If you’ve never bought a home before, don’t be surprised if you come across some unfamiliar words and phrases. We try our best to use language and terms that are easy to understand, but some are just unavoidable. The good news is, we’re here to guide you through.
This article has been written to help you understand the terminology used and give you greater confidence when buying a home and getting a mortgage. If there is something I’ve missed, please do email or call in, and I will answer any questions you might have.
Setting A Budget
The very first step towards getting on the property ladder should be to get an idea of just how much you may be able to borrow. So here are some of the phrases you may come across when you’re trying to get this information.
This is an estimate/calculation of how much you might be able to borrow based on your salary and current debts. This is very much a ballpark figure as several other factors will also dictate how much a lender is likely to offer you. Online calculators can be very misleading, so it’s best to speak to a broker. Your bank will have set affordability criteria, but a broker has access to other lenders that may lend more.
Decision in Principle (DIP)
Sometimes also known as an Agreement or Mortgage in Principle (AIP or MIP), this is an initial agreement to lend. It isn’t legally binding on the lender or you, and the decisions can change. It’s worth knowing that many estate agents will insist on seeing evidence of your mortgage capacity as an assurance before they'll put your offer to the seller.
When you make an application for a mortgage, all lenders will carry out a credit check to see how you have managed your finances in the past. Generally speaking, the higher this number is, the more likely that you’ll be accepted for credit. However, lenders use internal score cards and your credit score is only part of this.
Soft Vs. hard footprints
Each time your credit is checked it leaves a ‘so-called, footprint. These are split into the soft and hard footprints. The former is only visible to you. Lenders won’t see it and it will not affect your credit score. A hard footprint leaves a record of the search on your credit file and having many of these over a short space of time can negatively affect your credit score.
Searching For Your First Home
When looking for a home, property listings can often be full of unfamiliar words and phrases that you may not be familiar with. Speak to the agent if you are unsure, or give us a call.
Freehold and Leasehold Property
In a freehold property you own both the property itself and the land that it stands on and there is no time limit to your period of ownership. This generally relates to houses and bungalows. In a leasehold property you own the building, but not the land and a lease defines the fixed period during which you can live in it. Possession of the property will be subject to the payment of an annual ground rent. It can be any period up to 999 years but for properties in which there are fewer than 70 years left on the lease it may be hard to get a mortgage. Flats tend to be leasehold properties and they also carry service charges that need to be taken into account.
Ground Rent & Service Charges
If you are a leaseholder, these are additional charges that, as a leaseholder, you may have to pay the owner of the freehold for the upkeep of common areas. Ground rent is rent that you pay to the landlord or freeholder, usually on an annual basis. Service charge is the payment for all services, such as maintenance of gardens and communal areas of the property, which you'll use but are not specifically responsible for.
Finding a Mortgage
With so many options available it can be a minefield searching for the right mortgage. Your bank can be a great source of information, as can the internet. Our advice, find a reputable broker that can guide you and answer any questions that you might have.
Fixed, Variable and Tracker Rate Mortgages
As the name suggests, a fixed rate mortgage has a rate that stays the same for a specified period of time. Typically 2, 3 or 5 years. Some lenders offer a 10 year fixed product, but these are rare.
A variable rate mortgage has a rate that can rise and fall at any time. The rate is varied at the discretion of the lender and is not directly linked to an independent external rate such as the Bank of England Base Rate.
A tracker rate mortgage is directly linked to changes of an independent external index such as the Bank of England Base Rate, which can rise and fall.
Bank of England Base Rate
This is the interest rate which is set on a monthly basis by the Monetary Policy Committee (MPC) of the Bank of England and is the rate that it charges for its borrowing. The base rate is the single greatest weapon the government has to combat inflation. The MPC meets 8 times a year, which could mean 8 changes. If the rate changes, it could impact variable or tracker (if used as an index) interest rates.
Annual Percentage Rate of Charge is an indicative guide to help you compare the cost of different mortgage deals, taking account of interest rates payable (both during the initial product period and after) and any associated mortgage fees.
The Loan-to-value is the proportion of a mortgage compared with a property’s value. It’s expressed as a percentage so an £85,000 loan on a £100,000 property would be an LTV of 85%. The LTV you have affects the mortgage rates available to you.
In some circumstances a lender will ask for a guarantor. This is usually a family member who agrees to pay your monthly mortgage repayments if you aren’t able to meet the commitment yourself.
Underwriting is when a mortgage lender works out how much risk they would be taking by lending you money. They’ll check your income, credit score, assets and property details before deciding whether to make you a mortgage offer.
A mortgage offer is a formal document confirming that your lender is happy to lend you an agreed amount of money. You’ll only receive a mortgage offer after you’ve successfully completed the application process, your lender has assessed your financial situation and valued the property you want to buy.
Buying Your Property
Now you’ve found your dream home and arranged your mortgage. It’s time to complete the legal process of buying a house. Here are some of the key phrases you need to know to cut through the legal jargon.
Conveyancing is the legal process involved in transferring a property from one owner to another. It’s carried out by a licensed conveyancer or solicitor who acts on behalf of the buyer - beginning when your offer on a house is accepted and ending when final contracts are signed and the money to complete the purchase has been transferred.
Stamp Duty Land Tax
England and Northern Ireland
This is a tax that’s payable to the government when you buy a property. The amount you pay depends on the purchase price of the property but for first time buyers there is currently no stamp duty land tax payable on properties costing up to £425,000 (unless the property is a buy-to let). If you are buying with someone else, both people must be first time buyers for this to apply.
In Scotland you pay Land and Buildings Transaction Tax (LBTT), which is similar to stamp duty in that the rates are tiered. First-time buyers don't have to pay LBTT on the first £175,000 of the property. Home movers pay LBTT on property prices from £145,001 as long as it is your only property.
In Wales you’ll have to pay Land Transaction Tax (LTT) on properties over £225,000 whether it’s your first property or not (different rates may apply for second properties). It’s another tiered system like stamp duty, so the cost will depend on how much your property costs.
Property searches are the enquiries your solicitor makes to find out more information about the property you want to buy. They’re important because they can flag up key facts and help you decide if it’s the right house for you. For example, searches can show if any planned future developments might change the view from your window, whether there’s been any problems with flooding and or if you’re at risk from landslips or subsidence.
Exchange of Contracts
This is the moment when you exchange the legal agreements to buy or sell a property. At this point you are legally bound to go ahead with the purchase or sale. For an existing property (ie. not a new-build), you'll need buildings insurance in place at this point. In Scotland, this stage is known as Conclusion of Missives.
Your lender releases the mortgage money to the conveyancer who transfers it to the seller’s representative and it’s time to move in. This is the day when you finally achieve your aim of being a property owner.
The steps in the house buying process in Scotland are slightly different to England and Wales.
Of course, we've only explained here some of the many phrases that you may come across. We hope you find this jargon-busting guide helpful on your home buying journey. Don’t worry about it being a lot to remember because we are here to help.