Buying your first home? Don’t let mortgage jargon hold you back. This guide covers all the key terms you need to know when applying for a mortgage.
Navigating mortgage jargon can feel like learning a new language. From “DIP” to “APRC”, the terminology can make the mortgage application process feel overwhelming, and buying your first home is stressful enough!
Here’s a quick guide to help you understand some of the most common mortgage terms:
Loan-to-Value (LTV)
Your loan-to-value, commonly referred to as ‘LTV’, refers to the percentage of the property’s value that you’re borrowing.
For example, if your home costs £200,000 and you borrow £180,000, your LTV is 90%. The lower the LTV, the higher your deposit. Typically, the more deposit (or equity) you have, the more competitive mortgage interest rates you can access.
Equity
Equity is the portion of your home’s value that you own. When you buy your first property, the deposit you put down is your equity. As you make your monthly repayments, you increase that equity. If your property increases in value, this also increases the equity.
Fixed Rates vs. Variable Rates
It’s important to understand the different mortgage options available to you:
- Fixed-rate mortgage: These are the most common for homeowners. Your interest rate is ‘fixed’ at a price for a set period (typically 2 or 5 years); therefore, your monthly mortgage payments stay the same.
- Variable-rate mortgage: Your interest rate can change at a lender’s decision or in line with external benchmarks like the Bank of England Base Rate, meaning your payments might go up or down depending on market conditions.
APRC (Annual Percentage Rate of Charge)
This is the total cost of your mortgage across its full term, including interest and fees. It helps you compare deals more easily, but our brokers can guide you on the best mortgage rate for your circumstances.
Decision in Principle (DIP)
Also known as an agreement in principle (AIP), this is a lender’s indication of how much they might be willing to lend you. It’s not a guarantee that they will issue you a formal mortgage offer, but it’s useful when house hunting to help you set a budget and prove you are a serious buyer to estate agents.
Our team can help you secure your decision in principle. Get started here.
Stamp Duty Land Tax (SDLT)
Stamp Duty is a tax you pay when buying property over a certain price threshold. Typically, first-time buyers are exempt from paying SDLT, but you may still be liable if the property in question is above a certain price.
Try our free Stamp Duty calculator to see how much you could pay on your property purchase.
Mortgage Term
Whilst your rate term is how long your mortgage rate will last, your mortgage term is the time over which you agree to repay the mortgage. Generally, your mortgage term will be 25-30 years, but shorter or longer options are available.
Increasing your mortgage term can reduce your monthly mortgage costs, but it’s important to remember that this means you will pay more interest over time.
Early Repayment Charges (ERC)
Early repayment charges are fees you might incur if you pay off your mortgage early or switch deals before a fixed-rate term ends. These fees typically decrease the further you are into your rate term.
For example, for a 5-year fixed-rate mortgage, the early repayment charges could be 5% within the first year after securing the rate, then drop to 4%, 3%, 2%, and 1% annually.
Affordability Assessment
An affordability assessment is your lender’s check to ensure you can afford the mortgage repayments. This happens when they are underwriting your mortgage application, and the assessment is based on your income, expenses, and credit history.
Simplifying the mortgage process
Understanding these common terms surrounding mortgages is a great way to ensure you choose the right mortgage for your needs.
At MFB, we want to make sure you feel confident about your mortgage finance decisions throughout the home-buying process. That’s why we’re here to answer any questions and support you from your initial enquiry to when you pick up your keys to your first home.
Next steps
To discuss your next steps, call us on 0345 345 6788 or submit an enquiry here.
