Demystify financial jargon with FAQs

A mortgage is a secured loan that helps you to pay off the value of a property. Taken out over a lengthy period of time, such as 25 years, it makes the significant purchase of a property much easier to afford.

The most straightforward option is a repayment mortgage, which allows you to pay off the price of the house you’re buying and the interest payments all at once.

An interest only mortgage allows you to just pay off the interest on the money you’ve borrowed each month. As for the house itself, you will have to pay the full amount of the property in a lump sum at the end of the term, meaning you will have to organise a separate payment method for this alongside your interest only mortgage.

You will usually have the choice between a fixed and variable interest rate when choosing a mortgage. Fixed-rate mortgages will remain at a certain rate for a limited period of time, usually up to 5 years. A variable rate mortgage can change in accordance with the Bank of England base rate, but this can sometimes be dictated by the lender themselves.

A fixed rate mortgage comes with an initial period where the interest rate on your mortgage stays the same. The initial period can be anything up to 10 years but the longer it is, the higher the rate, as it is more risk for the lender. During this initial period if you try to pay it all off at once or remortgage your home, you will be penalised with an early repayment fee.

A variable rate mortgage means that the interest rate will change over time. However, these changes can sometimes be dictated by the lender themselves. There are three types of variable mortgage; standard variable, discount variable and tracker.

A standard variable rate mortgage, or SVR, comes with an interest rate that can change, normally in line with the Bank of England base rate. Whilst it will change with the base rate, it is normally still a few percentage points above it, since the rate is dictated by the lender themselves.

The difference between a standard and discounted variable rate mortgage is that the lender will offer a certain discount off its SVR for a short period of time. This can be up to a few years long and is offered as an incentive for those taking out a mortgage.

A tracker mortgage is similar to a standard variable rate mortgage (SVR), but is fixed in line with any movements from the base rate indicated by the lender (Bank of England and Libor are the most common), though the rate itself can be a few percentage points higher. Whilst an SVR can be changed at the lender’s discretion, a tracker mortgage has to move in line with the base rate, adhered to by the lender. Trackers usually last for an initial few years before falling back into a variable rate, but can sometimes be lifetime trackers that last for the whole of the loan period.

A capped rate mortgage is any of the variable rate mortgage options (standard, discount or tracker) but with an added upper limit to the interest rate. This means that even if the lender decides to increase the interest, or the base rate has risen, your interest rate won’t rise above a certain level.

An offset mortgage means that your mortgage repayments get linked with any savings you have in order to lower the overall interest rate being paid. If you were to have a mortgage of £150,000 and £20,000 savings, with an offset mortgage you would only pay interest on £130,000, with your savings acting as equity.

LTV stands for Loan-To-Value, which is a simple way of working out the percentage of loan you have compared to the value of the property. To work it out, take the amount you’re borrowing, divide it by the value of the property and multiply by 100. For example; If you wanted to borrow £80,000 against a property worth £100,000 it would be 80,000 divided by 100,000, which equals 0.8. Multiplied by 100 equals 80. This gives you an LTV of 80%.

If you’re planning on purchasing a property in England and Northern Ireland costing more than £125,000 then you will have to pay Stamp Duty Land Tax (SDLT). The stamp duty rate increases depending on the value of the property, up to a maximum of 12% on properties valued over £1.5 million.
(Correct at the time of writing – January 2019)

As a first time buyer you will receive Stamp Duty Land Tax (SDLT) relief, meaning you will pay no stamp duty on properties valued up to £300,000. For properties up to £500,000, you will only pay stamp duty on any value over £300,000, up to a maximum of £200,000. For properties over £500,000 you will have to pay any standard stamp duty charges.
(Correct at the time of writing – January 2019)

The length of time you can pay your mortgage for is completely up to you, but most of the time you will pay it over 25 years or more. This allows you to have enough time to comfortably pay off the value of the property, ensuring your payments are manageable for you.

In order to secure your property, you will have to pay a deposit against the value to provide added security for the lender. This is usually 10% of the value of the property, but the larger the deposit, the less you have to pay back overall.

By putting savings into a help to buy ISA you can get a favourable bonus that will come in handy when it’s time to move into your new property. The government has pledged to give you 25% of whatever you put in each month. You can deposit up to £1,000 in the first month (up to £250 bonus) and £200 in subsequent months (up to £50 bonus).
(Correct at the time of writing – January 2019)

The difference between the two refers to the ownership of the land that goes along with the property you’re thinking of purchasing. If you’re purchasing a freehold property you will own the land, whereas leasehold will mean you have to pay ground rent to the freeholder who owns it.

There are usually a number of different fees that will need to be paid prior to the purchase of a property. They include mortgage fees, survey fees, solicitor fees and mortgage broker fees. It’s worth taking these into account when saving for a house and applying for a mortgage.