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Glossary
of Mortgage Terms
Italics
denote a cross-referenced entry
Accident,
Sickness and Unemployment Insurance (ASU):
In the event of an accident, sickness or involuntary
unemployment befalling a borrower, this insurance will cover their mortgage
repayments. Some Lenders attach
mandatory insurance cover to their most attractive rates, although this is
increasingly uncommon.
Also known as: Mortgage Payment Protection Insurance (MPPI).
Additional
Security Fee: See Higher Lending Charge.
Adverse
Credit: This is an umbrella term used of applicants with
poor credit history. This may include
mortgage arrears, defaults, County Court Judgements (CCJs), bankruptcy, Individual
Voluntary Agreements
(IVAs) and house repossession. Borrowers with elements of adverse credit are
offered higher rates than standard
Full Status applicants are, usually with terms and conditions
relating to the extent of their adverse credit history.
Often, adverse credit mortgages are Libor-linked rates.
Annual
Percentage Rate (APR): The APR is a rate calculated using
a generic formula applicable to all
Lenders, which includes all the costs associated with a mortgage. This allows
for easy comparisons to be made
between the different mortgage products offered by each Lender.
Arrangement
fee: This fee may be charged on specific products and is
either payable in advance, added to the
loan or deducted from the advance on completion. It covers the administrative
expenses incurred whilst
processing an application.
Base
Rate: Every month the Monetary Policy Committee sets the
Bank of England Base Rate, to which all
mortgage rates are linked either directly, as Tracker mortgages, or
indirectly, in all other cases.
Booking
fee: This fee may be charged on specific products and is
either payable in advance, added to the loan
or deducted from the advance on completion. It is normally payable in order
to reserve funds when a product is
likely to sell out quickly.
Buildings
and Contents Insurance: This insurance covers damage to the
mortgaged property and/or its
contents in a variety of specified scenarios. It is compulsory for all Lenders,
and if the Lender's own insurance is
not taken they will often charge an administration fee. Some Lenders attach
mandatory insurance cover to their
most attractive rates, although this is increasingly uncommon.
Buy-to-Let
mortgage (BTL): This is a mortgage for property that will
be let by the borrower to other tenants.
When Lenders calculate how large a loan the borrower can afford to repay on
BTL they do so primarily on the
basis of projected rental income, rather than salary income multiples.
Capital
and Interest mortgages: With this method the monthly mortgage
repayments pay off both the initial
loan amount and the interest that is charged upon it. At the end of the loan
term the entire debt will be repaid.
Also known as: Repayment mortgage.
Capital
Rest Period: This is the regularity with which a Lender calculates
the outstanding balance on
mortgages, and hence the size of monthly repayments. It is usually annually,
monthly or daily. With Capital and
Interest mortgages this can be important; an annual interest calculation means
that the borrower will pay interest
on capital repayments that have been made in the course of that year. In contrast
a daily or monthly interest
calculation means that the balance, and consequently the interest charged,
will reduce with every capital
repayment made.
Capped
rate mortgage: This is a mortgage that is guaranteed not
to rise above a specific rate (the 'cap') within a
set period. Unless this is combined with another rate, such as a Discount or
Tracker, the Lender's SVR will be
charged if it is lower than the capped rate; if it rises above this ceiling
the rate charged will remain at the capped
level. There are often early repayment charges applicable if the loan is repaid
within the capped period.
Cashback mortgage: This is a mortgage in which the Lender refunds a sum of
money, either as a percentage of
the loan or a flat figure, to the borrower upon completion. With this type
of offer the borrower will typically be
tied to the Lender's SVR by early repayment charges necessitating repayment
of the cashback if the loan is
repaid within a set period.
Completion:
This is the moment when a transfer of property has legally taken
place, after all legal
documentation has been completed and funds have been transferred from the buyer's
solicitor to the seller's
solicitor.
Contents
Insurance: See Buildings and Contents Insurance.
Conveyancing:
This is the legal process whereby ownership of a property is transferred.
Current
Account mortgage: This is a fully Flexible mortgage combined
with a current account. Money in the
current account is automatically set against the mortgage balance and interest
is only charged on the outstanding
amount, meaning interest payments are reduced.
Discounted
rate mortgage: This is a variable mortgage that is discounted
from a Lender's SVR by a set
percentage within a set period. There are often early repayment charges applicable
if the loan is repaid within
the discounted period.
Discounted
Tracker rate mortgage: This is a variable mortgage that is
discounted from the Bank of England's
Base Rate by a set percentage within a set period. There are often early repayment
charges applicable if the loan
is repaid within the discounted period.
Early
Repayment Charge (ERC): This is a penalty charged on traditional
(i.e. non-Flexible) mortgages when
the loan is repaid in full within a set period. Usually it applies on a pro
rata basis when capital repayments are
made outside of the agreed monthly payments. Many Early Repayment Charge periods
are linked to those of
offers, such as Capped, Discounted or Fixed rate periods. However, some mortgage
rate have extended Early
Repayment Charges which tie-in borrowers even while they are paying the Lender's
SVR.
Also
known as: Early Redemption Penalty (ERP); Redemption Penalty.
Early
Redemption Penalty (ERP): See Early Repayment Charge (ERC).
Endowment:
A repayment vehicle associated with Interest Only mortgages.
Exchange
of Contracts: This is the stage in England, Wales and Northern
Ireland that the deposit money is paid
and both parties are legally bound to fulfil the agreed conditions of sale
and purchase.
Exclusive
mortgage: This is a mortgage only available to intermediaries
through a specific packager, in
conjunction with a Lender who provides the funding.
Fixed
rate mortgage: This is a mortgage that is charged at a fixed
rate within a set period. There are often early
repayment charges applicable if the loan is repaid within the fixed period.
Flexible
mortgage: As its name suggests, this is a type of mortgage
that offers considerably more flexibility than
traditional mortgages. Although specific details vary between Lenders, the
core features of Flexible mortgages
are:
- - daily or
monthly capital rest
- - ability
to make overpayments at any point of the loan term without an
early repayment charge
In addition,
many Flexible mortgages allow borrowers to:
- - defer payment
by taking payment holidays - drawback overpayments - drawdown
further advances
- - underpay
without penalty (often only to the amount of any previous overpayments)
Freehold:
The buyer of a Freehold property owns both the property and the
land it stands on indefinitely. See
also Leasehold.
Full
Status: This term describes borrowers with a good credit
history who are not self-certifying their income.
Gazumping:
This is when a prospective purchaser has an offer for a property
accepted, before another potential
buyer puts in a higher offer for the same property.
Higher
Lending Charge: This is a premium charged by Lenders in order
to indemnify themselves, and NOT
the borrower, against any financial shortfall they may incur in the event of
repossessing a property which must
then be sold at a loss. It is applicable if the amount required is higher than
a certain percentage of the property
value, usually 75% LTV; often the Lender will pay the cost of this insurance
themselves between 75% and 90%
LTV. The charge may either be added to the loan or deducted from the advance
on completion.
Also known as: Additional Security Fee; Indemnity; Mortgage Indemnity Guarantee
(MIG).
Homebuyers'
Report: See Valuation Fee.
Income
Multiples: These are the multiples that Lenders apply to
borrowers' income in order to determine the
maximum loan they will offer them.
Indemnity:
See Higher Lending Charge.
Individual
Savings Account (ISA): A repayment vehicle associated with
Interest Only mortgages.
Interest
Only mortgages: With this method the initial loan amount
remains the same throughout the term of the
loan, while the monthly mortgage repayments only pay off the interest being
charged on this amount. For this
reason, Interest Only mortgages are tied to investment in one of a number of
different repayment vehicles, which,
ideally, should cover the initial loan amount at the end of the loan term.
These repayment vehicles include
endowment policies, personal pensions, ISAs etc.
Introducer
fee: See Procuration Fees.
Leasehold:
The buyer of a Leasehold property owns the property for a set number
of years, but doesn't own the
land on which it stands. See also Freehold.
Let
to Buy mortgage (LTB): This is a mortgage where the borrower's
current property is let to other tenants
and the rental income is used to cover the mortgage repayments on a new property,
bought as the borrower's
main residence. When Lenders calculate how large a loan the borrower can afford
to repay on LTB they do so
primarily on the basis of projected rental income, rather than salary income
multiples.
Libor-Linked
mortgage: This is a variable mortgage that is either above
or below the London Inter-Bank
Offered Rate by a set percentage within a set period. The Libor rate is set
independently every 3 months. It is
often associated with Lenders that offer loans to borrowers with elements of
adverse credit.
Life Policy: See Term Assurance.
Loan
to Value (LTV): This is a percentage figure of the loan amount
in relation to the property value. For
instance a £100,000 property bought with a mortgage of £70,000
has an LTV of 70%. The higher the LTV, the
higher the interest rate charged will be; above certain LTVs a Higher Lending
Charge comes into effect.
Mortgage
Indemnity Guarantee (MIG): See Higher Lending Charge.
Mortgage
Payment Protection Insurance (MPPI): See Accident, Sickness
and Unemployment Insurance
(ASU).
Non-Conforming:
See Adverse Credit.
Offset
mortgage: This is a fully Flexible mortgage which allows
a borrower to keep balances (such as mortgage
debt, savings account and current account) in separate accounts, but, for the
purposes of interest calculation, all
balances are aggregated. Money in savings or current accounts is set against
the mortgage balance and interest is
only charged on the outstanding amount, meaning interest payments are reduced.
Overpayment:
This is when an unscheduled capital repayment is made or when monthly
payments are
increased, in order that the mortgage is repaid before the end of the mortgage
term, saving considerable sums in
interest. Many traditional (i.e. non-Flexible) mortgages include early repayment
charges if overpayments are
made within a set period. In contrast, Flexible mortgages allow unlimited overpayments
without penalty and,
increasingly, mortgages are semi-Flexible, allowing borrowers to overpay a
certain percentage of their loan each
year without incurring early repayment charges.
Pension:
A repayment vehicle associated with Interest Only mortgages.
Personal
Equity Plan (PEP): A repayment vehicle associated with Interest
Only mortgages.
Portability:
A portable mortgage is one that can be transferred to another property
without penalty if the
borrower moves house within an early repayment charge period. The new interest
rate that the Lender will be
prepared to offer depends on whether the loan amount increases or decreases.
If the latter, early repayment
charges may apply.
Procuration
Fee: This is commission paid by Lenders to intermediaries
for introducing business to them. If the
intermediary receives more than £250 they are obliged under the Mortgage
Code to disclose to the borrower the
exact amount they received.
Also known as: Introducer Fee.
Redemption
Penalty: See Early Repayment Charge (ERC).
Repayment
mortgage: See Capital and Interest mortgages.
Right
to Buy (RTB): This is when a tenant living in a council-owned
property purchases it at a discount, the
size of which depends on the length of their tenancy.
Self
Build: This is a mortgage for property under construction.
The loan is paid out in stages as the property is
completed, in order to ensure the LTV does not rise too high at any point.
Self
Certification mortgage (S/C): This is a mortgage where a
borrower states their income and signs a
confirmation of their ability to repay a loan, without having to provide evidence
such as accounts, payslips or
bank statements. Consequently, S/C rates are often higher than standard Full
Status mortgages.
Shared
Ownership: This is a scheme operated by a Housing Association
where the borrower owns part of a
property, and pays the mortgage on this, while a Housing Association owns the
rest of the property, and the
borrower pays rent on this.
Split
Loan: This is a mortgage that is taken partly on a Capital
and Interest basis and partly on an Interest Only
basis.
Stamp
Duty: This is a government tax charged on properties with
a purchase price in excess of £60,000.
Properties are charged 1% from £60,000 to £250,000, 3% from £250,000
to £500,000 and 4% above £500,000.
It is not payable on remortgages.
Standard
Variable Rate (SVR): This is a variable rate determined entirely
at each Lender's discretion. Unless
linked to Libor or the Bank of England Base Rate, the SVR is the reverting
rate at the end of any special offer
period, such as a Capped, Discounted or Fixed rate.
Term
Assurance: This insurance repays the mortgage in the event
of the insured person's death.
Also known as: Life Policy.
Tracker
mortgage: This is a variable mortgage that is either above
or below the Bank of England's Base Rate
by a set percentage within a set period.
Valuation
Fee: Whether purchasing or remortgaging the Lender undertakes
a valuation of the property to ensure
it provides adequate security. The charge is borne by the borrower and increases
exponentially with the
valuation/purchase price. There are 3 levels of valuation: in order of increasing
detail these are Basic,
Homebuyers' Report, and Structural survey. The more stringent the valuation,
the higher the fee.
Your
home may be repossessed if you do not keep up repayments on your mortgage.
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