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Mortgages explained

At Saffron Building Society, we understand that sometimes mortgages can seem very confusing.

But when stripped back to the basics, they're quite easy to understand. That is why we have created a guide to mortgages that will help you make sense of the transaction you may be about to enter into.

Our guide to mortgages

Glossary of mortgage terms

APRC: Stands for Annual Percentage Rate of Charge. This is a calculation that includes the amount of interest you pay and any other fees charged such as arrangement fees for setting up the loan. It also takes into consideration when and how often interest and charges must be paid. An APRC figure is intended to let you easily compare products from different lenders. The lower the APRC the better the deal.

Arrangement Fee: This is a fee to reserve the funds for your mortgage. The arrangement fee for your mortgage may be charged separately or added to the mortgage loan.

Arrears: It is important that you keep up-to-date with the monthly repayments on your mortgage. When mortgage payments have not been paid on time and/or are not made at the correct amount, borrowers are said to be in arrears.

Bank of England Base Rate: The Bank of England Base Rate is set by the Bank of England and determines the cost of borrowing money.

Building Societies Association (BSA): The trade association representing interests of member societies and mutuals.

Cash-back: On completion of a cash-back mortgage, your lender will pay a lump sum "back" to you.

Completion: This is the last stage in the purchase of a property. The legal documentation is finalised and the lender has sent the mortgage funds to the purchaser's solicitor. Once the purchaser's solicitor forwards the funds to the seller"s solicitor the property is now owned by the purchaser.

Council of Mortgage Lenders (CML): A trade association representing mortgage lenders.

Deed: A Deed is the legal written document which transfers title (ownership) or an interest in real property to another person.

Early Repayment Charge: An early repayment charge is a fee made by the mortgage lender if you redeem your mortgage early. Not all mortgages have early repayment charges.

Equity (housing): In housing terminology, equity is the difference in the value of the property and the amount outstanding on any loan secured against it.

Exchange of Contracts (England & Wales only): This is the stage where legally binding contracts are exchanged between the buyer and the seller. After contracts have been exchanged the vendor must sell and the purchaser must buy on the terms agreed.

Fixed Rate: The interest rate is guaranteed not to change during a fixed term.

Freehold: The legal right to hold land/property as the absolute outright owner, free of payment or any other duty owed to another party. As a freeholder, you can then offer to rent your land/property to parties with whom you"ll have a legal agreement. In other words, you may create leaseholders.

Most houses are sold as freehold properties but most flats are sold on a leasehold basis.

Further Advance: A further advance is additional borrowing with the same lender against the security of the property.

Interest-Only Mortgage: The borrower must make monthly payments until the end of the mortgage term. These monthly payments only cover the interest charged on the mortgage. The borrower will still owe the capital balance borrowed at the end of the mortgage term. The borrower is responsible for making their own arrangements to repay this capital balance and any other amounts owing at the end of the mortgage term. Failure to repay the mortgage debt in full at the end of the mortgage term could result in your home being repossessed.

Leasehold: You have a lease from the freeholder (sometimes called the landlord) to occupy the home for a number of years. The leases are usually long term, often 90 years or more.

Loan to Value (LTV): Loan to value (LTV) is a ratio between the size of the loan you would like against the value or sale price of the property you wish to re-mortgage or purchase. Generally the lower your LTV, the lower your interest rate is likely to be.

Mortgage Indemnity Guarantee (MIG): A Mortgage Indemnity Guarantee (MIG) is an insurance policy designed to protect the lender (the bank or building society for example) against loss in the event of the borrower failing to repay your mortgage. The policy may be insisted on by the lender at the start of the mortgage, but it's usually the borrower who pays the premium.

Mortgage Term: The term of a mortgage is the length of time over which the mortgage lender is willing to advance you the money on your mortgage before it must be repaid. The standard mortgage term in the UK is 25 years.

Mortgage Offer: The mortgage offer is the document issued by a mortgage lender to a prospective borrower following approval of the mortgage application. The mortgage offer will contain the conditions of the mortgage and the terms on which it is being made available.

The mortgage offer is a legal document and details the terms by which the mortgage lender and borrower will be bound. It requires careful reading. It is usually valid for a set period of time such as 3 - 6 months, but it can be revoked should circumstances change for the borrower, such as redundancy before the mortgage is completed.

Negative Equity: This is when the value of a property falls below the amount of the mortgage taken out to purchase it.

Overpayment: An overpayment is when more is paid each month to a mortgage lender than the contractual monthly repayment.

Portable Mortgages: A portable mortgage offers the opportunity to move the mortgage from one property to another. This allows the mortgage borrower to move property and move the mortgage from the old property to the new one.

Redemption: Redemption is what occurs after the capital borrowed and all interest is fully paid off. At this point the mortgage lender no longer has any claim on the property.

Remortgage: A remortgage is the replacement of an existing mortgage with a new one on the same property.

Repayment Mortgage: A repayment mortgage is where the capital is repaid gradually over the term of the mortgage. Payments consist of both the interest and the capital balance of the mortgage. In the early years of a repayment mortgage each monthly payment has a greater ratio of interest to capital. Over the term this ratio changes, meaning that eventually more capital is paid than interest.

Variable Rate: The rate of interest paid can change according to market conditions and/or changes to the Bank of England Base Rate or lenders Standard Variable Rate.

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