What is an AIP, LTV or ERC? Explaining the mortgage jargon which can confuse first-time buyers

Buying property is tough enough first time around without having to understand banking shorthand

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Taking out a mortgage comes with a language of its own, with numerous acronyms and jargon such as LTV, APR, equity and legals.

It’s important to understand these terms as they will determine how much you can borrow, the interest rate you’ll pay, and how flexible your mortgage will be later on.

This guide explains the key phrases in the order you’re likely to meet them in the mortgage process, explaining what they mean and why they matter.

Here, meanwhile, you can find the latest lenders who are cutting mortgage rates - in particular for first-time buyers.

Affordability

What does it mean? A lender’s affordability check assesses whether you can realistically keep up with your mortgage repayments – both now and if rates rise. It looks at your income alongside regular spending such as debt payments, car finance, childcare, travel and everyday living costs.

Why does it matter? Affordability ultimately decides how much you can borrow. High outgoings can reduce the mortgage amount you’ll be offered. These checks apply to every applicant, including first‑time buyers, home-movers and remortgagers.

Agreement in principle (AIP)

What does it mean? Sometimes called a ‘mortgage in principle’ or ‘decision in principle’, an AIP is an early indication of how much a lender might let you borrow.

Why does it matter? First-time buyers often need an AIP to show estate agents or sellers that they’re in a credible financial position to proceed with purchase.

Deposit

What does it mean? Your deposit is the portion of the property purchase price you pay upfront when you buy a property. The mortgage covers the rest.

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Why does it matter? A bigger deposit usually unlocks cheaper interest rates and a wider choice of deals. First-time buyers with smaller deposits will find it more difficult – and expensive – to get a mortgage.

Loan-to-value (LTV)

What does it mean? The LTV is the percentage of the property’s value you’re borrowing as a mortgage. For example, a 10% deposit of £20,000 and mortgage of £180,000 on a £200,000 home means your LTV will be 90%.

Why does it matter? Every mortgage deal has a maximum LTV. In general, the lower the maximum LTV, the cheaper the rate. For first‑time buyers, your LTV depends on your deposit; for remortgagers, it’s based on the equity in your home.

Equity

What does it mean? Equity is the part of your home you actually own – the difference between its value and how much you owe on your mortgage. If your home is worth £100,000 and you owe £80,000, you have £20,000 equity.

Why does it matter? As you repay your mortgage or your home’s value rises, your equity grows. More equity usually unlocks better mortgages rates and makes remortgaging easier and cheaper.

Arrangement fee

What does it mean? The arrangement fee (or product fee) is a charge for taking a specific mortgage deal. It can range from a few hundred pounds to a couple of thousand.

Why does it matter? The arrangement fee is part of the total cost of a mortgage product, so you need to factor it in when comparing deals.

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Valuation

What does it mean? A mortgage lender’s valuation checks the property is worth what you want to borrow. It’s done to protect the lender, not the buyer.

Why does it matter? If the lender’s valuation comes in lower than the price, you may need a bigger deposit or to renegotiate the price. If you’re remortgaging, the valuation affects your LTV.

Legals

What does it mean? ‘Legals’ are the legal checks needed to set up a mortgage. A solicitor reviews the property, handles Land Registry work and ensures the lender’s charge is correctly recorded.

Why does it matter? On remortgages, ‘free legals’ usually means the lender covers their part of the legal work. If you’re buying, you’ll still need your own solicitor to handle the full conveyancing process.

APR

What does it mean? APR stands for annual percentage rate. Unlike the headline interest rate, the APR also includes mandatory fees such as product fees, valuation fees or lender admin charges.

Why does it matter? The APR helps all types of borrower compare the true cost of different mortgage deals.

Early repayment charges (ERC)

What does it mean? ERCs are a penalty for repaying your mortgage – or switching deals – before your fixed or tracker period ends. It’s usually a percentage of your outstanding balance.

Why does it matter? ERCs can cost thousands, so they’re crucial to factor in if you’re thinking about leaving a fixed deal early.

Mortgage term

What does it mean? Your mortgage term is the length of time you agree to repay the loan over – usually 25 to 40 years. It’s separate from your initial deal period, which usually lasts two to five years.

Why does it matter? Longer terms mean lower monthly payments, but a higher interest bill overall.

Putting it all together

For first-time buyers, affordability checks, your deposit and LTV determine how much you can borrow.

When picking a deal, you need to factor in fees - so use the APR and ERCs to work out the total cost and how much flexibility you’ll have.

Once you’ve had an offer accepted, valuations and legals move the purchase forward.

And finally, when you’re on the property ladder, equity becomes your main lever for cheaper future borrowing!

When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.