Mortgage terminology can be a bit overwhelming. You want to buy a house, but how do you go about getting a mortgage, what does it all mean and where do I go? To help you out we’ve created a list of common words and questions that regularly occur in the mortgage world.
So, if you want to understand mortgages, read on!
Interest rate
Want a loan and wondered “what is an interest rate?”
The interest rate is the annual cost a borrower pays for a loan. Interest rates are expressed as a percentage of the principal.
Interest only
“What is an interest-only loan”
An interest-only loan occurs when the borrower of a loan only pays back the interest component of the loan and not the principal (the loan itself). Interest-only loans are initially cheaper to pay off compared to other loans but later become more expensive because the life of the loan is extended.
An interest-only loan is only temporary and is typically used at the start of a loan’s life. Once the interest-only term finishes the loan becomes a principal and interest loan.
Principal and interest
“What is a principal and interest loan”
Principal and interest loans are the most frequently used type of loan in which the borrower pays back the interest component of the loan and the principal (the loan itself).
As opposed to the interest-only loan, the borrower of the loan is required to pay back the principal component of the loan alongside the interest component.
Repayments
“How do repayments work”
When money is lent to the borrower, they are expected to repay the full amount of the loan over time. Repayments are the amount of money that the borrower pays back to the lender.
If the borrower is unable to make the required repayments and defaults on their loan, they may be forced into bankruptcy as a last resort. This affects the borrower’s credit score meaning they will find it difficult to obtain a loan in the future.
Term
“What is a loan term”
A Term is the number of years it takes to pay off the loan
What do I need to provide the bank for a mortgage?
If you are applying for a mortgage, you will need to provide your bank with the following items:
- Proof of identity: Identify yourself (passport, drivers licence, etc)
- Proof of income: Proof that you earn as much as you sat you do (pay slip, tax return)
- Credit documentation
- Expenses: Detailed list of what you spend during the month
- Assets: Anything that you own that has monetary value (cars, savings, etc)
- Liabilities: All financial debts that you have outstanding (car loan)
How long does it take to get a mortgage?
On average, it takes around 30 days for your mortgage to get approved at the bank. It may take longer to get approved during busy periods.
What is mortgage insurance?
Mortgage insurance protects the lender if the borrower defaults on repayments of their mortgage loan. The borrower is typically required to pay mortgage insurance if they have a deposit below 20% of the home’s value.
Can I pay out my mortgage early?
Yes, you can pay off your mortgage early, although you may incur a fee from your lender.
So, this is all the common terms and questions regarding mortgages. But, if you still need help, book a meeting and have a chat to us about it.
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