Your Complete Jargon Busting Guide To Mortgages
Whether you are a First Time Buyer or an established home mover, the terminology associated with mortgages can be somewhat tricky to understand. This jargon buster guide aims to help you get a better understanding of the terminology you may come across when applying for a mortgage.
The amount of your mortgage.
An abbreviation for Annual Percentage Rate of Charge.
The charge that may be made to cover the cost of providing a mortgage (not all of our mortgage products have an Arrangement Fee). This fee is normally charged to your mortgage account on completion.
The price the seller is asking for the property.
The rate of interest set by the Bank of England.
Insurance against the cost of repairing damage to property caused by events such as fire, storm or flood, or even rebuilding a property from scratch following major structural damage. All mortgage lenders usually insist you have adequate buildings insurance, in order to safeguard the money they are lending. All Insurance companies will have an excess payable in the event of a claim.
A mortgage for a property that is, or will be, let to tenants. This is semi-commercial lending, reflected in the higher set-up costs and marginally less attractive rates available. Income multiples are of secondary importance with this type of lending; mortgage lenders are more concerned with the relationship between rental income and mortgage payments.
Protects against loss of fees/survey.
Legal documents signifying the owner’s legal entitlement to the property.
The amount of money the buyer must pay when the contracts are exchanged. The amount that is required varies depending on the specific product terms and conditions. However, as a guideline the minimum you should have is 5% of the purchase price.
You pay a discount off the Standard Variable Rate for an agreed period. Monthly repayments could increase or decrease depending on the Standard Variable or Flexible Mortgage rates at the time.
Remortgage within an agreed period (usually linked to the period the interest rate is discounted, capped or fixed) and the penalty fee (ERC) charged if you pay your mortgage off during the period of the deal. This fee doesn’t apply to all mortgages.
With an endowment mortgage you take out an assurance policy designed to repay the mortgage either on death or at some other time in the future. In the meantime, only the interest portion of the mortgage is paid until the policy matures.
The value of the policy is not guaranteed on maturity and may not provide enough capital to repay your mortgage. Not usually offered these days.
A term used by lenders to describe potential borrowers’ working arrangements. Self-employed applicants are sometimes seen as a greater risk than employees are. But many specialist lenders and mortgages have emerged in recent years designed especially for different types of employment status, and the Charcolonline website has a wide variety of these in its database.
The difference between the value of the property and the amount of any loans secured against it. If your house is worth £150K and you have a mortgage of £90K and no other secured loans, you have £60K equity.
Where both the buyer and the seller become legally bound to the transaction.
You pay a fixed rate of interest over an agreed period, allowing you to budget more easily.
All items in the house that are not part of the actual building but may be included in the sale (eg. cooker, dishwasher, washing machine, light fittings, etc).
You can pay more than your regular payment each month, helping you pay your mortgage off early and potentially saving thousands of pounds in interest. Interest is calculated daily on flexible mortgages and often includes other features such as short payment breaks.
Ownership of property and the land it stands on.(see Leasehold).
When your offer on a property has been accepted then another buyer puts in a higher bid and your offer is then rejected by the seller.
Before tax.
Annual rent (usually low) paid on a leasehold property.
A charge made when you take out a high Loan to Value (LTV) mortgage that protects the lender against defaults on such loans.
A more detailed inspection than the standard valuation. It lists only faults that are obvious to the valuer. It is not a full structural survey.
Impaired credit mortgages are specialist loans for customers whose credit problems disqualify them from using mainstream lenders’ standard products. Some lenders specialise in loans like these, which are also known as adverse credit loans.
This is the formula we use to decide how much lenders can lend you. Following the Mortgage Market Review, other financial information must also be considered.
Insurance designed to pay your mortgage if you are unable to earn an income on a monthly basis due to sickness or job loss.
You pay just the interest on the loan each month. Interest-only mortgages are normally arranged with a savings vehicle (eg. ISA ) intended to pay off the loan at the end of its term for buy-to-lets. The value of the policy/ investment is not guaranteed on maturity and may not provide enough capital to repay your mortgage.
The frequency with which mortgage lenders calculate the outstanding balance on mortgages – annually, monthly or daily – is an important consideration if you have a repayment mortgage. The annual calculation systems of traditional mortgages mean that you are paying interest on capital repayments already made during the course of that calendar year. The daily or monthly interest calculations used with flexible mortgages enable payments (and overpayments) to have a quicker impact on the outstanding balance. Other things being equal, daily or monthly as opposed to annual calculation saves borrowers money.
ISA’s provide a way of repaying an interest-only mortgage. The Government increased the annual limit to £20,000 in 2017. The type of ISA most suitable for repayment purposes is the equity (stock and shares) based one. The future value will be dependent upon investment growth and investments can go down as well as up. ISAs enjoy significant tax breaks with no capital gains tax on growth, reduced tax on dividend income and no tax levied upon withdrawals. Whilst contributions can be amended at any time, there is an upper limit on the amount you can pay into an ISA.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. For ISAs Investors do not pay any personal tax on income or gains. Tax treatment varies according to individual circumstances and is subject to change. Tax treatment varies according to individual circumstances and is subject to change.
A fee paid to register ownership of a property.
Property ownership where the property is leased by the owner to a leaseholder or tenant for a fixed number of years.
Will be in contravention of your mortgage deed unless it is a Buy to Let mortgage.
Lease Lenders have different mortgage schemes for residential and let properties. If you intend to let your property you should let your lender know.
The person who grants a lease.
A policy payable upon the death of a specified person.
Your solicitor will check with the local authority for anything proposed that could affect your potential property. For example, road improvements or planning permission.
A percentage figure indicating the size of the mortgage on a property in relation to its value. Thus, a house worth £120K with a mortgage of £60K would have a loan to value of 50%. Better mortgage deals are available for lower loan to values – 75% and below. At higher loan to values – usually, from 90% to 95% – you are likely to find yourself paying a higher lending charge.
The amount you pay to your lender each month.
A document that shows the seller that you can afford to buy in principle (AIP- agreement in principle) the property.
A loan made against the security of a property.
Any form of protecting the debt – critical illness cover, accident, sickness and unemployment, etc.
A Bank, Building Society or other lender who lends the money for the mortgage.
The person who borrows money and whose property secures the loan.
A form of cover that pays the policyholder an income for a specified time (usually after a preliminary deferment period) in the event of prolonged illness resulting in loss of earnings.
A portable mortgage is one that can be transferred without penalty if you move house during a rate-control period. If you increase your mortgage the rate available for additional borrowing depends on what schemes the lender is prepared to offer you. If you reduce your mortgage, a pro-rata early repayment charge may apply. Most mortgages nowadays are portable.
In the context of insurance, a premium is the regular sum you pay to keep your cover in force.
The amount of the mortgage on which interest is calculated.
The total amount paid by the mortgage lender to a mortgage adviser/ intermediary, whether directly or indirectly, in connection with providing applications from customers to enter into regulated mortgage contracts with the mortgage lender.
The process of switching your mortgage loan from one lender to another without moving house.
Payment of a mortgage loan in full or part.
You repay part of the capital and the interest on your mortgage each month. Under this option, if all repayments are made, your mortgage will be repaid in full at the end of the agreed term.
The means by which a mortgage loan’s capital is repaid. Examples include endowment policies, ISAs, and personal pensions.
A legal investigation to establish what if any calls on the ownership of the property exist and to determine if it is affected by planning applications etc. Main types of search are Land Authority search and Land registry search.
If you should default on your mortgage, the lender can ultimately repossess your property to recover their money. The loan is hence said to be “secured” on the property.
A mortgage that has some of the loan set up on an interest-only basis and some on a repayment basis.
This is a tax payable when purchasing a property or land in England & NI (Scotland & Wales have their own rates and rules that apply). The amount payable depends upon the purchase price. If you are paying £250,000 (£425,000 for First Time Buyers buying up to £625,000) or less, then you are exempt from paying stamp duty (as long as this is the only residential property you own). If you are paying more than £250,000 then you pay stamp duty, normally 5% to 12% of the purchase price – on a sliding scale for residential properties.
You will usually have to pay 3% on top of the SDLT rates if buying a new residential property means you will own more than one.
A shorthand term for the borrower’s credit record and employment situation.
A detailed inspection of a property to check that it is structurally sound.
Occurs when the sale of the property has been provisionally agreed. It allows the buyer or the seller to withdraw without incurring any penalty.
The process of cashing in an unwanted endowment policy with the insurer who sold it to you. Doing this often produces a poor return for the money invested to date in the policy’s early years.
Standard Variable Rate, the interest rate at which a lender’s standard mortgages are set.
The period of time (years) over which a mortgage will run. Typically 25 Years or to expected retirement date if that comes first.
The ownership of the property.
Follows but usually exceeds the Bank of England Base Rate for an agreed period, by a pre-arranged amount. This means your monthly payment will automatically change in line with any adjustments made to the Base Rate, so this is a form of variable rate.
A deed which transfers ownership of a property.
The term used when the seller of a property has provisionally (‘subject to contract’) accepted a buyer’s offer.
A mortgage repayment is smaller than the regular agreed sum. Some flexible mortgages have this feature, which can be useful for people with irregular income.
Inspection of property which establishes its market value and security for a mortgage. There are three levels of valuation/survey:
These are carried out purely on behalf of the mortgage lender even though you may have to pay for it. Most lenders charge valuation fees on a scale depending on the value of properties. The report is basic, and all lenders disclaim any responsibility for the condition of the property. You have no comeback against the surveyor for any defects or problems overlooked in the report.
Homebuyers’ report – a more detailed but still limited report to a set format on the readily accessible parts of the property. It may offer you some limited recourse should the surveyor, who is acting on your behalf rather than the lender’s, be negligent.
Full structural survey – the most thorough (and most expensive) report. If the property is defective, the surveyor should discover this. If major defects are not discovered then the surveyor acting for you would have some legal liability, and you would be able to claim redress.
With any level of survey, if there are potential or actual defects found the surveyor may suggest you obtain additional specialist reports, which could be at your expense and may be time-consuming. If you opt for a homebuyers’ report or full structural survey, you will sign a contract with the surveyor to formalise his responsibilities to you.
Applicants should always check with mortgage lenders before instructing their own valuation or survey. Lenders tend to work with panels of surveyors, and if your surveyor is not known to your lender you may find yourself paying again for a valuation by one who is known.
The interest rate paid on the mortgage is linked to the lender’s Standard Variable Rate.
The person selling the property.
The buy-to-let mortgage market is a specialised one. In April 2014 the mortgage industry implemented the changes that came from the financial conduct Authority’s (FCA) Mortgage Market Review (MMR). The MMR changed the face of mortgage lending, forcing lenders to pay much more attention to affordability and expenditure rather than simply assessing gross rental income.
Lenders view buy-to-let mortgages as higher risk than residential mortgages because they know that many landlords rely on rental income to make the mortgage repayments and if the property is vacant for a period there is no income. Because of this perceived risk, interest rates tend to be higher than residential mortgages. The lender will also demand a larger deposit.
Typically in the current market you will struggle to borrow more than 75% of the property value, and any lender will look for rental income that covers around 125%of the mortgage repayments. A lender will expect you to prove the rental income potential too.
The Financial Conduct Authority do not regulate some buy to let mortgages.
This communication does not constitute advice and should not be taken as a recommendation to purchase any of the products or services mentioned.
Before taking any decisions we suggest you seek professional advice.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
