgage payment if you are in financial difficulties. For example if you were mad redundant. It is important to always contact your lender if you require a repayment holiday as each lender has different criteria as to when a repayment holiday can be applied.

There will normally be a maximum period for which a repayment holiday can be applied or some lenders may say that you just need to pay the interest rather than the full monthly payment.

What Is Porting?

Porting allows you to take your current mortgage deal from your current property to a new property without incurring any penalties if you are in a fixed rate period.

However, it is important to note that a Porting application is treated as a new application by lenders and as such if you wish to port your mortgage both you and your new property must fit the mortgage lenders criteria.

What Is An Early Repayment Charge?

In most circumstance the answer to this questions is no. However, it will be dependent on your personal circumstances and how high any early repayment charges are. If you are looking to move mortgage lenders for a cheaper interest rate you will need to ensure that the cheaper rate saves you enough money to make it worth paying the early repayment charges.

What Does Loan To Value Mean?

Loan to Value(LTV). Is the size of your mortgage as a percentage of the value of your property. If you have a £100,000 mortgage and your home is worth £200,000 your Loan to Value is 50%. 

What Is A Mortgage In Principle/Agreement In Principle/Decision In Principle?

These are all the same thing. They are confirmation from a lender that subject to the information you have provided being correct they are happy to accept a full mortgage application from you. It is not a requirement for First Time Buyers but in a competitive house buying market having an Agreement In Principle in place can help set your offer for a property apart from other buyers as the seller of the property is more likely to take your offer seriously.

Your home/property may be repossessed if you do not keep up repayments on your mortgage