Mortgages can involve unfamiliar terminology, particularly if you’re buying your first home. Understanding common mortgage terms can help you compare products and become more familiar with the costs and commitments involved. From interest rates to loan-to-value ratios, knowing what these terms mean can make the mortgage process easier to understand.
Understanding mortgage interest rates
An interest rate is the percentage a lender charges for borrowing money. The rate applied to your mortgage can affect your monthly repayments and the total interest you pay over time.
A fixed-rate mortgage keeps the interest rate unchanged for an agreed period, providing certainty over the rate during that time. When the fixed-rate period ends, your mortgage will usually move to the lender’s standard variable rate (SVR), unless you arrange another deal or a different rate applies under your agreement.
A variable-rate mortgage has an interest rate that can change according to the product’s terms and conditions. Changes to the rate may affect your monthly repayments, so it’s important to understand how the rate works before choosing a mortgage.
You may also come across the Annual Percentage Rate of Charge (APRC). This represents the overall cost of a mortgage as an annual percentage, taking account of interest and certain fees. It can help you compare mortgage costs, although it is based on assumptions that may not reflect what you actually pay.
What is loan-to-value (LTV)?
Loan-to-value (LTV) describes the mortgage amount as a percentage of the property’s value. For example, a larger deposit generally means borrowing a smaller proportion of the property’s value, resulting in a lower LTV.
If a property is worth £200,000 and you borrow £180,000, your LTV is 90%. The remaining £20,000 represents a 10% deposit.
LTV can affect which mortgage products and interest rates a lender makes available. However, the rates and products offered will also depend on the lender’s criteria and your individual circumstances. Understanding LTV can help you compare mortgage products and consider how your deposit relates to the amount you borrow.
Understanding mortgage terms
A mortgage term is the length of time agreed for repaying your mortgage. This is different from an initial fixed-rate period, which determines how long a particular interest rate applies. The overall mortgage term can affect both your monthly repayments and the total interest you pay over the life of the loan.
For a repayment mortgage, a shorter term generally means higher monthly repayments but less interest paid overall, assuming other factors remain comparable. A longer term can reduce monthly repayments, although it will generally result in more interest being paid over time.
When comparing mortgage terms, consider both the monthly cost and the overall cost of borrowing.
Repayment and interest-only mortgages
With a repayment mortgage, your monthly payments cover both the interest charged and part of the amount borrowed. Provided you meet the agreed repayments and the mortgage follows its repayment schedule, the outstanding balance should reduce over the mortgage term.
With a fully interest-only mortgage, your regular monthly payments cover the interest charged but do not reduce the amount originally borrowed. You will need a credible repayment strategy to repay the outstanding capital at the end of the term.
Although monthly payments may be lower than those on a comparable repayment mortgage, it’s important to consider how you would repay the outstanding balance and the risks if your repayment strategy does not work as planned.
Mortgage fees and affordability
When comparing mortgages, look beyond the interest rate and consider any additional fees. Some lenders charge an arrangement fee when setting up a mortgage. If this fee is added to the mortgage balance, interest will generally be charged on it as well.
Other potential costs include valuation fees, legal fees and mortgage broker fees, depending on the lender, product and services involved.
Early repayment charges may also apply if you repay some or all of your mortgage before a specified date, depending on the terms of your agreement.
Lenders also carry out affordability assessments, reviewing factors such as your income, regular expenditure, existing debts and other financial commitments. Meeting a lender’s affordability criteria does not guarantee that your mortgage application will be approved.
Understanding these terms can help you compare mortgage products and recognise the costs and commitments involved. Ready to learn more about mortgages? Visit our mortgages page to explore mortgage information and the comparison services available through MoneySpider.
