A-Z Mortgage glossary of terms
APR
The annual percentage rate (APR) is the annual rate charged to the customer on the amount borrowed
Bank of England
The central bank of the United Kingdom. The Monetary Policy Committee (MPC) of the bank meets at regular intervals to set the base rate.
Arrears
Getting into financial difficulty and falling behind with mortgage payments is best dealt with immediately. Lenders are obliged to treat those in arrears fairly and not take advantage of them being in a vulnerable situation. Homes can be repossessed but lenders do have a responsibility to reasonably seek to reach an agreement with the borrower for repayment of the arrears.
Asking price
In Wales and England, the asking price is the price at which the property is marketed, for sale by private treaty. It is common for properties to be marketed at a higher price than the seller would accept and for buyers to make lower offers. The seller is free to choose whichever offer they choose and either side can pull out of the sale right up until contracts have been exchanged with no penalty or compensation to the other party.
Auction
Buying property at auction is a very fast process and can sometimes lead to a bargain. The key point is that once your bid is successful, you are committed to buy the property or face considerable financial loss. Contracts exchange on the same day and you pay a 10% non-refundable deposit. Completion takes place within 28 days.
Base rate
The base rate is set by the Bank of England. The members of the MPC (Monetary policy Committee) meet at regular intervals to set the rate. Banks have a Standard Variable Rate (SVR) above the base rate that may be adjusted with reference to changes in the base rate
Basis point
One hundredth of one percent
Buildings Insurance
Obtaining sufficient buildings insurance cover is usually a condition of mortgage funds being released. The sum insured is for the rebuild cost of the property. Most people opt for a combined buildings and connects insurance policy which does not have to be purchased from your mortgage provider
Buy to Let
Buy to let refers to a property which is purchased or remortgaged for the purpose of renting to a private tenant. Buy to let landlords usually require a business buy to let mortgage which is an unregulated product. Under some circumstances a landlord will be able to access a consumer buy to let mortgage which affords better protection as this is a regulated product.
Capital and interest
A capital and interest mortgage is generally referred to as a repayment mortgage. Monthly payments go towards paying the capital (amount borrowed) and interest, ensuring the mortgage is paid off at the end of the term. This contrasts to an interest only mortgage where monthly payments pay the interest each month.
Capped rate
A mortgage that has a capped rate of interest which it will not rise above for the term of the capped rate, usually a few years.
Cash back
A sum of money paid to the borrower by the lender, usually at the beginning of the loan.
Commercial Mortgage
A mortgage taken out to purchase business premises either for use by the buyer or to rent out for a profit. Commercial mortgages generally require a higher deposit.
Completion
Completion is the final stage in the home purchase process and takes place after exchange of contracts. The sale must proceed after exchange of contracts but completion refers to monies having reached the sellers account and the solicitor confirms to the estate agent that the keys to the property can be released.
Consumer buy to let
Regulated mortgage products that are available to landlords that meet certain criteria. A consumer buy to let is a product available when 1) the landlord did not initially buy the property as an investment, eg previously lived in it or inherited it 2) has no other rental properties 3) is only looking to remortgage and not for extra borrowing.
Contents insurance
This type of cover is for the personal belongings of the homeowner or the tenant. Most homeowners buy a combined buildings and contents policy.
Conveyancing
A solicitor or licensed conveyancer will check if the property is owned by the seller, make sure that all the loans secured on it are discharged, establish its legal boundaries and perform local planning searches including information for upcoming developments which could affect the property's value.
Council Tax
A charge levied by the local authority. The amount paid will vary depending on the value of the property and also varies depending on the local authority that the property is situated in.
CCJ County Court Judgement
Defaulting on a debt affects a persons ability to obtain credit or limits borrowing options, meaning higher rates of interest. If a County Court rules against you for defaulting on a debt, this will be registered against your credit file for six years.
Credit Reference Agency
Your credit file is held by credit reference agencies and shows a record of your financial behaviour. These will be looked at by lenders when assessing your application. If you have a financial connection with another person, this will also be on your file. You can check your file for free at clear score.
Current Account
Regular bank account with sort code and account number that mortgage payments must be made from by direct debit. These accounts usually have cheque book and debit card facility but pay very little interest.
Deeds
Title deeds are the formal document showing ownership of the property. Deeds can be viewed and downloaded from the Land Registry website for a small fee. A mortgage lender will record their loan on these deeds enabling them to be able to take back (repossess) the property should you fail to keep up the repayments.
Deposit
The amount of money that the buyer puts forward as a lump sum when purchasing a house. A 10% deposit would mean that you are looking for a 90% LTV (loan to value) mortgage.
Discounted Rate
A mortgage product offered by a lender at a discount to its SVR. The SVR may move up or down, but the discount will remain the same.
Early Repayment Charges (ERC)
Mortgages that have an initial special rate such as a fixed rate, capped rate, cash-back or discount mortgage usually have ERC’s, sometimes beyond the term of the initial special rate and will be detailed as a % of the mortgage.
Equity Release
A special type of mortgage used to raise money for any purpose. It is a specially regulated product, is for those aged 55 plus and is a loan, secured against the property that you already own.
Exchange of contracts
The point at which the sale/purchase becomes legally binding on both party’s, the buyer must buy and the seller must sell. This is the last stage before completion and you should generally have buildings insurance in place from this date as if the building was damaged at this point, you would still have to buy it.
Fixed rate mortgage
The interest rate on your mortgage is fixed for a set period of time. 2, 3 and five year terms are the most common but 10 year fixes are also available. Once the fixed period comes to an end, the interest rate charged will revert to the lenders SVR (standard variable rate). ERC’s will apply should the mortgage be exited or repaid early. A fixed rates offers certainty that your repayments will remain constant for a set period of time and protect you from higher borrowing costs when interest rates rise. Conversely, when rates fall, you may be locked into a higher rate of interest for an extended period or have to pay a ERC.
EICR (Electrical Installation Condition Report)
This is a test of the electrical installation of a property and must be carried out by a qualified electrician. Prices start from a couple of hundred pounds and is usually determined by the size of the property. Buyers can be advised to ensure an EICR has been carried out and is in a satisfactory condition. For landlords, it is compulsory to ensure that an EICR is carried out at least once every 5 years and when a new tenant rents the property.
Illustration
A mortgage illustration is a lenders estimates of what costs and repayments would be for a particular mortgage product.
Interest
The amount of money paid to the lender in order to borrow their money. This is in addition to the amount borrowed and is part of your monthly mortgage repayment. The amount of interest paid over the term of the loan will depend on the interest rate charged which will vary over the loan term depending on the Bank of England base rate, the lenders SVR and the mortgage product that the borrower secures.
Interest only mortgage
A mortgage product whereby the borrower only makes interest payments on the loan and the capital (amount borrowed) is still left to pay at the end of the mortgage term. This product is often used to finance buy to let properties. Borrowers must have a plan in place for repayment of the capital sum at the end of the mortgage term.
Money Markets
Banks lend money to each other on the wholesale money markets. Lenders can borrow money in the markets to fund mortgages.
Mortgage Adviser
A person or business who has undertaken specific training in order to provide mortgage advice. Also referred to as a mortgage broker. Mortgage advisers are required to have a Cemap qualification.
Mortgage Term
Most mortgages are taken out with repayments over a number of years, historically, a 25 year term has been the norm for a first time buyer. Terms usually range from 5 years to as many as 35 years. Mortgage terms are usually longer than the special/introductory rates that lenders offer, with the interest rate switching to the lenders SVR at the end of the introductory term. Many borrowers remortgage at the end of the special terms in order to avoid being on the SVR which is usually a much higher rate of interest.
Offset Mortgage
Using a savings pot to offset the balance of the mortgage. Rather than earn interest on the savings, the borrower doesn’t pay interest on the savings amount thus reducing the mortgage payment and the amount of interest paid over the mortgage term. The borrower also retains access to the savings.
Overpayment
Some mortgages allow a borrower to make payments in excess of the regular monthly payment. By making an overpayment, the outstanding balance is reduced which will reduce the amount of interest paid over the lifetime of the mortgage. The total is often capped, typically at 10% a year. This is useful if you receive a one off lump sum, bonus from work or if your income increases and you are tied into a mortgage product with an ERC.
Letting Agent
Letting agents help landlords to find tenants for properties. They can also manage the property or a portfolio of properties on behalf of a landlord by collecting rent, drawing up tenancy contracts and dealing with minor repairs.
London Interbank Offered Rate (LIBOR)
LIBOR was previously a global benchmark standard by which banks lent money to each other. It was phased out on 30 June 2023 and replaced by the Secured Overnight Financing Rate SOFR).
LTV
Loan to value is the amount you wish to borrow, divided by the purchase price. So if you are purchasing a property for £120,000 and have a £30,000 deposit, you need to borrow £90,000. 90000/120000= 0.75 x100. Your LTV is 75%. The lower the LTV, the less risky the lender views the loan and can also result in a lower rate of interest being charged.
Land Transaction Tax
LTT replaced stamp duty in Wales and came into force in April 2018. There are different tax bands to pay, dependent on the purchase price of the property.
Payment Holidays
Some mortgages offer the option of being able to take a short break from repayments. Interest will still accrue during the payment holiday which will mean the monthly repayment or mortgage term will increase.
Remortgage
Moving your mortgage from your current lender to another. Usually done at the end of an initial special deal to switch to a more competitive rate with a different bank. Can also be done to increase the amount borrowed subject to affordability.
Repayment mortgage
Mortgage payments each month cover a portion of the capital repayments of the loan and the interest.
Secured loan/secured borrowing
A mortgage is a loan secured on the property. If you fail to make repayments the lender can repossess the property. A second charge mortgage is a type of secured loan whereby the lender has a second charge against the property.
Self certification mortgage
Self cert mortgages are designed, in the main, for people with irregular income or the self employed. Borrowers make a self declaration of the income and don’t generally need to provide payslips or bank statements to prove it.
Stamp Duty
Stamp Duty Land Tax is a tax levied by the government on property purchases. The amount payable varies depending on purchase price, whether you are a first time buyer or if it is being purchased to live in, as a second home or as a buy to let property. In Wales, this tax is called Land Transaction Tax and is charged at different rates to England. There is a 3% surcharge if the property is an additional or second home.
Standard Variable Rate (SVR)
Lenders have a headline rate which a mortgage will revert to once a special introductory rate has expired.
Survey
There are 3 types of report that are available when purchasing a house. A valuation report is a basic report that informs the lending institution if the property provides enough security for the loan. A Homebuyers report is carried out at the property by the surveyor and gives an indication of any potential issues that you may not have foreseen. This will involve inspection of walls, the roof, guttering and so on but the surveyor will not be able to remove carpets, flooring and wall coverings. A full structural survey is more comprehensive and more expensive and will give a more detailed report on the structural integrity of the property. Sometimes specialist surveys may be required. For example a damp and timber survey would indicate if there are any issue with damp or wood infestations. In this circumstance, the surveyor would obtain the permission of the vendor to remove floorboards.
Tracker Mortgage
The mortgage rate is not fixed but it tracks a benchmark rate such as the Bank of England base rate.