The terminology used by mortgage lenders can be very confusing, so here is a breakdown of some of the most common mortgages currently available, as well as an explanation of some of the terminology.
Repayment mortgage – you repay the loan along with the interest in monthly payments spread out over the term of the mortgage.
Interest-only mortgage – only the interest is paid monthly. An interest-only mortgage is usually linked to a savings scheme that aims to repay the mortgage at the end of the term.
Offset mortgage – you can offset the amount of interest you owe against your savings. Your monthly repayments will be lower and the overall amount of interest you’ll pay on your mortgage will be reduced, though you won’t earn any interest on your savings.
Standard variable rate (SVR) mortgage – a rate is set by the lender and this is how much interest you pay. The risk is that lenders can increase and decrease the standard variable rate regardless of the changes to the Bank of England base rate.
Discounted variable rate (DVR) mortgage – an alternative to a fixed rate or base - rate tracker mortgage. The lender offers a discount on their standard variable rate, usually for two years.
Fixed-rate mortgage – interest rates are fixed for a set period (usually two to five years) and then they usually revert to the standard variable rate at the end of the fixed rate period.
Base-rate tracker mortgage – this is where the loan rate ‘floats’ or follows the Bank of England base rate for a set period, usually two years.
And here is an explanation of what some of the mortgage jargon means:
Loan-to-value ratio – this is the size of your mortgage as a percentage of the market value of your house. For example if you have a £50,000 deposit for a house that is worth £100,000 the LTV ratio is 50%.
Higher lending charge (HLC) – this is a type of insurance policy that lenders take out to cover the risk of a high LTV (usually 90% LTV) in case you default. Lenders will generally pass this charge onto the borrower.
Porting – if you’re moving to a new house, you might be able to transfer your existing mortgage over if you are staying with your current lender. This is known as porting, and you will need to speak with your lender to discuss your options.
Arrangement fee – this is the fee you pay the lender for arranging the mortgage and is usually around £1,000.
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