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15 February 2012, 08:05
Financial jargon could be costing us money because we struggle to understand basic terms or question banks when it comes to talking about topics we don't know anything about.
A new study by building society Nationwide shows one area that we appear to need an interpreter for is the world of property, with over 40% of people saying the jargon has confused them, with first time buyers likely to be the most affected because of a lack of knowledge to start with.
Less than a third of those surveyed knew that LTV stood for Loan to Value and almost one in ten did not know the meaning of APR which is the annual percentage rate.
Around 15% of people did not know that negative equity means when the value of the mortgage, which is outstanding on the property, is more than the market value of the property.
A-Z Of Mortgage Terms
David Wilson, Director of NE Money has given Capital a quick lesson in money with his A-Z of mortgage terms...
APR -The Annual Percentage Rate is the total amount of interest you will pay annually on a mortgage. The two varieties of APR are Nominal APR; simply the interest rate, and effective APR; any fees applicable on the mortgage and the interest rate. It's important to understand the difference between these two variances when reviewing mortgage deals for cost comparisons.
BANK OF ENGLAND BASE RATE - This is the rate set by the Bank of England but shouldn't be confused with mortgage lenders Standard Variable Rate. The standard variable rate of a mortgage lender is worth considering when reviewing your mortgage as this is not set by the bank of England and is a good sign of the competitiveness of a lenders proposition.
CONVEYANCING - This is the legal work required for the sale and purchase of a property. It involves a duly qualified conveyancer/solicitor completing the legal transfer of ownership between the various mortgage related parties. Both the vendor (seller) and purchaser will require legal representation and the time the process can take is from days to months to complete.
DISCOUNTED RATE - This is where a mortgage lender will offer a discounted rate for a fixed period of time below their Standard Variable Rate. This is often a very attractive option as payments are lower initially, but consideration should be given to arrangement fees; tie in periods and any associated withdrawal penalties.
EQUITY RELEASE MORTGAGE - A source of generating a lump sum of money, or regular income, from the equity within a property. Equity release is usually applicable for those at a later stage of their financial life with the mortgage lender taking ownership of a portion of the property. Specialist advice from an appropriately qualified advisor is required for equity release mortgages given the retirement nature of the products.
FLEXIBLE MORTGAGE - Flexible mortgages can vary between lenders but can include the facility of payment variations (increased and decreased payments), offsetting savings against outstanding mortgage balances, as well as the ability to change the type of rate you have midterm of the mortgage. Flexible mortgages can be a productive way to manage your mortgage to an earlier repayment date.
GROUND RENT - A payment made to the freeholder or landlord of a property by the leaseholder. The leaseholder can own the property but the land can be owned by a third party (the freeholder). Worth understanding fully on some new build property when considering your budget as ground rents can sometimes include a monthly or annual payment.
INTEREST ONLY MORTGAGE - Interest only mortgages involve a monthly payment being made to the mortgage lender but this only covers the interest owed for the previous month. Interest only mortgages do not reduce the amount owed to the lender and at the end of the mortgage term the original amount borrowed will still be the same. Advice regarding interest only mortgages is recommended to understand the risks.
JOINT TENANTS - This relates to the ownership of a property and specifically refers to the way the in which a property is owned. Joint tenants have rights to the whole of the property and therefore in the event of the death of one party the ownership of the whole property transfers to the joint tenant. This is in contrast to 'tenants in common' where the ownership upon death transfers to the person?s estate and is subject to their will/rules of intestacy.
KEY FACTS ILLUSTRATION - A document provided when applying for a mortgage which details important information such as the amount being borrowed, fees/charges, any additional features and also your monthly payment. All lenders produce this in the same format so it?s easy to compare different products when searching the market.
LIFE COVER - Sometimes called Life Assurance, this provides a lump sum on the death of the insured persons to repay the outstanding mortgage balance. The two types of life cover are decreasing term (the level of cover decreases usually in line with a repayment mortgage) and level term (the level of cover remains the same throughout the mortgage). Seek independent financial advice when considering or reviewing life cover.
MORTGAGE OFFER - The mortgage offer follows any agreement in principle from a lender and is usually their formal commitment to lend. This formally states the conditions of the mortgage and will be required by your chosen conveyancer/solicitor before completion. Whilst a lender will issue their commitment to lend it is still subject to withdrawal should your circumstances change.
NHBC GUARANTEE/WARRANTY - Specifically relevant to any new build properties (or those built within last 10 years), The National House Building Council (NHBC) Guarantee, offers peace of mind that the subject property is of sound construction. NHBC inspectors will examine the property and issue a warranty which then offers the purchaser insurance backed protection against structural defects for 10 years since construction.
OPEN MARKET VALUE (OMV) - This is the estimated amount for which a property should exchange/sell for between a willing buyer and a willing seller following a full marketing period. The 'for sale' price quoted by an estate agent may be the target price required by a seller but it is down to the buyers due diligence regarding this price whether it represents a fair value. It is worth understanding that the OMV set by an estate agent may not be the value set by a surveyor instructed by a mortgage lender.
PORTABLE MORTGAGES - An important aspect for any mortgage customer to understand as this allows a mortgage to be moved from one property to another if a move is required. 'Porting' a mortgage is usually considered when the mortgage is capped, discounted, fixed and subject to an early repayment fee.
QUOTATION - When considering your next purchase or mortgage seek independent quotations for the appropriate mortgage amount. This will quickly identify, without commitment, what you can afford and what is available. However, care needs to be taken with quick quotations as mortgage rates change frequently and it?s important to ensure the quote represents your true financial situation. Use the services of a mortgage adviser to access independent quotes and advice.
REPAYMENT MORTGAGE - Repayment mortgages are where the monthly payment to the mortgage repays both the interest and capital (the amount borrowed) over the term. The repayment amount is based on the interest due on the outstanding balance and a percentage of the capital calculated over the term. Repayment mortgages, subject to monthly payments being maintained, will result in the balance being fully repaid at the end of the term (this is unlike interest only mortgages where the capital remains at the end of the term).
STAMP DUTY - Stamp Duty Land Tax is a tax paid to the government on the purchase price of a property over a specific threshold (£125,000). The tax is payable on a sliding scale subject to the value of the purchase price and is payable upon completion. When considering properties to buy it is vital to understand and budget for any associated Stamp Duty. For more information visit www.hmrc.gov.uk
TRACKER MORTGAGE - The interest rate of a tracker mortgage will 'track' the movement of either the Bank of England?s or a mortgage lender?s base rate. The rate payable will vary dependent on the rate set by either institution which means that mortgage payments are subject to increase/decrease on a monthly basis.
UNDERINSURED - This is the gap between any insurance, for example home insurance or life insurance, and the insurable interest (the value of the insured item). Understanding the underinsured gap and making the necessary provision is critical; particularly in the case of home insurance where the mortgage lender will require their interests (the property) to be fully insured.
VALUATION - Instructed by a mortgage lender when you apply for a mortgage this is for the lenders purposes to ascertain the properties acceptability as security. The valuation will provide a quick snapshot of the property with more detailed reports for the buyer being available such as a Homebuyers report or full structural survey.
WATER AUTHORITY AND LOCAL AUTHORITY SEARCH - This is part of the home buying process which is handled by the conveyancing company dealing with the transaction. This provides specific information regarding the property and will highlight any outstanding matters such as planning permissions, sewerage plans, as well as a range of other information required by the mortgage lender to ensure they have valid and ongoing security.
X SIGN HERE - Before you sign on the dotted line for a mortgage ensure you fully understand everything involved and all of your responsibilities. Mortgage advisers and solicitors can answer any questions you may have in respect to your mortgage.
YOUR HOME MAY BE REPOSSESSED - This statement is seen on most mortgage documents and needs to be taken seriously. If you experience financial difficulty, and especially when this affects secured creditors such as a mortgage lender, talk to your advisor or lender about what options are available as the earlier you take action the easier resolution could be.
ZZZZ - Any financial decision should be taking with confidence and managed attentively to ensure a good financial life and that you sleep soundly at night!
To further information about any of the above terms or to understand more about your mortgage contact the mortgage team at NE Money on 0191 2361042.