Mortgage Terms Explained – A Plain English Guide

Mortgages come with a vocabulary of their own, and the first time you encounter terms like LTV, ERC or APRC in a mortgage illustration it is not always obvious what they mean or why they matter. This guide covers the terms you are most likely to come across and explains them in plain language.

Agreement in Principle

Also called a Decision in Principle or Mortgage in Principle, this is a conditional indication from a lender that they would be willing to lend you a certain amount, based on an initial assessment of your income and credit profile. It is not a formal mortgage offer and does not guarantee that a full application will be approved, but it gives you a working figure to house hunt with and shows estate agents and sellers that you are a serious buyer. Many lenders use a soft credit search for an agreement in principle, which is not visible to other lenders, but some carry out a full credit search, so it is worth checking before you apply.

LTV – Loan to Value

LTV expresses your mortgage as a percentage of the property’s value.

For illustration purposes, if you are buying a property worth £250,000 with a £25,000 deposit, you are borrowing £225,000, which is 90% of the value. Your LTV is therefore 90%. A lower LTV generally means access to better mortgage rates, because the lender’s risk is lower when more of the property is owned outright. As you pay down your mortgage, or if your property's value increases, your LTV falls and you may be able to access better rates when you remortgage. If property values fall, your LTV can rise.

Fixed Rate Mortgage

A fixed rate mortgage locks your interest rate for a set period, typically two, three or five years, though other terms are available. During the fixed period your monthly payment stays the same regardless of what happens to wider interest rates. At the end of the fixed period, most borrowers remortgage to a new deal rather than moving onto the lender’s standard variable rate.

Tracker Mortgage

A tracker mortgage follows an external interest rate, usually the Bank of England base rate, plus a set margin. If the base rate rises, your payment rises. If it falls, your payment falls. Trackers can be attractive when rates are falling or expected to fall, but carry more risk in a rising rate environment.

Standard Variable Rate (SVR)

The SVR is the rate a lender moves you onto automatically at the end of a fixed or tracker deal if you do not remortgage. SVRs are set by each lender individually and are typically higher than the best available deal rates. Staying on an SVR for any length of time usually costs significantly more than switching to a new deal.

Early Repayment Charge (ERC)

If you want to pay off your mortgage, overpay beyond your allowed limit, or switch to a new deal before the end of your current product term, you will usually pay an early repayment charge. ERCs are typically expressed as a percentage of the outstanding balance and reduce over the term of the deal. It is important to understand what ERCs apply to your mortgage before making any changes.

Overpayment

Many mortgage products allow you to overpay by up to 10% of your outstanding balance each year without paying an early repayment charge, although limits vary by lender and product. Overpayments reduce the outstanding capital, which reduces the interest charged on your mortgage and can shorten the overall term.. Some products allow unlimited overpayments.

Capital and Interest Repayment

A capital and interest repayment mortgage means your monthly payment covers both the interest charged and a portion of the capital you have borrowed. Over the full mortgage term, you will have repaid the entire loan. This is the most common mortgage structure for residential purchases.

Interest Only

An interest only mortgage means your monthly payment covers only the interest, not the capital. The loan balance does not reduce during the term. At the end of the mortgage you still owe the original sum borrowed and need a plan to repay it. Interest only mortgages are more commonly used in buy-to-let than in residential purchasing.

Product Transfer

A product transfer means switching to a new deal with your existing lender at the end of your current product term. It is typically quicker and involves less paperwork than a full remortgage to a new lender, though it does not always produce the best available rate in the market.

Remortgage

Remortgaging means switching your mortgage to a new lender, or taking a new product with your existing lender alongside additional borrowing. People remortgage to secure a better rate, to release equity from the property, or to adjust the mortgage term.

Porting

Porting means taking your existing mortgage deal with you when you move to a new property. Not all mortgages are portable and the lender will reassess your affordability for the new purchase. If the new property costs more than the current one, you would typically take out an additional amount at a new rate alongside the ported portion.

APRC – Annual Percentage Rate of Charge

The APRC is a standardised measure of the overall cost of a mortgage expressed as a yearly rate. It takes into account the initial deal rate, the SVR you would revert to, fees and other charges. It is a useful tool for comparing mortgages on a like-for-like basis, though in practice most borrowers focus on the monthly payment and the total cost over the initial deal period.

Valuation and Survey

A mortgage valuation is carried out for the lender to confirm the property is suitable security for the loan. It is not a detailed survey of the property’s condition. A homebuyer’s report or full structural survey is separate, commissioned by you rather than the lender, and gives a much more thorough picture of the property’s condition. Both are worth understanding before you exchange contracts.

If any of these terms come up in conversation and you would like them explained in the context of your own situation, I am always happy to go through them.

Your property may be repossessed if you do not keep up repayments on your mortgage.

The FCA does not regulate valuations or surveys.

For valuations and surveys we act as introducers only.

Barry, The Mortgage Network - Helping you make confident decisions and plan a mortgage that works for you.