Does your mortgage adviser speak plain English? Or does he make sentences out of words where only one or two of them have any real meaning? If your adviser said he was going to ‘DIP your mortgage with lenders who don’t have MIGs’, would you think it was a financial cookery lesson for RAF pilots without planes?
In this section below, we give you the most common mortgage words and phrases used and a good explanation of each to help you in your search.
Repayment mortgage –
A loan secured against a property which decreases over a period of time of your choosing, often 25 years. The monthly payment is made up of two parts, a) the interest charged by the lender for allowing you to borrow the money and b) the capital payment calculated by the lender to reduce the amount you owe so that it is guaranteed to be paid off in the time that you have specified.
Interest only mortgage –
Often (wrongly) confused with endowment mortgages. The interest only mortgage is one part of the repayment mortgage i.e. the interest part. The payments are cheaper because the loan is not being paid off so, in the long run, if no extra payments are made you will pay hugely more interest and still have to find enough to pay off the mortgage at the end of the time you have specified. Scary eh? Interest only mortgages though do have a place for some people, a good adviser can explain when an interest only mortgage is the best advice.
Flexible mortgage –
Can be either repayment or interest only but you can choose to pay extra and pay off your mortgage early. Or you might decide to pay extra for 10 months of the year and then have a month off in December and August when your finances are likely to be tighter.
Tracker Mortgage –
Similar to a discounted mortgage but the interest rate is linked to the Bank of England rate rather than the whims (or business interests) of the lender. Great when rates are falling but pretty ineffectual when rates are rising.
Fixed rate –
This is an offer that a lender makes in order to entice people to borrow money from them. They will agree to ‘fix’ the interest part of your mortgage so that the payment stays exactly the same for a certain period usually 2,3 or 5 years. This is useful if you are working to a tight budget or you are concerned about interest rates rising. Beware though of lenders who will penalise you for leaving them once the fixed rate ends (see Early Redemption Penalties).
The difference between how much you owe to your mortgage company and the value of your house.
Discounted rate –
This is a different kind of offer that a lender makes to entice you in. They will reduce their interest rate for an agreed time which makes your monthly payments lower, this is a variable rate though which means that if the interest rates rise then your payment will go up, similarly if the interest rates go down then your payment will go down. If you are comfortable that you can afford the payments if rates rise (your adviser can tell you how much it could be) then this is the cheapest payment if rates don’t rise above the level of the fixed rate. Beware stepped discounts that start cheap and steadily increase in the following years – they may look like a bargain but you could get caught out!
Early Redemption Penalties –
A charge made by the lender if you move your mortgage elsewhere, this could be anything up to 6% of the amount you borrowed! Make sure that you don’t have any penalties once the fixed or discounted rate that you have chosen comes to an end, or you could end up paying large amounts of interest on the lenders highest rates – the Standard Variable Rate.
Mortgage Indemnity Guarantee (MIG) –
An insurance policy which protects your lender if you don’t pay your mortgage and your lender has to repossess the property and sell it for less than the outstanding loan. The insurance policy will not protect you if your property is taken into possession and sold for less than the amount you owe. So, in other words, you pay for it and the lender benefits – good stuff eh?
Both meaning the same, this is the report usually instructed by the lender to confirm the value of your new house, remember that this is a very basic report which does not protect you if defects are found later. If you want a more in-depth report then you should ask for a Homebuyers Survey, usually double the cost of the basic valuation/survey, this will offer you more protection. The Rolls Royce of surveys, though, is the Structural Survey – this will get right to the nitty gritty of the structure of the property but as it is usually so expensive and not generally necessary it is probably better to have a Homebuyers Survey and then, if the valuer advises, get a Structural Survey.
D.I.P. – also known as A.I.P.
If you weren’t confused enough! Both mean the same thing – agreement or decision in principle. The lender will agree to do a basic credit check and make a decision on the (limited) information that you supply. It is not a guarantee to lend you money because they may still have to verify your income and check out the house that you are buying but it is a useful first step to applying for your mortgage.
Exchange of Contracts –
Transaction carried out by the solicitor at which point a Completion Date (or moving day) is agreed and both parties are now committed to proceed.
Completion Date –
The day on which the money is transferred from buyer to seller and the house legally changes ownership. Note that Exchange of Contracts and Completion can sometimes take place in the same day.
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