In this section Mortgage Success has compiled a summary of mortgage terms, frequently asked questions, jargon-free terminology and other general information to help you get to grips with everything you needed to know about mortgages, but were afraid to ask!
The list of mortgage terms and FAQ’s is in alphabetical order for ease of use.
APR: This stands for the Annual Percentage Rate, and is calculated by taking the total interest cost over the entire term of the mortgage, plus any fees.
Arrangement fee: This is the set up fee for your mortgage, and can include a range of fees such as booking and application fees to cover the costs of processing your application.
This is the fee for the mortgage product, and is sometimes known as the product fee or completion fee. You can sometimes add this to your loan, but this will increase the amount you owe, your interest and your monthly payments.
Arrangement fees are an important consideration when picking a particular mortgage deal and can amount to thousands.
Arrears: The term ‘arrears’ legal term for the part of a debt (i.e. mortgage) that is overdue after missing one or more required payments.
The amount of the arrears is the amount accrued from the date on which the first missed payment was due.
You are perhaps likely familiar with the term ‘your home is at risk may be repossessed if you do not keep up the repayments on your mortgage’?
To get your home repossessed is very much the last resort for a lender but to get to that stag means you have ‘defaulted’ at least once on your mortgage repayments and you have missed one or more repayments and been in an arrears situation.
If you continually fall into arrears you’re at risk of losing your home. If you cannot avoid missing a payment speak to your lender at the first opportunity.
Base rate: This is the rate of interest set by the Bank of England which is then used by many banks and lenders to base some mortgage deals on, such as ‘base rate’ trackers, which are pegged at a certain percentage rate above the base rate.
Many lenders’ standard variable rates (SVR) are also usually set depending on any base rate moves, although this will be down to the individual lender’s discretion.
Booking fee: This is a mortgage set up fee, sometimes lumped under ‘arrangement fees’.
This is sometimes charged when you simply apply for a mortgage deal and is not usually refundable even if your mortgage falls through.
Some mortgage providers will include it as part of the arrangement fee, while others will only add it on depending on the size of the mortgage.
Bridging loan: A bridging loan is a short-term loan that, as the name iplies ‘bridges’ the time period between two property transactions. It is used to cover shortfalls between buying one property and selling another.
Bridging loans can be an expensive method of short term borrowing. However, if you can live with the expense and wish to avoid losing your next house purchase because your currently property sale completion is delayed, then a whole of market broker such as ourselves can source the best option for you.
Buy-to-let: This is a property bought for the specific purpose of letting it to tenants, and there are many lenders that offer buy-to-let loans to fit these borrowers. These tend to be at higher rates than standard residential mortgages.
Buildings insurance: Your lender will require you to have buildings insurance for your property as a condition of the loan. This protects you both against risks such as your house burning down, being flooded or suffering from a landslip or subsidence.
Capital: The ‘capital’ refers to the amount of mortgage/loan you borrow to buy a property.
Capped rate mortgage: A capped rate is a loan product from some lenders that doesn’t let your repayments rise above a certain level, even if interest rates rise during the term of the ‘cap’. However, if interest rates go down it will allow your payments to drop as well.
Cashback incentive: Largely used by lenders for First Time Buyers or to entice mortgage switchers, this type of ‘incentive’ gives you a cash rebate on completion of the mortgage.
The sum is either a percentage of the amount you borrow, or a fixed sum. The cashback can help you to cover some of the expenses of setting up home, carrying our home improvements if switching lenders. However, whilst the cashback is enticing it should be noted that this bonus often comes at the expense of a higher interest rate, or is subject to a penalty if you repay the mortgage early. A whole of market broker can help you navigate the best deals and the terms and conditions to find the most suitable loan deal.
Collar rate: A collar rate basically means that your monthly repayment can’t go below a certain, minimum level.
Collar rates are often put on tracker mortgages by lenders, to make sure that the rate doesn’t fall to an amount that’s too low to make the loan commercial unviable for them.
Whilst there are some lenders that offer ‘collar’ free tracker loans, the collar rate has seen a resurgence since the financial crisis of 2008, as many lenders were caught out when the Bank of England ‘base rate’ dropped to an historic 0.5% shortly after.
To put this into context, the base rate in 1990 was an historic high of 15% but saw an average of approx 6% during the 1990’s and 4.5% to 5% during the period 2000 to 2007.
Completion: Once the purchase or remortgage of a property is ‘complete’ and you are now legally the new owner, or the new mortgage has formally begun this stage of the process is referred to as ‘completion’.
Conveyancing: Conveyancing is the legal process of transferring the ownership of the property which is involved in the process of buying, selling or remortgaging your home/property.
Conveyancing fee: This is the fee that your solicitor or a licensed conveyancer will charge for undertaking the legal work involved in buying, selling or remortgaging your property, i.e. the conveyancing process.
Credit score: This is a score that every borrower has and is used to help assess their suitability for borrowing. A poor credit score is typically a result of past missed repayments on loans or credit cards, for example.
Deposit: The ‘deposit’ is amount of money that you can put down towards the purchase of a property. Typically you would need at least 10% of the property’s value as a deposit, although there are a growing number of lenders that will let you have a mortgage for a deposit of less than 10% and 5% deposit loans are more common place again.
Discounted rate: This term denotes the offer a discount on another interest rate – usually a lender’s Standard Variable Rate (SVR).
So if a lenders SVR is currently 5% and the discounted rate is 1% below SVR, you’d pay a rate of 4%. Discounted rates are still variable, so your payments can go up as well as down.
Most discounted rates are for an introductory term of two, three or five years, some will even have a collar, and there are even a few iscounted rates that could even be for the entire term of the mortgage (i.e a lifetime discounted rate).
Drawdown: The ‘drawdown’ is a term that refers to when you actually physically borrow the money from your lender and usually indicates that the house purchase, home mover or mortgage switch is in the final stages and near ‘completion’.
Early Repayment Charge: Some mortgage deals levy an early repayment charge 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.
Typically the charges range from 1–5% of the value of the early repayment. For example, a £200,000 mortgage with a 3% charge would cost you £6,000.
This fee might not always apply, so be sure to check what the rules are with each mortgage provider, especially if you want to make an early repayment in the future.
If you intend to pay off your mortgage with regular overpayments or a future lump sum be sure to let your broker know at the outset, so you can weigh up all the options.
Equity: This is the amount of the property value over and above from the sum you owe on the mortgage – this is known as the ‘equity’ in your property. If you home is worth £200,000 and your remaining mortgage is £100,000, than you have 50% equity of £100,000. Your Loan To Valuation i.e. LTV therefore is also 50%.
Fixed rate mortgage: This is a mortgage deal over a period of years – typically between two and five – that offers a fixed interest rate for the security of regular monthly repayments.
Guarantor: This is somebody – for example a parent for their child – whom guarantees to meet the mortgage sum if the borrower is unable or won’t meet repayments.
Higher Lending Charge: A fee sometimes charged by lenders if you borrow a particularly high LTV of around 90%, although these fees are less common these days and in most cases its only likely to be a requirement if you have a small deposit for a house purchase mortgage.
The fee is often 1.5% of the mortgage and it pays for the lender’s insurance for the higher risk if you can’t pay back the mortgage and they have to sell your property at a loss
Interest-only mortgage: This type of mortgage enables the borrower to only pay the interest on the capital sum. However, this means your loan balance does not reduce over the term and will still have to be repaid at the end of the term.
Key facts illustration: This sets out the key details of the loan that the borrower will need to know.
Loan to value (LTV): This is the proportion of the property price that you borrow when you take out a mortgage. For example, if you borrow £90,000 on a property worth £120,000, this is an LTV of 75%.
Mortgage broker fee: This fee is for a broker such as ourselves. Broker fees are very transparent and in most cases can be fixed and covers the cost of any advice plus the arranging of the loan.
Mortgage term: The length of time you agree to pay off the mortgage in – typically, 25 years, but it can be more or less than this.
Negative equity: This is a situation when the amount you owe on your mortgage is greater than the value of your property. It particularly becomes a problem if you want to move house.
Offset mortgage: This is a particular type of loan which allows borrowers to ‘offset’ their savings against their mortgage debt. So, for example, if you have £60,000 offset balance left and £10,000 savings, you only pay interest on £50,000 of the of loan that isn’t ‘offset’.
Overpayments: Typically, lenders will allow you to make 10% overpayments every year on your home loan debt penalty-free, even if you are tied into a deal. Overpaying on your mortgage will result paying less overall interest and shortening the time it takes to clear the debt.
Remortgaging: This is when you arrange a new mortgage on your current home.
Repayment mortgage: This is a type mortgage when you pay the interest as well as a portion of the capital debt with each repayment, so by the end of the term you will no longer owe the lender anything, provided you keep up repayments.
Standard Variable Rate (SVR) is just that, the standard rate of interest that the lender charges. This is a variable rate, so it can go up or down depending upon changes to the Bank of England base Rate.
Tracker mortgage: These mortgage deals are typically linked to the Bank of England base rate, and will rise or fall as they ‘track’ this to set your monthly repayments.
Valuation fee: As part of your application (be it a purchase, or remortgage) the lender will wish to be apprised of the value of your property and make sure it’s worth the amount you wish to borrow.
Some lenders might waive this fee on certain deals. On others, where the loan to valuation has improved significantly (e.g. for loans less than 50-70% of the last valuation) some lenders will take the view that such a remortgage/mortgage is such low risk that they don’t require a new valuation.
it is important to note that the lender’s valuation/survey only looks at the property value, not necessarily the potential problems and future costs.
You can also pay for your own property survey to identify all the repairs or maintenance that might be needed. Particularly for a home purchase as opposed to switching your mortgage but staying in the same home.