There are many terms which relate to the mortgage market, and while some are relatively self-explanatory, others might not be so simple to fathom. Some of the slightly more misunderstood terms include:
Arrangement Fee: This is simply the cost that the mortgage provider is charging you for reserving the mortgage and to cover their administration costs. In many cases, it’s possible to add this fee onto the mortgage amount itself, so you don’t have to pay it up front. The disadvantage of this is that you will be charge interest on it.
Bank of England Base Rate: The base rate is reviewed monthly by the Bank of England and financial services providers, such as Banks and Building Societies, use this as a guide when setting the rates of interest they charge on their borrowing. In terms of your mortgage, you can avoid fluctuations in this rate by opting for a fixed rate product which allows you to know the exact amount you will pay every month for a set period.
Loan to Value (LTV): With the downturn in the housing market, this term has been in the news a lot in recent times. Essentially, this is the amount you are borrowing as a percentage of the property value. For example, if you were buying a property valued at £100,000 and had a £20,000 deposit; you would need to borrow the remainder of the funds required to buy - £80,000, or 80% of the property's value.
Mortgage Term: In plain terms this is the length of time over which you will pay the mortgage back. Depending on how much you can afford each month it’s possible to set this to different periods. One of the most common mortgage terms is twenty-five years.
Negative Equity: Again this particular phrase has come to prominence more in recent times, and relates to situations where the total amount outstanding on your mortgage is higher than the value of your property. With sudden falls in house prices this can be a real problem and means that if you were to sell your property, you would then have to find the shortfall from another source in order to repay your mortgage lender in full.
Stamp Duty: This is a government tax which is payable when you purchase a property over a certain value. The current stamp duty threshold in the UK starts at £125,001 and increases on a sliding scale from thereon up at set intervals. For example buying a house at £130,000 would invoke a 1% stamp duty charge of £1300. This is not strictly part of arranging mortgages but it’s important to factor this into your purchase as it’s easily overlooked.
A clear understanding of these and other mortgage terms, such as fixed-rate and tracker mortgages, will ensure that you can negotiate the best mortgage deal for yourself, regardless of your financial and personal situation.
Isla Campbell writes on a number of topics on behalf of a digital marketing agency and a variety of clients. As such, this article is to be considered a professional piece with business interests in mind.