Mortgage and Protection Terminology
A mortgage is a loan secured against your home or property. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
The Financial Conduct Authority does not regulate commercial mortgages, some forms of bridging finance and most forms of buy to let mortgage.
Affordability Criteria - The affordability criteria assess how likely you are to be able to afford the monthly repayments and how reliable you will be even if a sudden unexpected change of circumstances were to negatively impact your finances. Factors taken into consideration include age, occupation, and dependants.
Agreement in Principle - A document from a mortgage lender confirming that you will be able to borrow a certain amount. It can be used to prove to a seller or their agent that you can afford to buy the property.
APR - The Annual Percentage Rate, the overall cost of borrowing, including interest and fees. APR tends to be used for personal loans.
APRC - The Annual Percentage Rate of Charge, often referred to as APRC is the total cost of the credit to a mortgage consumer, expressed as an annual percentage of the total amount of credit.
Arrangement Fee - A fee charged by the mortgage lender when you apply for a mortgage.
AVM - Stands for Automated Valuation Model. It is a search used by some lenders to establish the value of your property based on recent local sales and value trends. This is instant and means that they do not have to send a surveyor to your property.
Base Rate - The UK's core interest rate, set by the Bank of England. The lender's Standard Variable Rate (SVR) is usually higher than the Base Rate, but is often adjusted by reference to it.
Bridging Loan/Bridging Finance - A temporary loan to help you buy a new property before you have sold your existing one.
Buildings Insurance - Insurance cover which protects the holder against damage to the property itself (although it can be linked with contents insurance in a combined policy). The amount insured may vary from the purchase price/valuation of the property depending on the type and location of the property. The valuer will usually provide a rebuild cost for insurance purposes.
Building Survey - Provides a more detailed report than a Homebuyer Survey. It’s recommended for older properties and those in need of renovation work.
Buy to Let - There are two types: Business Buy to Let – this is where someone buys a property for investment purposes. Income is provided by the tenants' rent, and capital growth (if any) by the property's increasing resale value; Consumer Buy to Let - But-to-Let Mortgages that are driven by certain circumstances where the potential borrower (a) did not set out to borrow for business or investment purposes, (b) does not have any other buy-to-let properties and (c) is only looking for a re-mortgage. For this reason, these mortgages are regulated giving you greater protection than with a business buy to let mortgage.
Capital and interest - A capital and interest mortgage is also known as a repayment mortgage. It involves paying all of the interest plus repayment of a little of the capital each month, which over the mortgage term guarantees full repayment of the mortgage, if all payments are made.
Capped Rate - A mortgage where the interest rate is linked to the lender’s standard variable rate, with a guarantee that it won’t go above a set level for a certain period, usually for the first few years of the loan.
Capped and Collared Rate - A mortgage where the interest rate is linked to the lender’s standard variable rate, with a guarantee that it won’t go above a set level or below a set level for a set period, usually for the first few years of the loan.
Cashback - A cash amount paid by a mortgage lender to a customer (typically at the beginning of a contract) as an inducement to enter into a mortgage contract with the mortgage lender. Completion - The final stage of the house-buying process, which comes after exchange of contracts. The sale must proceed after Exchange, but Completion occurs when the property's agreed sale price (less any deposit already paid) safely reaches the seller's bank account.
Contents Insurance - Insurance cover which protects the personal belongings of your home contains. In the case of rented accommodation, the landlord is responsible for insuring those contents which he owns, but not those owned by his tenants.
Conveyancing - Normally carried out by a solicitor or licensed conveyancer on the buyer's behalf, conveyancing includes proving the property is really owned by its seller, making sure that all the loans secured on it are discharged, establishing its legal boundaries and searching local planning information for upcoming developments which could affect the property's value.
Council Tax - A local authority charge which replaced the Community Charge in 1993/94. Generally speaking, the more valuable your property is, the higher your Council Tax bill will be, although the amount for an identical property can vary considerably between different local authorities. In rented or buy to let accommodation, the tenants are usually responsible for the Council tax.
County Court Judgement (CCJ) - If a County Court rules against you for defaulting on a debt, that ruling is listed on your credit record. Having such a judgement listed against you may mean you are turned down for future loans or be expected to pay a higher interest rate than other customers. The Scottish equivalent of an English CCJ is a Decree.
Credit Reference Agency - When assessing your application, a mortgage lender will study your credit records. These records are held centrally by credit reference agencies and contain information from many different aspects of your life.
Credit Scoring - Some mortgage lenders use a credit scoring system to help them decide whether or not to lend money to you. They will ask a series of questions about you and your finances and score your answers. Depending on your score you’ll be accepted or declined.
Critical Illness Insurance - This is a type of insurance that pays out a tax-free lump sum if you're diagnosed with a specific medical condition or illness listed in your policy. Care should be taken to ensure that the policy covers illnesses that the client wants covered. Many cheaper policies have a reduced list of diagnosis’s that are covered.
Decision in Principal - See Agreement in Principal.
Decreasing Term Life Insurance - Particularly appropriate for those with repayment mortgages. With these policies the pay-out decreases over time as the size of outstanding repayments on your mortgage or other debts go down. Decreasing term life insurance policies are, other things being equal, cheaper than level term policies given the decreasing pay-out size.
Deeds - The formal written document which lists exactly who owns a property and enables transfer of a property's ownership from seller to buyer. A mortgage lender will record details of their mortgage on these deeds (which means they can take ownership of the property if you default on the loan payments).
Deposit - In the context of mortgages, the deposit is the initial lump sum payment which the buyer must contribute to the property's total purchase price to secure the mortgage loan after exchange of contracts. The bigger the deposit, the better the mortgage is likely to be.
Discharge - Paying off a mortgage.
Discounted Rate - A mortgage which has an interest rate below the lender's standard variable rate (SVR), Bank Base Rate or Libor rate, typically for the first few months or years of the loan. The rate payable may move up and down, but the discount on SVR remains constant.
Early Repayment Charges (ERC's) - A charge levied by the mortgage lender on the customer in the event that the loan is repaid in full or in part before a date specified in the contract. The amount will depend on the mortgage left outstanding and on the terms of the mortgage.
Employment Status - A term used by lenders to describe potential borrowers' working arrangements. Self-employed applicants are sometimes seen as a greater risk than employees are.
Equity - The value of the property less the outstanding mortgage.
ESIS - The European Standard Information Sheet, is a replacement of the Key Facts Illustration/Mortgage Illustration. These documents set out the key facts about the mortgage being offered and are intended to supply you with information to help you decide if the mortgage being offered is correct for you.
Exchange of Contracts - The terms of a property's purchase become legally binding for both parties when contracts are exchanged. The buyer is then committed to buying, and the seller to selling. As a buyer, you should normally ensure that you are covered by building insurance from this date, because even if the property were damaged badly, you would still have to buy it.
Family Assisted Mortgage - This is where a family member deposits cash into an account linked to the mortgage account. There are two main types, deposit and offset. With a deposit account the family member gets paid the interest, but the lender can access the account if the borrower fails to make the mortgage payment. With Offset, the deposit is netted off the mortgage amount and the borrower will only pay interest on the net amount.
Fixed Rate - A mortgage which fixes your interest rate at a specified level, typically for the first few years of the loan. Usually you will find that a fixed rate mortgage offers very favourable terms, but early repayment charges will limit any flexibility to switch away from it. The good thing about a fixed rate mortgage is that you know how much you'll be repaying each month for the length of the fixed period, which can make budgeting much easier. Where fixed rate mortgages don’t necessarily work is if the standard rates begin to fall - and you end up fixed on a higher rate with prohibitive early repayment charges.
Flexible Mortgage - A mortgage which allows borrowers to make overpayments when they have spare cash. Other features could include the option to reduce or miss payments altogether when times are tight, and to reborrow any overpayments. Not all flexible mortgages offer all of these features. Often useful for self-employed people whose income varies from one month to the next.
Freehold - This is where you own the building and the land it stands on.
Further Advance - An additional loan added to your existing mortgage.
Gross pay - Before tax or deductions.
Guarantor - A guarantor is someone who guarantees to pay your mortgage if you can’t.
Help to Buy - The government has launched a number of different Help to Buy schemes, including equity loans, mortgage guarantees, ISA’s and specific schemes for Scotland and Wales. They all aim to make home-buying easier.
Help to Buy ISA - A tax-free savings account, into which the government pays first-time buyers a cash bonus towards the purchase of a property. For every £200 saved, the government will deposit an additional £50, up to a maximum of £3,000, and is available to each individual mortgage applicant.
Home Information Pack - Includes documents such as an Energy Performance Certificate, a Property Information Questionnaire, evidence of title and standard searches. It may also include a Home Condition Report.
Impaired Credit - 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.
Income Protection Insurance - Is a policy that protects you against loss of income due to unemployment, illness or accident. It could provide you with a tax-free income and could continue to pay out until you are able to return back to work or retire.
Independent Mortgage Advice - Independence in regard to mortgage advisers is defined by the FCA as advice given that is representative of the whole of the market. Steve Davies Independent Mortgage Services Ltd offers Independent Mortgage Advice.
Interest - The premium which a borrower must pay a lender in return for use of the lender's money.
Interest-Only Mortgage - An interest only mortgage or interest only re-mortgage is where you simply pay the lender the minimum amount to cover the interest on your loan and invest enough each month in an investment vehicle to build up a large enough fund to pay off the capital part of the mortgage, when it becomes due at the end of the agreed term. These tend to be the standard way of borrowing for a Buy to Let property.
Intermediary - An adviser who can help you arrange a mortgage. Some intermediaries are only able to advise on a restricted number of mortgage deals. Others offer a whole of market advice service. Steve Davies Independent Mortgage Services Ltd provides whole of market advice. This means that we offer a comprehensive range of mortgage products from across the market. We offer both first and second charge mortgages, but not deals that you can only obtain by going direct to a lender.
Joint Mortgage - A mortgage where there is more than one person responsible for the contract. Joint Tenants - A form of ownership often used by couples to ensure that when one dies, the property passes automatically to the surviving spouse.
Land Registry - The official body responsible for maintaining details of property ownership.
Leasehold - This is where you own the building but not the land it stands on, and only for a certain period (up to 999 years). You may find it hard to get a mortgage if there are fewer than 80 years left on the lease of the property you want to buy.
Letting Agent - A property agent who can help landlords locate suitable properties for purchase, and who finds tenants to occupy those properties and can manage the rental process which follows.
Level Term Life Insurance - When you take out a level term life insurance policy, you’ll set a term at the beginning, usually the same as your mortgage, as well as a pay-out size. This pay-out will be the same whether you die at the beginning or end of the policy term.
Loan Consolidating - A mortgage that consolidates other loans, secured and unsecured, and /or credit card debt with a mortgage. The mortgage refinancing rate – as long as you choose carefully – should be a great deal less than you are paying for credit cards, unsecured loans or other finance and can therefore save you a significant amount each month. However, you may pay more over the term of the loan, as you could pay interest over a longer time.
Loan To Value (LTV) - This is the amount you want to borrow divided by the purchase price. In other words, it reflects the size of your deposit. Generally, the lower the loan to value, the safer the lender will view the loan and the lower the interest rate charge will be. For example, if your mortgage amount was £85,000 and your property is valued at £100,000, your loan to value is 85%.
Local Search - See Search. London Inter-Bank Offered Rate (LIBOR) - The interest rate at which leading banks lend to one another. Sometimes used as an alternative to base rate in setting the benchmark for a tracker mortgage. There are separate LIBOR rates for different periods up to a year but either "1" or "3" months LIBOR is what is normally used in setting mortgage rates.
Money Markets - The wholesale markets in which banks and other financial institutions lend money to one another. Mortgage lenders often borrow money in these markets, particularly for funding fixed rate mortgages.
Mortgage Adviser - A firm/ individual with permission for advising on regulated mortgage contracts.
Mortgage Deed - The formal contract between lender and borrower.
Mortgage Illustration - See ESIS.
Mortgage Payment Protection Insurance (MPPI) - Insurance that covers your mortgage, usually for a year if you are unable to work due to accident, sickness or unemployment. It is also known as ASU insurance.
Mortgage Refinancing - See Loan Consolidating.
Mortgage Term - see Term.
Negative Equity - If the value of the mortgage outstanding on the property is higher than the market value of the property, then the borrower is said to be in Negative Equity.
Net Pay - After tax or deductions have been deducted.
NHBC - National House Building Council. A warranty scheme for new properties providing cover against major structural defects for 10 years.
Offset Mortgages - Most mortgage borrowers also have savings, even if they are small, and using this money to cancel out mortgage debt makes sense. This is the basic principal behind offset mortgages. With interest only paid on the balance between savings and mortgage debt you achieve the same effect as overpaying a home loan: but you retain the ability to get the money back if you need it.
Overpayment - A mortgage repayment bigger than the one needed to meet the loan's minimum requirements. Mortgages that allow these without penalty are often useful for people whose type of employment means that from time to time they receive significant bonuses or other influxes of money. Most mortgages allow overpayments of up to 10% of the original loan amount each year without penalty or ERC’s being incurred.
Payment Holiday - A short break from regular mortgage repayments, sometimes offered with flexible mortgages. This can sometimes be a useful feature for self-employed people or others with irregular income.
Portability - Some lenders will let you move your mortgage to a new property when you move house.
Procurement Fee - 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.
Product Fee - See Arrangement Fee
Rebuild Cost - For insurance purposes, the cost of rebuilding your home if it is destroyed, this is not the same as the purchase price which may be significantly higher.
Re-mortgage - The process of switching your mortgage loan from one lender to another without moving house.
Repayment Mortgage - See Capital and Interest.
Repayment vehicle - The means by which a mortgage loan's capital is repaid. Examples include ISAs, personal pensions, or sale of the property.
Right to Buy Scheme - Enables tenants in council houses and housing associations to buy the homes they live in.
Search - A local authority search is an examination of local planning records to uncover details of any upcoming developments near the property which could affect its future value or existing restrictions on the site.
Secured (loan) - 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.
Self-build mortgage - A self-build mortgage is designed to help you finance the building and ownership of a house that you are about to build. The UK self-build mortgage market is a specialist area, because you are asking lenders to put forward money against an asset which does not exist at the beginning of the project.
Self-employed - The definition of self-employed varies from lender to lender, some expect the mortgage applicant(s) to own 100% of the business, whilst other lenders may accept as self-employed someone who only owns 10% on the business. Some lenders will only accept income from the self-employed that is either salary and/or dividends, whilst others may accept salary and net profits. Because of the various definitions it can be difficult for the self-employed to arrange a mortgage without the advice of an intermediary, such as Steve Davies Independent Mortgage Services Ltd.
Service Charge - The fee paid to a managing agent for the ongoing maintenance of a leasehold property.
Shared Ownership - This is where you purchase a share of a property (usually between 25% and 75%) and pay rent on the remaining share, which is owned by the housing association.
Stamp Duty - Stamp duty, or stamp duty land tax (SDLT) to give it its full title, is the tax levied by the government on house purchases. The amount of stamp duty you'll pay depends on if you are a first-time buyer and whether you're buying a main, secondary residential property or a buy to let investment.
Status - A shorthand term for the borrower's credit record and employment situation.
Standard Variable Rate (SVR) - A mortgage lender's main interest rate. Fixed-rate and discount loans usually switch to SVR when the special offer period expires. Conversely, tracker mortgages switch to a fixed percentage above Bank of England Base rate (or LIBOR).
Survey - An expert examination of the property you are considering buying, aimed at discovering any structural flaws or repairs needed which you may have failed to notice yourself.
Tie-in Period - This is the period during which you are locked in to your mortgage deal. You’ll have to pay an early repayment charge if you leave your mortgage during this period.
Tracker - Tracker mortgages link your interest rate to a benchmark, such as Bank of England base rate. The rate you pay moves up and down in line with the benchmark selected.
Term - The period of time over which your mortgage will run. Historically 25 Years was the standard term, now it is not unusual to have longer terms, sometimes into retirement.
Total Amount Payable - The total cost of repaying a mortgage.
Underpayment - A mortgage repayment smaller than the regular agreed sum. Some flexible mortgages have this feature, which can be useful for people with irregular income.
Valuation - Carried out by the lender to ensure the property you are borrowing against is worth the amount of mortgage being requested.
Variable Interest Rate - See Standard Variable Rate (SVR).