Terraced houses in England

Buying your first house? Key property terms explained

Buying a house is the largest purchase most people will ever make. Parting with much of your life savings and committing to paying off a mortgage for the next few decades is a daunting thought, but the process does not need to be too stressful if you do your research and get some first time buyer mortgage advice.

Here we will explain some of the key elements and terms involved in buying a property.

What is a mortgage?

A mortgage is most simply described as a loan taken out to buy property or land. Many will run for 20-30 years, but you can take out a mortgage for longer or shorter periods. The amount you will be able to borrow for a mortgage will depend on your deposit and how much you (and your partner if you are buying together) earn each year, with each bank or building society offering slightly different rates and amounts.

What is a deposit?

The deposit is the amount you need to put down on a house upfront to make the purchase. Generally, banks and building societies will ask for at least 5% deposits when buying a house. For example, if you want to buy a home that costs £250,000, then you will have to provide a deposit of at least £12,500.

What is a loan to value ratio or ‘LTV’?

When discussing mortgages, one key term is the ‘loan to value’ or ‘LTV’, which is simply the amount you have borrwed to buy the property compared with the mortgage lender’s valuation of the property.

For example, if you buy a home for £250,000 and put down a 10% deposit of £25,000 and have a mortgage for the remaining £225,000, then your LTV is 90%. The lower the LTV, the better the mortgage rate you are likely to be able to get, as high LTV represent more risks to banks and building societies. An LTV of 60% will generally offer the best rates.

Leasehold vs Freehold – what’s the difference?

Properties in the UK can be purchased on a leasehold or freehold basis, and the distinction between these two terms can be quite expensive.

If you have a freehold then you own the property outright in perpetuity – this is what most people think of when they are buying a house. However, if you own the leasehold of a property then you own the property for a specific number of years, after which ownership will revert back to the freeholder. Many flats are sold as leasehold as a way to ensure that owners of each flat pay towards the common upkeep of the building – such as the roof or sewage, with leaseholds granted for at least 21 years and can last as long as 999 years.

A small number of properties are also available to purchase as ‘commonhold’, which is a new type of property ownership type brought in in 2002 designed to create a fairer way for flat owners to own their property outright and in perpetuity, but also make sure they pay their way towards general building upkeep. Commonhold was heralded as the future of flat ownership, but in reality few properties are sold this way today.

Looking for explanations for more financial terms? Take a look at our glossary.

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