A-Z Mortgage Glossary
AIP or Agreement in principle – A certificate given by a mortgage lender to say how much you can borrow. This means you can be sure you are looking at properties in the right price range. It also means estate agents will take you seriously. AIPs are given subject to full underwriting, so you will still need to apply for a mortgage and submit all your documents.
Arrangement fee – This is what you pay to the lender to set up your mortgage. The amount of fees can vary significantly. Quite often the lower the interest rate on offer is, the higher the fee; although more complex cases such as buy to let or adverse credit mortgages often have higher fees. These fees can be paid on application or added to the loan. If you do choose to add to the loan be aware that you will be charged interest on this amount over the term of the mortgage, making it more expensive.
Affordability – This is how lenders assess how much they are happy to lend to you. They take your income (salary or earnings from self-employment, plus other sources such as rental income, certain state benefits or other income sources like child maintenance) and also look at your committed outgoings (payments to debt, pension contributions, travel or childcare costs along with costs of living like utilities) to see what level of monthly payment is affordable to you – both now and in the future. This will determine the amount they are happy to lend to you.
Adverse Credit – Or “bad” credit. You would likely need an Adverse Credit Mortgage if you have any of the following; a CCJ, a Default, Missed Payments on a mortgage, credit card or loan, a Debt Management Plan, an IVA or have been previously bankrupt or repossessed.
In this case you would need a specialist lender, as mainstream lenders often decline this kind of application. Interest rate and fees tend to be higher on these kinds of Mortgages.
Arrears – The financial and legal term that refers to the status of payments in relation to their due dates. If one or more payments have been missed, the account is “in arrears”. This is recorded on your credit file and, if you do not make up these payments, you are at risk of the property being repossessed. In this instance it is imperative you speak to either your lender, or a recognised debt charity such as StepChange for assistance.
ASU – Accident Sickness and Unemployment insurance. A type of income protection that is designed to cover mortgage payments if you are unable to work for those reasons.
Base Rate – Or to give it the full name, Bank of England Base Rate. This is the rate set by the Bank of England and sets the level of interest that banks charge for borrowing and pay for saving. The purpose is to regulate inflation. The current Base Rate (as of 20th August 2020) is 0.10%, which is the lowest it has ever been – it was reduced to this 19th March 2020.
Booking fee (also see arrangement fee) – If they are called booking fees, they are more likely to be payable upfront and be non-refundable.
Buy-to-Let – A type of mortgage that allows a property to be bought for the specific purpose of letting it out to tenants. These tend to be at higher rates than residential mortgages and Buy to Let mortgages are unregulated.
Buildings Insurance - an insurance policy that covers the financial cost of repairing damage to the physical structure of a property in the event of damage or theft. This includes the roof, floors, and walls, as well as any fitted or permanent fixtures (i.e. a fitted kitchen). The cause of the damage is important. A typical policy will cover the holder from damage which is out of their control, and may include the following: Flooding, Fires, Malicious damage and vandalism, and Storm damage
Credit score – Agencies such as Experian and Equifax will hold a record of your credit history, and lenders use this information to assess if you are a good risk to offer a mortgage to. A lower credit score is typically made up of past missed or late payments on agreements such as loans or credit cards.
CCJ – County Court Judgement. If you delay paying your debts the creditor will take you to court and, if found liable, you will be issued with a CCJ. This will impact your credit score. Once repaid the CCJ is satisfied and although your credit file is updated, the CCJ remains visible for 6 years.
Capital and Interest – another term for Repayment Mortgage. Your monthly payment is split, partly to repay the interest and partly to reduce the outstanding balance.
Cashback – Sometimes this is offered on a mortgage, usually in lieu of a free valuation or free legal fees. It can either be a fixed amount or a percentage of the amount borrowed.
Completion – When the sale and purchase agreement is processed, and ownership of the property passes to the purchaser. This will usually be the day you would get the keys.
Conveyancing – The legal process of buying and selling property.
Contents Insurance – This is not compulsory but is recommended. It will cover your possessions in the event of fire, theft, damage, or loss. The contents of your home would be things you would take with you if you moved – furniture, clothes, jewellery, electrical items etc.
Critical Illness Cover – Also known as Serious illness insurance. Pays out with a lump sum or monthly income on diagnosis of an illness specified in the policy. Most policies cover over 30 conditions with the most claimed for conditions being Cancer, Heart Attack, Multiple Sclerosis and Strokes (According to the Aviva 2019 claims report)
Deposit – The amount of money you are putting towards the purchase.
Debt Consolidation – Increasing your mortgage to pay off loans and credit cards. If you choose carefully, this should save you money each month as the mortgage rate should be cheaper than the interest rate on loans, credit cards and other finance. However, you may pay more over the term of the loan.
Decision in Principle (see also Agreement in Principle).
Default – When a lender closes your account due to missed payments, usually when you are between 3 and 6 months behind. This will impact your credit score. Once repaid the Default is satisfied although your credit file is updated, the Default remains visible for 6 years.
Early Repayment Charge - Some mortgage deals charge a fee if you pay some or all of your mortgage off before the end of the term, or transfer to another rate before the end of the product period.
Equity – The difference between the value of the property and the outstanding mortgage.
Equity Release Mortgage - A type of mortgage for the over 55s that allows you to access (or release) the equity in your home and turn it into a cash lump sum.
Endowment – A life assurance policy that is designed to pay off an interest only mortgage. Very popular in the 80’s and 90’s but less so now.
Exchange of contracts – The point in the legal process of purchasing property where contracts are signed, and the deposit paid. Once signed, the contracts become legally binding and if either party pulls out, they will need to pay the other compensation.
Fixed rate Mortgage – A short term mortgage deal (usually between 2 and 5 years) that offers a fixed interest rate for the security of regular monthly repayments.
Flexible Mortgage – A mortgage where overpayments and payment holidays are allowable, and in some cases, you can also borrow back or make underpayments if you have previously overpaid. You may also be able to use your savings to offset your mortgage balance and save interest.
Freehold – When you own both the property, and the land it is built on.
Family Help – There are various schemes around that can allow family members to help you with a purchase. This can be by gifting or loaning the deposit, or by even acting as a guarantor for you.
Guarantor - This is somebody who guarantees to meet the mortgage sum if the borrower is unable to or will not meet repayments.
Graduate mortgages – some lenders offer specialist graduate mortgage products, depending on your career. They may offer to lend more of the basis of an income that increases each year or even have a reduced deposit.
Ground rent – if your property is leasehold (see leasehold) this is the fee paid to the freeholder each year.
Help to Buy – A government scheme to aid purchasers with homes they could not otherwise afford. This could be by an Equity loan or Shared ownership.
With an Equity loan the Gov will lend up to 20% (or up to 40% in London) of the purchase price which will be added to your deposit – you will need to put in a minimum of 5%. You then get a mortgage for the remaining 75%.
With a shared ownership you own part of the property and pay a mortgage on this, whilst the housing association owns of the rest of the property and you would pay rent on this.
Homebuyer’s Report – A type of survey that is more detailed than the lenders’ Mortgage Valuation. A homebuyer’s report will tell you about any major problems such as rot, damp, subsidence, but the surveyor is non-intrusive so will not look behind furniture, lift floorboards or drill holes. It provides traffic light indications as to the state of the various parts of the property to give you a summary of the possible risks affecting the home and a list of defects that you may wish to address if necessary.
Interest Only – With this type of mortgage, you are never repaying the debt, only paying the interest charges each month. This means that at the end of the term you will still owe the same amount and it is your responsibility to ensure that you have the funds to repay the loan at the end of the term.
Interest – The fee the borrower pays in return for using the lender’s money. The interest rate can be fixed or variable.
Income Multiples – This used to be how lenders would assess how much they could lend you, for example 3x joint salary. Now the lenders use an affordability calculation (see affordability) that factors in outgoings as well as income.
Income Protection Insurance – Provides a monthly benefit in the event you suffer from an accident or illness meaning that you cannot work.
Intermediary – Also known as mortgage broker or Mortgage adviser. The person who advises on and arranges the most appropriate mortgage for you.
Impaired credit (see Adverse Credit)
Joint tenant’s vs Tenants in common –
Joint tenancy is a type of ownership where each person owns the whole of the property - so each person has a 100% stake in the property's value. In the eyes of the law, you must all act together as a single owner. As a joint tenant, you cannot leave part of the property to someone else in a will. If one of you dies, the property automatically passes to the other owner(s). This is known as 'right of survivorship'. Couples that own property together would typically be joint tenants.
As tenants in common you each own a separate share of the property. These shares do not have to be equal size - for example, you might own 40% of the property while the other owner has a 60% share. This type of joint ownership is typically used by friends or relatives who are buying together, or alternatively for couples who want to use it as a tax planning tool.
Tenants in common can each leave their share of the property to whoever they like in their will.
Key Facts Illustration – (KFI) Also knows as a Mortgage Illustration or an ESIS (European Standard Information Sheet). The document that sets out the mortgage that has been recommended to you. It will detail the term, product, interest rate and monthly payment as well as any fees, penalties, or incentives.
LTV (loan to Value) - This is the proportion of the property price that you borrow when you take out a mortgage. For example, if you borrow £150,000 on a property worth £200,000, this is an LTV of 75%. Generally, the lower the loan to value, the safer the lender will view the loan and you’ll have a lower interest rate.
LIBOR (London Inter-Bank Offered Rate) – The interest rate at which banks lend to each other.
Leasehold – The alternative to freehold. You only own the property, not the land as well. The lease refers to the length of time you will own the property for.
Most flats are leasehold property, however more recently some new build houses are as well.
A lease will usually be initially granted for between 99 and 125 years. The number of years left on the lease reduces each year, and the lease length affects the value of the property, and the ability to secure a mortgage against it. You can usually pay to extend a lease before it expires, which can add value to your property, especially if your lease is short. You need to have owned the property for at least two years.
Lifetime Mortgages – (see also Equity Release) A lifetime mortgage is when you borrow money secured against your home, provided it's your main residence, while retaining ownership. When you die or move into long-term care, the home is sold and the money from the sale is used to pay off the loan.
Let-to-Buy – If a homeowner keeps hold of their existing home and rents it out to tenants, and then buys a new home for themselves and their family to live in, this is called a Let-to-Buy. It is a sort of reverse version of a Buy-to-Let.
Land Registry Fee – This is paid to the Land Registry by your solicitor to register ownership of an area of land.
Local Authority Searches - A check carried out by the buyer's solicitor to check that there are no proposed developments around the property such as roads, railways or other buildings. The check also includes details of the planning permission for the property and whether the council has served any enforcement notices on the property.
Mortgage – A loan to buy property, where the property acts as security against you paying back the loan. If you fail to keep up repayments on the loan the property may be repossessed.
The Company lending the money is called the Mortgagee
The borrower is called the Mortgagor
MPPI (mortgage payment protection insurance) also known as ASU (see above) - This insurance provides a monthly benefit to help you pay your mortgage for up to 12 months if you are unable to work due to accident, sickness and/or involuntary unemployment.
Mortgage Term – The length of time you take the mortgage over – for example 25 years.
Negative Equity – This is where the amount owed on the mortgage is larger than the value of the property. It can cause problems if you want to sell the house.
Overpayment – Most mortgages nowadays allow you to make overpayments, even if you are tied into a deal. Typically, no more than 10% of the outstanding balance per year. Overpayments can be lump sums, or by increasing your monthly payments for a regular overpayment. Overpayments have an immediate impact on the outstanding balance resulting in you paying less interest overall and reducing the mortgage term.
Offset Mortgage - This is a mortgage which allows borrowers to ‘offset’ their savings against their mortgage debt. Using savings, however small, to cancel out mortgage debt can make sense. These mortgages are especially popular with self-employed people who save up each year to pay a tax bill. With interest only paid on the difference between your savings balance and your mortgage balance you see the same effect as having overpaid the mortgage, but you retain the ability to get the money back if needed. So, for example, if you have £60,000 offset mortgage and £10,000 savings, you only pay interest on £50,000 of the of mortgage.
Offer - A mortgage offer is official confirmation from a lender that it will provide you with a mortgage. You will only be given a mortgage offer once you have gone through the full mortgage application process and provided the lender with all the information, they require to carry out their underwriting checks. The valuation will also have been carried out.
After you have accepted the mortgage offer, your solicitor can start the final phase of buying your property. That means they will agree a date to exchange contracts with the seller.
Porting - The process of transferring your existing mortgage product to a new property. All of the terms and conditions of your mortgage product remain the same but the mortgage is moved onto the new property that you are purchasing. When you port your mortgage, you may want to borrow extra and this will be on whatever rate is available at the time.
Payment Holidays – A short break from regular mortgage payments. Usually only available to borrowers who have previously overpaid but during the Covid19 pandemic they were available to all.
Product Transfer - when you move from your existing mortgage deal to a new one with your current lender, either because they are offering a competitive rate, or your circumstances mean another lender would not accept you at this time.
Repayment Mortgage - Your monthly payments are partly to repay the amount you borrowed and partly to pay the interest on the outstanding mortgage. This is also known as a capital and interest mortgage.
Remortgage – When you change your mortgage to a different lender without moving to a new house. You can do this to save money, to change to a different type of mortgage or to release equity from your home.
Right to Buy - A tenant in a council owned property may purchase the property at a discount depending on length of their tenancy. This is now being opened up to some Housing Association tenants too.
Repayment Vehicle – If you have an interest only mortgage, you need to evidence how you eventually plan to repay the loan. This could be by selling another property, stocks and shares, or other investments.
Repossession – If you are in arrears on your mortgage, the lender can apply to the courts to take possession of the property and sell it to re-coup their losses. This means you will have lost your home.
Stamp Duty - This is a tax payable on the purchase of a property by the purchaser.
For properties with a purchase price of up to £125,000, no stamp duty is charged.
For properties between £125,000 and £250,000, 1% stamp duty is payable on the purchase price.
For properties between £250,000 and £500,000 it is 3% and for properties over £500,000 it is 4%.
Please note for First Time Buyers properties with a purchase price of up to £250,000, no stamp duty is charged.
If you are buying a second, or subsequent property an additional fee of 3% is payable.
In July 2020, the government temporarily increased the stamp duty threshold to £500,000 for property sales in England and Northern Ireland, until 31 March 2021. This means if you are buying a property under £500,000 there is no stamp duty to pay. More expensive properties will only be charged on the value above £500,000. The 3% levy on additional homes still stands.
Shared Ownership - you buy a share of a property (usually between 25% and 75%) and pay rent on the remaining share, which is owned by the housing association.
SVR - The default mortgage interest rate that your lender will charge after your initial mortgage deal period ends. This is usually higher than your original rate and the reason why people remortgage.
Secured Loan – Otherwise known as a second charge mortgage. A way to borrow further on your property without changing the original mortgage. This could be because you are in the middle of a mortgage deal and to leave this early would come with a high early repayment charge.
Term – The overall number of years your mortgage runs for.
Tie in Period - This is the period during which you are 'locked in' to your mortgage deal. You will have to pay an early repayment charge if you leave your mortgage during this period
Tracker Mortgage - The interest rate on your mortgage tracks the Bank of England base rate (see above) at a set margin above or below it.
Unencumbered – This is where the property is owned outright, with no mortgages or loans secured against it.
Unacceptable Properties – Not all properties are suitable for a mortgage, and if you want to buy of these it can be tricky to find a lender who will accept it. It is always worth speaking to a Mortgage Adviser before making an offer on one of these types of properties, as you could be limited on who will lend:
Non-standard construction such as Post War prefabs, Mundic concrete, kit houses or log cabins.
Grade 1 listed buildings.
Properties with poor EPC ratings.
Properties in extremely poor condition, or that have dry rot or Japanese knotweed.
Valuation – The lender’s check on the property to find out what it is worth and if they are happy to lend on it. You might want to consider your own survey (such as a homebuyer’s report) to check for repairs and maintenance the property may need.
Variable rate - The interest rate the lender charges. it goes up and down and your repayments change accordingly.
MORTGAGE RISK WARNINGS
‘A mortgage is a loan secured against your home’
“Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured against it”
“Think carefully before securing other debts against your home”
“Equity Release will reduce the value of your estate and can affect your eligibility for means tested benefits.”