Getting a mortgage is a stressful experience. Working hard for months or even years to save for your deposit, waiting on the results of your credit check to see if you’ve been approved… the last thing you need is further stress being caused because you don’t understand what your lender or solicitor is talking about as they reel off a load of mortgage-related jargon. So we’ve put together a quick guide to help you get up to speed with some of the terms you are likely to hear in your home-buying process.

Agreement in Principle

Often referred to as its acronym, AIP, an Agreement in Principle is good news as it means that your mortgage provider has agreed that they will (in principle) agree to lend you a certain amount of money. Not only does this put your mind at ease and give you a guide price as to the kind of properties you can begin looking at, but it reassures estate agents and sellers too; if you come to them with an AIP already in place they will be more likely to take you seriously. It’s worth bearing in mind that this is not the final agreement to lend – their offer is still subject to certain terms and conditions such as a surveyor’s report on the property you wish to purchase.

Mortgage Rate

Your mortgage rate is the rate of interest at which you agree to pay back your mortgage. You will encounter a few different options here, so it is worth spending time considering which will best suit your circumstances.

Fixed Rate Mortgage – This is when your lenders agrees that the rate of interest you pay will not change for a set time period, often between two and five years. Once this has expired, you revert to the lender’s standard variable rate, or apply to remortgage your house to agree a new fixed rate. This type of mortgage is good if you want to be certain of your exact repayments for a time period and they also protect you from any rises in interest rates. However, you wouldn’t benefit if the interest rates fell below your repayment rate.

Tracker Mortgage – Unlike a fixed rate mortgage, a tracker mortgage does fluctuate according to the base rate of interest set by the Bank of England. However, this doesn’t mean that the rate of interest you pay will be the same as the Bank of England’s rates; your lender may set the rates for your mortgage a percentage or two higher (or lower) than the base rate.

Discount Rate Mortgage – Not always the cheapest option, despite what the name suggests. A discount mortgage simply guarantees that your mortgage rate will always be a certain percentage below whatever the lender’s SVR is. These types of mortgages are still vulnerable to any fluctuations in interest rate, so if it’s stability you are looking for a fixed rate mortgage might be better. It’s also worth being aware that the price will hike by whatever the rate of your discount might be once your initial agreement ends.

Standard Variable Rate

If you have been on a fixed rate mortgage, a tracker mortgage or a discount mortgage, you will automatically switch to paying a standard variable rate of interest (SVR) once your initial mortgage term is up. This is a rate of interest set by your lender which will vary over time, usually in relation to the base interest rate set by the Bank of England. If you don’t want to be on a standard variable rate of interest, you will be required to remortgage your home to agree a new deal.

Capped Rates and Collars

A capped rate is an agreement between you and your lender that the interest rate on your mortgage will never exceed a certain percentage. A collar is an agreement that it will never go below a certain percentage.

Loan to Value

Loan to value is the amount you need to borrow compared to the value of the property. It is given as a percentage rate, so for example if your new home was valued at £200,000 and you put down £20,000 deposit, your LTV rate would be 90%. Your loan to value rate is taken into consideration when your lender sets the terms of your mortgage; as a general rule the lower the LTV the better rates you are likely to be offered.

Equity

Your equity is the percentage of the property you actually own, calculated based on the property’s value and the amount you have borrowed. For example, if you have paid a 10% deposit on a house worth £200K, and paid another 10% over the first couple of years of your mortgage, in theory your equity would be 20%. During the credit crunch you may have heard the term ‘negative equity’ a lot. This means that the value of a homeowner’s property is now worth less than the value of the loan they took out against it. Using the same example, if a fall in the market meant that £200K house you bought was now only worth £150K, you’d be in negative equity. This is because even accounting for the 20% you had already paid back, if you sold the house you’d still owe your lender money. Conversely, if the value of your property rises, your equity stake rises with it.

Mortgage Term

This is amount of time in which you are expected to pay your mortgage back. In general, terms for first mortgages are between 25 and 30 years.

Guarantor

If you’re a first time buyer, you might well be asked to provide a guarantor alongside your mortgage application. This is someone (very often a parent) who agrees that they will meet any payments if you are unable to make them. With young buyers facing less job security than ever before, more lenders are asking for a guarantor to protect their loans.

 Early Repayment Charge

While you’d assume that your lender would be delighted should you come into money and decide to pay off your entire mortgage in one hit, it turns out that they’ll charge you for the privilege. They’d actually prefer to keep you longer term paying their interest rates than have the money upfront. It’s worth checking what these might be, just in case your financial circumstances do allow you to make early payments on your mortgage.

Booking Fee

A mortgage lender may charge this in order to hold the money you wish to borrow in reserve until all contracts have been signed. In most cases this is around the £100 mark, but as with everything it’s worth checking before you agree to anything.

Arrangement Fees

Very often your mortgage lender will charge an arrangement fee or a completion fee for helping secure your mortgage. It might feel frustrating that you’re paying extra fees for them to do their job, but it is standard practice so don’t feel you’re being ripped off when you see the fee mentioned in the breakdown of costs. In most cases this fee will be charged on completion. If you’re not able to pay the fee straight away (what with just having made the most expensive purchase of your life and everything) then most lenders will allow you to add it to your loan. Be aware you will pay interest on it if you choose this option.

Stamp Duty

The tax you pay on the purchase of your home. Good news – if you’re a first time buyer then you don’t need to pay any stamp duty on the purchase of your home. For everyone else,  if you are buying a home for more than £150,000 then you will be required to pay. How much exactly depends on a number of variables such as whether your property is residential or mixed use. You can calculate how much stamp duty you are likely to pay using HMRC’s stamp duty calculator.

Did You Know…? If you’re renting while saving for a new home, you can make your rental payments count towards your credit rating. Sign up free to Credit Builder to begin making your rental payments work for you.