Mortgage JARGON Explained...
When looking to buy your first home or even looking to remortgage your current home, it can seem like a minefield with lots of unfamiliar terminology. Words that are everyday language for Estate Agents, Mortgage Advisers and Solicitors can seem alien to you and make the whole buying process a nightmare…… Well Your Mortgage Hub are on hand to help you. Here are some words and terminology that you will come across and here’s what they mean.
First Time Buyer
A first-time buyer is a term used for a potential house buyer who has never previously owned a property. This is a requirement for the Government Stamp duty benefit, and will also be a requirement later this year to qualify for the Government Help to Buy Scheme.
You do not currently need to be a first-time buyer to qualify for the Forces Help to Buy, you can use this when moving property.
However, for a mortgage application you can be classed as a first-time buyer if you haven’t owned a property for the last 3 years.
A first-time buyer is usually desirable to a seller as they do not have to sell a property, and as such will not involve a housing chain
When you buy a property, sell a property or change the ownership of a property, this needs to be done by a Solicitor or a Conveyancer.
Conveyancing is the transfer of legal title of a property from one person to another, or registering a mortgage or a secured loan. A typical conveyancing transaction has two major phases: the exchange of contracts and completion.
Agreement in Principle or Decision in Principle
Agreement in Principle (AIP) is the first step towards getting a mortgage. Also known as a Mortgage Promise or a Decision in Principle, it lets you know how much you could borrow before you apply for a mortgage. As well as letting you know how much you could borrow, you’ll also get an idea of how much you can afford to spend on your new home. This agreement isn’t legally binding or a guarantee that you will get a mortgage, it is reliant on you entering the correct information. Usually at the point that you apply for an AIP this will carry out a credit search.
Credit Score & Search
A Credit search is when a company looks at your financial history, usually covering the past 6 years, you will be able to see that they have searched your information and this will leave what is known as a foot print, you also need to give your permission for them to do this. They are assessing your financial conduct, and also looking to see if you have an address history, so make sure you are registered on the electoral role. You need to regularly monitor your credit file to ensure that you have a good score, this has a massive impact on the type of mortgage, loan, hire purchase or credit card interest rate you would be entitled to – the better the credit history – the lower rate of interest you will be able to achieve, this can save you a lot of money. Be careful not to allow too many credit searches as this can have a detrimental effect on your credit score.
Many people are spending lots more money than they need to do each month, this is because when they purchased their property they took out a fixed rate over a period of 2 or 5 years, then at the end of the 2 or 5 years their mortgage reverted to the Banks Standard variable rate which is usually higher than the initial term, At this point it is important to contact your Mortgage Adviser and re negotiate a new rate. At the moment some clients are seeing an improvement in their rate of interest saving them money each month. At the point of remortgages you can also look at your current circumstances, you might be looking for extra money to carry out some home improvements or you might want to do some debt consolidation – you must take advice. If you think that your circumstances have worsened and you are worried that if you have your mortgage assessed you might no longer be able to get a Mortgage or even worse you might have to pay your current mortgage lender back – don’t worry your Mortgage Adviser is on hand to help you in difficult situations.
LTV – Loan to Value
This is the percentage of Mortgage required verses the purchase price or value of your property, for example a property valued at £150,000 and a mortgage amount of £112,500 – this is a 75% LTV. This is important to understand as interest rates are lower the lower the LTV, so for example if you purchased a house for £150,000 and you had £15,000 which you could use as a deposit, meaning that you wanted a 90% LTV, but you decided that you only wanted to use £13500 and keep £1500 towards curtains and carpets, this would put you into another LTV as far as lenders are concerned, you would see a increase in your interest rate on the full amount. Normally the lowest interest rates are for LTV’s below 50%, here are the percentages which trigger slightly higher rates. 50%, 60%, 75%, 80%, 85%, 90% and 95% each bracket would demand a different rate of interest – plus the higher the LTV the lender needs to have more confidence in your credit history, so for people who have a poor credit history it might be that the bank wants a higher deposit, this is all down to risk for the bank.
Government Help to Buy
Help to Buy was launched on April 1, 2013 and available until 2020, is an Equity Loan scheme. It is open to both first-timer buyers and homemovers – but is restricted to new-build homes.
Under the scheme, the buyer is only required to raise 5% of the property value as a deposit. The government will provide loan of up to 20% With a combined deposit of up to 25%, you will then have access to more attractive mortgage rates from lenders participating in the scheme.
The cost of the government's 20% loan, For the first five years, it’s interest-free. In year six, you will be charged 1.75% which will climb at a rate of 1% of that figure plus any increase in inflation every year thereafter.
The point to be aware of is that it is an equity share loan, this means that if your property increases in value – so does the 20% share, on repayment of the loan to the Government you will need to have your house valued, at your cost and then pay the Government 20% of the updated value of your home.
You can use Forces Help to Buy as your 5% deposit.
I was once asked ‘who would I share with?’ and ‘Do I have to share the house with a stranger?’
With shared ownership, you buy between a quarter and three-quarters of a property. And pay Housing Authority rent on the part you don’t buy – so for example, buy 50% and rent 50%, you can then buy more percentage as your income increases, these schemes are aimed at people who don’t earn enough to buy a home outright. You also have to have a local connection – however the Military have an exemption to this and benefit from National Local Connection, whilst you are serving and for 12 months after you leave.
Most of the homes available are newly built, but some are properties being re-sold by housing associations.
All shared ownership homes in England are offered on a leasehold only basis.
Forces Help to Buy or FHTB
This is available to serving Military personnel, who have more than 6 months left in the Forces, there are exceptions which you need to check with your line manager or chief clerk around medical down grade and serving contracts. But in essence you may be able to borrow up to £25,000 interest free. It is calculated by either 50% of your current basic salary but maximum of £25,000.
So, if you earn £36,000 PA the maximum you could borrow would be £18,000. This can be used for your deposit and Legal fees. The way you pay it back is via your monthly salary. If you borrow more than £10,000 then you are liable for Beneficial Loans Tax – it is important that you seek Financial Advice to understand how this would affect you.
You can not use FHTB to buy a property to rent out, or a second home – you lose your rights to Families Living accommodation once you have taken out FHTB, however your family could occupy the property and you could live in the block whilst on duty.
If you get posted over 50 miles away you can then request permission to rent out your property and apply to move back in to quarters.
Repayment Verses Interest Only Mortgages
When you take out a mortgage generally this is repaid by a repayment option, this means that each month your payment is made up from some interest and some capital, the out come of this is at the end of the term you would have fully repaid the mortgage meaning that you are then mortgage free.
The Interest Only option is more common now a days for properties that are not your main residence, for example for a Buy to Let Property. With this option you pay less each month, but all you are paying is the interest and not anything from the balance of the mortgage, this means that at the end of the mortgage term you would still owe the full amount – this is only recommended if you have another way of paying the full balance for example a second property or an investment. It is really important if you are considering to take interest only you seek advice from a fully qualified Mortgage Adviser.
Consent to Let
This is what you need from the Mortgage Provider if you intend to rent out your property, In the Military you are able to buy a property and obtain consent to let from day one, some mortgage lenders will allow this as they understand that you sometime will get posted which can make settling down a real problem, so to help you they will allow you to buy a property and then rent it out on a rental agreement. Some personnel have benefited by doing this and then when they leave the forces the rent has paid some or all of their mortgage.
What Type of Mortgage????
Fixed Rate This is the most common choice, this means that you fix your interest rate for a period, this can be for 2,3,4,5 or even 10 years. This offers you stability of payment, you know how much your mortgage is going to cost for the next chosen period. At the end of your fixed rate you can then remortgages and re negotiate your mortgage securing another fixed rate.
The only downside is that during the fixed term if you repaid your mortgage in part or full you could suffer an early repayment charge – which is explained further down.
Variable, SVR or Tracker rate These are less common as they usually move with the Bank of England’s base rate – this is reviewed each month and can be increased or decreased at any time. We are currently at 0.75% base rate, but the Bank of England have implied that this could and will increase in time. If the Base rate is increased by the Bank of England and you are on a Variable Rate or Tracker Rate then your mortgage would increase inline with the increase. On a mortgage of £100,000 this can be quite an increase to factor into your monthly expenditure.
Why you ask would anyone have one of these?? Some of these mortgages come with no penalty if you choose to make a large over payment or repay in full, this can be important if you are looking to leave with a lumpsum payment which you want to pay off some or all of your mortgage.
Early Repayment fees and Charges or ERC’s
When you enter into a mortgage contract it is important to receive expert advice, some mortgages have Early Repayment Charges, which means that if you chose to pay off your mortgage during the Fixed rate period you could suffer a hefty charge, for example on a five year fixed rate mortgage, if you repaid it all in year one you could expect a 5% fee, and that is of the balance of the mortgage so for example if your mortgage balance is £100,000 and you had a 5% ERC the your charge would be £5000, in addition you could find a closing account fee – so be aware of what you are signing for! – Most Fixed rate mortgages have a 10% overpayment allowance per year without penalty. The 10% allowance is of the Mortgage balance and not the monthly mortgage payment. Be aware that some Mortgage Lenders have an ERC that overhangs after the fixed rate has ended, this is not a good feature at all because you could find yourself on a high variable rate, and not being able to move for a few months until the penalty period had ended.
That is only some of the terminology, the best cause of action is to get a Whole of Market Mortgage Adviser to hold your hand through the process, for any help of advice please do not hesitate to contact me