Do you know your LTV from your ERC? If so, top marks. If not, join the club. The jargon encountered when you first come to take out a mortgage can be overwhelming but we’re here to crack the codes.
It’s the first part of a new ‘jargon buster’ series in which we have set out some of the most commonly-used phrases, acronyms and words used by lenders and brokers to help you understand more about the process of taking out a mortgage and how it may impact you.
We are kicking off with three abbreviations which you’ve probably heard or seen already – LTV, SVR and ERC, in that order (in case you are looking for one, specifically).
Here goes…
What’s an LTV? Loan-to-Value
When it comes to jargon, the snappily titled loan-to-value ratio – or LTV – is the one most likely to send you into a mild panic.
It is, in fact, referring to the percentage of the property’s value for which you need a loan.
Here’s an example:
If the value of the home you are buying is £200,000 and you have a deposit of £20,000 your deposit will cover 10% of the home’s value and you’ll need a mortgage to pay for the remaining 90%.
So, the loan-to-value (LTV) ratio is 90%.
The lower the LTV the lower the rates are in general. As you build up equity in your home and you start remortgaging you will begin increasing the share of the property you own and so your LTV will start decreasing. This will allow you to tap into better rates.
What’s an SVR? Standard Variable Rate
If you are a new first-time buyer this is one to keep in your pocket and remember when you come to the end of your deal. The Standard Variable Rate (SVR) is the rate onto which your mortgage will default if you don’t switch – or remortgage – when your deal finishes.
Sometimes also known as the reversion rate or bank rate this is pretty much always much higher than your current deal. Think 3% to 4% and possibly even more when the Bank of England has set it’s benchmark rate – the base rate – high.
You can go onto your lender’s website to find out what its current SVR is set at. This will give you an idea of the savings you could potentially make by remortgaging.
Some people can slip onto this rate without realising. Others may choose to be on this rate – perhaps for a month or two – if they are waiting to move house and sign up to a new deal.
But overall, the experts advise you to switch before you fall onto this rate or you could end up spending more than double in interest payments.
What’s an ERC? Early Repayment Charge
This one does what it says on the tin – to a degree. Basically, if you pay off your mortgage before the deal you are on comes to an end, you will pay an Early Repayment Charge (ERC).
Many of us can only dream of paying off the mortgage – but it does happen. Alternatively, you can also be hit with an ERC if you remortgage before your deal ends or also if you make an ‘overpayment’.
Most mortgages offer a 10% overpayment buffer, but if you go over this ceiling you may start paying charges.
However, if you feel this may be something you need to consider when taking out your mortgage it’s worth speaking to a broker to find out if there any flexible deals which allow overpayments.
If you are in the middle of a deal and would like to remortgage, speak to a broker as they will be able to help you decide if the ERCs are worth paying to secure a cheaper deal – sometimes the charges can be lower than the savings you make.
If you are moving home
…and are midway through a deal you can avoid paying the ERC by ‘porting’ your mortgage – or taking it with you and using it, in part, to pay for your new home.
If this is not an option, you can speak to a broker who will be able to help you with the technicalities.
