Early repayment charge (ERC) or redemption penalty
If you sign up to a special-rate mortgage and later decide to pay off your loan early, then expect to pay a hefty fee for the privilege of bailing out before time.
Endowment policy
An endowment is a toxic combination of life insurance and an expensive investment policy. Pass the sickbag!
F is for...
First-time buyer (FTB)
First-time buyers prop up the entire property, because they are the people willing to step up to the first rung of the property ladder. Having said that, FTBs are a rarity these days due to today's sky high property prices and tetchy interest rates.
Flexible
With a flexible mortgage, you can make lump-sum or monthly overpayments and underpayments, take payment holidays, and so on. However, many modern mortgages now include some of these features, so don't be tempted to pay over the odds for a fully flexible loan.
H is for...
Higher lending charge (HLC) or mortgage indemnity premium (MIP)
Mortgage lenders are cautious beasts, so they don't like to lend you more than, say, three-quarters (75%) of a property's purchase price. If you want to borrow more that this 75% threshold (or, in some cases, 90%), certain lenders will charge you a percentage fee depending on how close to 100% you wish to go. This fee can amount to thousands of pounds, so do ask if an HLC applies.
I is for...
Insurance
Mortgage lenders are very keen to cross-sell other financial products to their borrowers, particularly over-priced protection. Many people believe that MPPI is a waste of money and should not be touched ? even with a long stick. Instead, shop around online for this cover or see a reputable insurance broker.
Interest rate
Many prospective home-buyers don't look beyond the attractive headline interest rates advertised by lenders. Although it's true that mortgage interest will account for the lion's share of your home-buying costs, you still need to take other one-off and ongoing costs into account. For the record, you have several choices when it comes to choosing your interest rate, such as capped, discounted, fixed, tracker and standard variable rate (SVR) deals. You can learn about mortgage interest rates here.
L is for...
Lodger, parents or 'share to buy'
If you are unable to buy a property on your own, then you boost your budget by, for example, getting help from your parents or buying with others using a share to buy mortgage. Another alternative is to take in a lodger: under the government's Rent a Room scheme, you can earn up to ?4,250 a year, tax free, by allowing someone live under your roof.
M is for...
Monthly repayments
Most home-buyers arrange a mortgage over 25 years, which means coughing up three hundred monthly mortgage repayments. Having said that, now that you can stretch a mortgage over 40 years you could find yourself forking out ?480 per month. Eek!
In Part 1 I explained my A-D of mortgage terminology. I hope that the sequel, Part 2, this E to M of the mortgage terminology has lived up to the original. Now that they are out of the way, i'll allow you time to absorb and will finish off with N to Z in a follow-up article.
Knowledge is power and the key to holding power over your mortgage rather than your mortgage holding power over you is to have a sound knowledge of the language of mortgages. A plain English understand save you from being bamboozles with sneaky charges that the lenders hope that you do not understand.
A is for...
Annual Percentage Rate (APR)
The APR is meant to give you an indication of the cost of borrowing, enabling you to shop around for low-rate loans. However, it's complicated to calculate and open to manipulation, so don't rely on it too much. Always dig down into the small print to find out exactly how much you have to pay.
Application, booking or reservation fee
These days, most special-rate mortgages (and even some bog-standard deals) come with an upfront fee attached. You can pay this separately or add it to your mortgage, which will cost a lot more in the long run. In the past, this initial fee would be around the ?200 to ?400 mark; the current norm for low rate ?deals' is between ?600 and ?2500. Ouch!
B is for...
Broker
A mortgage broker is a middleman who helps you to find a good deal. However, some brokers have links only to certain lenders, so be sure to look for a broker who can search the whole of the market for you, and avoid brokers with high brokerage fees. The Fool's mortgage service is an award-winning, no-fee, whole-of-market facility, which we're rather proud of.
C is for...
Capital repayment or interest only (IO)
With a repayment mortgage, your monthly repayments pay your monthly interest bill plus an extra amount which chips away at your debt. With an interest-only mortgage, you pay only the interest bill and must make your own arrangements to pay off your debt at the end. Interest only is usually abbreviated to IO, which is short for 'I owe a lot of money, so I can't afford a repayment mortgage'.
Cashback
With a cashback mortgage, you receive an upfront 'gift' (of up to 10% of your loan) in return for being locked into a higher mortgage rate for, say, ten years. As with most bungs, this can backfire, so I generally warn readers against taking out a cashback loan.
Conveyancingor legal fees
The fees paid to your solicitor or conveyancer for doing the necessary legal work to buy or sell your home. Can add ?1,000+ to the purchase cost.
D is for...
Daily interest
Some lenders take your repayments each month, but only subtract them from your debt at the end of the year. It's far better to have daily interest, where each repayment reduces your loan as soon as it hits your account. Deeds release, exit, sealing or discharge fee A charge paid to your mortgage lender when you pay off your mortgage. Fifteen years ago, this would have been about ?50; nowadays, some lenders charge ?300+. Learn how to reclaim rip-off mortgage exit fees.
Deposit
This is what you need to save in order to own a stake in your home. Even a 5% deposit (a twentieth of the purchase price) will give you access to better mortgage interest rates. No-deposit (100%) mortgages are riskier and thus are more expensive.
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