Home and dry on the jargon

Published on Friday 29 February 2008 20:23

1 WHAT IS A MORTGAGE? A mortgage is a loan, usually from a bank, building society or finance company, to help you buy your home. You have to pay back everything you borrow from your lender within an agreed time – the mortgage term. You also have to pay interest on what you have borrowed. It is "secured" against the property, which means the lender could repossess your home if you fall behind on payments.

2 FIXED-RATE MORTGAGES

The main benefit of a fixed-rate mortgage is payment security. You know exactly what you will be repaying each month for the agreed term – usually two, three or five years, but some lenders offer 25-year fixes. Whatever happens to interest rates and the economy, your monthly mortgage payments won't change. A fixed-rate can be a good option for first-time buyers who don't want any payment shocks.

The disadvantage is that you won't benefit if the Bank of England reduces the base rate.

3 VARIABLE MORTGAGES

These are based on the lender's "standard variable rate". They usually follow the Bank base rate but this is at the discretion of the lender. Following recent base rate cuts, not all lenders have followed suit. But a tracker rate will follow the movement of the base rate.

4 REPAYMENT MORTGAGES

You pay back some of the capital as well as interest on the amount still outstanding each month. As long as you keep up your payments, your mortgage is guaranteed to be paid off at the end of the loan term, which means it is the least risky option.

5 INTEREST-ONLY MORTGAGES

Borrowers pay the interest on the loan, but don't repay any of the capital until the end of the term. Many people hope enough equity will build up in their home to pay off the capital, but given the fact that house-price growth is slowing, it is recommended that a savings vehicle is in place. For example, you could pay into an individual savings account (Isa); an endowment (these have fallen from popularity because of poor returns) or a pension scheme.

6 SELF-CERTIFICATION

Self-certification mortgages are primarily for self-employed people, contract workers and freelancers who cannot provide typical proof of income, such as pay slips, from their employer. They allow people to state their own income. Such mortgages have recently become less readily available, as lenders have become stricter. There were fears "self-cert" loans were being used by people trying to get a bigger mortgage than they would rightly be entitled to, by falsely inflating their salary.

7 SUBPRIME MORTGAGES

These are loans for people who have poor credit ratings – perhaps they have been in arrears on a loan or defaulted on a mortgage before. They tend to come with higher rates and fees than mainstream mortgages. These are now in limited supply because of the subprime crisis in the US, where lending policies had become too liberal.

8 SOLICITOR

In Scotland, a solicitor plays a vital role in advising house buyers in an "offers over" situation. They will help people decide how much over the asking price they should offer. It is always essential to find out how much your solicitor will charge and what services they will offer you.

9 SURVEY

You will be required to have a survey done before the lender will make a mortgage offer. A survey is also important to protect your interests by identifying any possible problems with the property.

10 STAMP DUTY

This tax is paid when you buy a property over a certain value. Currently you pay the land tax on any property purchased for 125,000 or more.

&#149 To obtain a copy of The Scotsman Guide to Mortgages produced in association with Albannach Financial Management. e-mail mymortgage@ albannachfm.co.uk or call 0800 953 0223