Going through the home buying journey is exciting, but it also can be confusing and stressful. It’s even more tricky when it’s your first time. You might find the process so daunting because there’s lots of jargon… lots of it! That’s why OnLadder is here to help: in this article, we’re going to help you understand some of the key terms that you’ll encounter during your journey.
Let’s start with your best friend during the early stages of the process: your mortgage broker. Your broker can help you by facilitating your relationship with lenders and answering any questions you have about the mortgage process. Brokers are your first port of call in this storm: they know the market, and a good broker should understand which lender and product best fit you and your needs. When choosing a broker, be sure to look for a “whole of market” mortgage broker—they’re not tied to any specific lender, so you’ll have more mortgage options available.
A term that you’ll probably hear a lot from your broker (and your mortgage lender) is your LTV or Loan-To-Value ratio. This ratio basically means how much the lender has given you versus your deposit: if you put down a 15% deposit, the bank will lend you 85%—that’s an 85% LTV mortgage. If you have higher LTV mortgage (85% or above), you’ll pay less deposit up front, but you’ll make higher interest payments, and it’ll be harder to get a mortgage. (If you haven’t heard yet, a deposit is the sum of money you’ll need pay up-front for the house. Most people pay their deposit from savings or the bank of mum and dad. We think OnLadder is a good solution!)
Another important term related to your mortgage is your MIP, or Mortgage in Principle, the first document you will need from your lender. The MIP is a non-binding agreement from the lender that says the lender is willing to lend to you, and how much that lender is willing to lend. Sometimes it’s called a decision in principle (DIP) or an agreement in principle (AIP): these are exactly the same as an MIP.
After securing your MIP, one of the key decisions you’ll need to take is what type of mortgage you want. The options you’ll usually see are:
Fixed-rate mortgage: a mortgage that allows you to keep the same interest rate for several years (usually 2-5). After this “fixed” period, it’ll usually convert to a standard variable rate mortgage, which is below.
Variable rate mortgage: a mortgage where your interest rate will change. These come in two flavors: Tracker mortgages, which are based on the Bank of England’s interest rates, and Standard Variable Rate (SVR) mortgages, which are based on the lender’s own interest rate.
Fixed-rate mortgages give you a lot of security from day one: you know what payments you’ll be making for years in the future. However, if interest rates drop during your fixed term, you won’t be able to take advantage of the lower rates easily. This isn’t a problem with tracker mortgages- although if interest rates rise under a tracker mortgage, you’ll end up paying more. SVR mortgages are the least transparent of the three: the lender can decide to raise or lower rates as they please.
One other mortgage option that you might pass by is an interest-only mortgage, which is a type of a mortgage where your monthly payments only pay the interest on your loan. This is different from traditional mortgages, where you pay both your interest and part of your mortgage debt every month. With an interest-only mortgage, you must pay the full mortgage amount as a lump sum at the end of your mortgage term. While the payments might be smaller with an interest-only mortgage, these are much more expensive than other mortgage plans, because you pay interest on the whole amount for the life of the loan. On a repayment mortgage, the principal, or amount of the original loan lent to you, goes down with time: this is the number that lenders use to calculate interest.
One of the most common ways to compare mortgages is through the APRC or Annual Percentage Rate of Charge, which shows you the total cost of your mortgage, not just the interest on an annual basis. These other costs can include fees from the bank, or from their surveyor.
Let’s say that now that you have an idea of what mortgage you want to progress with. It’s time to add a legal expert to the team, to make sure that there are no legal problems with the purchase. (You can do this yourself, but the consequences of missing an important detail may be enormous!)
You can hire a conveyancer, or a solicitor.
Conveyancer: these are specialist lawyers who can professionally manage and carry out your legal matters directly related to the property purchase. There are many specialists available, and you can even find inexpensive options online.
Solicitor: can provide a wider range of legal services (versus the solicitor) might be a better choice for complex transaction, but most likely going to be more expensive. While solicitors can act as conveyancers, not every solicitor may be experienced in conveyancing, so if you decide to go with one, make sure that they specialise in real estate.
Once you’ve geared up with the right team, contracts and a good understanding of some of the key terms, it’s time to start house hunting!
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