Mortgage Jargon Buster

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P
Q | R | S | T | U | V | W | X | Y | Z

A

Administration Fee - This is a fee charged which is not refundable if the mortgage application does not proceed. The Administration fee will often form part of the valuation fee but will be retained by the lender even if the valuation has not been carried out.

Annual Percentage Rate (APR) - This is meant to show the true cost of borrowing and adjusts the notional interest rate to take account of all the initial fees and ongoing costs to reflect the real cost of borrowing throughout the entire mortgage term.

Annuity Mortgage - (See Repayment Mortgage)

Arrangement Fee - This is a fee charged in order to access particular mortgage deals. Arrangement fees particularly apply if you are looking for a fixed rate or discounted rate mortgage and these may either be payable up front, added to the loan on completion, or deducted from the loan on completion.

Arrears - Contracted mortgage payment not made by the due date. Applicants who have arrears on a current mortgage may experience problems if attempting to arrange a new mortgage through the lenders.

 

B

Bank of England - UK's central bank responsible for the regulation of the banking industry, issuing of money and more recently the control of inflation, with the formation of the Monetary Policy Committee under the new Labour government.

Base Rate - The minimum rate at which banks are prepared to lend money , altered by the central bank's dealing rates with the discount houses. It forms the benchmark for all other interest rates.

Basic Rate of Tax - The basic rate of income tax is set in the annual budget.

Basis Point - Unit of measure (usually one hundredth of a percentage point) used to express movements in interest rates, foreign rates or bond yields.

Buy to Let - A mortgage designed for people who buy a property with the intention of letting it out. Largely similar to other mortgages, but the maximum loan-to-value (LTV) is usually lower, meaning that a larger deposit is required. Other restrictions may also apply, such as minimum letting terms and rental income. Lenders will normally incorporate a proportion of the rental income when calculating how much money they are willing to lend you.

BSA - Building Societies Association - The trade Association representing the interests of member societies.

 

C

Capital and Interest Mortgage - ( see Repayment Mortgage )

Capital - Amount of money invested, not including interest earned that may have been added to it.

Capital Raising - Normally refers to a Remortgage when additional funds are taken over and above the amount required to repay the existing mortgage debt which is then used for personal finance purposes.

Capped Rate - A capped rate is a mixture between a fixed rate and a variable rate. The interest rate is guaranteed not to rise above a set level within the capped rate period but if the normal variable mortgage rate is below the capped rate then the variable rate is charged. This gives the 'best of both worlds' as the interest rate can fall but will not rise above the capped rate. However, the level at which the cap is fixed is usually higher than for a fixed rate mortgage for a comparable period of time. Sometimes 'Cap and Collar' mortgages are offered and these impose a minimum payment rate ( the collar ) in addition to the maximum rate (the cap).

Cash Back - This is the arrangement whereby a cash sum of money is repaid to the borrower at the start of the mortgage. Cash back deals are also available in conjunction with some fixed or discounted rates but the amount of the cash back will normally be reduced in these circumstances. If a large cash back is being considered then it could, in some circumstances, be liable to Capital Gains Tax ( refer to your accountant or local tax office for clarification ). There will normally be early repayment charges if the mortgage is repaid. Early repayment charges vary depending upon the mortgage product being sold.

Consumer Credit Act 1974 - An Act which regulates lending for personal purposes and prescribes statutory safeguards.

Current Account Mortgage (CAM) - With a current account mortgage (CAM), your mortgage, current account, savings account and even credit cards and personal loans are all combined into one account. You have your salary paid directly into this account and your debt reduces immediately, with any unspent income at the end of the month effectively reducing your debt in the long term.

Conditional Insurance - This refers to insurance products which some lenders will impose as a condition of their mortgage offer. This could mean that the lender insists that accident, sickness and unemployment cover is taken out or that combined buildings and contents insurance is taken, or on their own.

 

County Court Judgement (CCJ) - A judgement for debt recorded at a County Court. These judgements will be shown when the lender carries out a credit search. If the debt has been repaid, subsequent to the judgement being recorded, then the entry will be marked 'satisfied'. The appearance of CCJ's on the credit register will greatly reduce mortgage options and nearly all lenders will insist that they are satisfied before considering an application. Even with the judgement(s) satisfied few lenders are prepared to consider lending other than for the most minor judgements.  More insolvency advice

 

D

Daily Interest - Interest is calculated on the balance of the account at the end of each day. Interest is then accrued daily and added to the account balance on the last day of every month. This means every cleared payment that is made reduces the mortgage balance and interest is recalculated on the reduced balance.

Discounted Rate - The lender agrees to give a fixed discount off the normal variable rate for a guaranteed period of time. The discounted rate will move up and down with the normal variable rate but the payment rate will retain the agreed differential below the variable rate for the agreed period of time. If a discounted rate is taken the lender will normally impose early redemption charges if the mortgage is repaid. Early repayment charges vary depending upon the mortgage product being sold.

 

E

Endowment Mortgage - An interest only mortgage supported by an endowment policy. During the term of the mortgage only interest on the mortgage is paid to the lender. At the same time premiums are paid into an endowment policy which may provide funds at the end of the term to do towards discharging the debt.

Early Repayment Charges - An additional charge made by the lender if the mortgage is repaid within a pre-agreed period of time. These have become increasingly common with the growth in fixed rate and heavily discounted products. They are generally applied to compensate the lender for the costs incurred in arranging the fixed rate or discounted mortgage schemes. The costs are spread over the term of the initial fixed rate or discount period and are recovered over the period of the fix or discount.Normally expressed as a number of months interest within a set period of years i.e. 6 months interest if repaid within the first seven years but may also be expressed as a percentage of the mortgage debt i.e. 5% of the mortgage if redeemed within the first seven years.

Exchange of Contracts (NOT SCOTLAND) - This is the stage in the property transaction at which legally binding contracts are exchanged between the buyer and the seller. Once contracts are exchanged the vendor becomes legally obliged to sell and the purchaser to buy on the terms agreed.

Existing Liabilities - This term is used by lenders to define all other finance commitments apart from the existing mortgage. This will take into account such items as bank loans, HP, credit cards, maintenance payments( to ex-spouse ) etc. Most lenders will take these items into account when assessing how much they are prepared to lend and will usually deduct 12 months payments from gross annual income before applying their normal income multipliers.

 

F

First Time Buyers (FTB) - lenders differ in their definition of a First Time Buyer. Some lenders will include in this someone who has owned a property before but has no property to sell (i.e. may be renting temporarily after selling ) and other lenders will include joint borrowers where just one party is a FTB. Other lenders will take a more literal definition and only include someone who has never owned a property before.

Fixed Rate - The lender will fix the interest rate that they charge at a set level for a fixed period of time. There are normally a whole range of fixed rate products available which vary in terms from very short periods (3 - 6 months ) up to the whole 25 year mortgage term. The lender will normally charge early repayment charges if the mortgage is repaid. Early repayment charges vary depending upon the mortgage product being sold.

Freehold (NOT SCOTLAND) - This describes the tenure of a property where ownership of the property and land is held indefinitely. This compares with leasehold property where the property is held for a limited period of time.

Financial Services Authority (FSA) - Watchdog or regulatory organisation, answerable to the Treasury, that ensures Building Societies comply with the Building Societies Act.

Further Advance - This is an additional loan made by the existing mortgage lender and secured by the first charge on the property. The Further Advance can be used for a variety of purposes ( subject to the lenders approval ) such as home improvement, purchase of freehold or purchasing a partners share of the equity in your home.

 

G

Guarantor - A guarantor is a person, other than the borrower, who guarantee the payment of the mortgage dept. A Guarantor can sometimes be used to support a borrower who has insufficient income to qualify for a mortgage in their own right. The Guarantor will normally need to have sufficient income to support the new mortgage in its entirety after taking into account any existing mortgage and other commitments they have personally. The Guarantor becomes responsible for the whole mortgage debt if the borrower defaults.

 

H

Home Buyer's Report - A type of survey report which is more detailed than a Mortgage Valuation but not as in depth as a Full Structural Survey. A Home Buyer's Report is often carried out by the proposed lenders surveyor and the report can then be used for the lender to replace the Mortgage Valuation in addition to acting as a detailed report for the borrower. A Home Buyer's report may not be suitable for certain types of property where a Structural Survey may be more relevant. If in doubt talk to the surveyor you propose to use.

 

I

Incentive rate - A rate of interest charged for an initial period to attract business to the provider . Typically this might be a lower APR on credit cards for the first six months if existing balances are transferred to them. After the incentive period the rates will revert to the normal rates prevailing at that time.

Income Multiplier - Income Multipliers are used as one calculation in determining how much mortgage lenders are prepared to lend on mortgage.

Initial Interest - This figure is usually shown on the mortgage completion statement and refers to the amount of interest charged from the date that the funds are drawn down to the first repayment date. This has the effect of increasing the first mortgage payment and the amount of the initial interest payable will depend on the time in the month when the mortgage is completed.

Inland Revenue - Government department responsible for assessment and collection of direct taxation on items such as income, capital gains, stamp duties, inheritance etc.

Interest Rate - The amount paid on the money deposited or the price paid for borrowing money. The way it is debited or credited will vary but the rate will usually be linked directly or indirectly to base rates.

Insurance - You'll need to arrange buildings insurance to cover the full cost of rebuilding your home and we strongly recommend that you have enough life insurance to cover your borrowing at all times.

Interest Only Mortgage - Interest only mortgages have become increasingly popular in recent years. Interest only mortgages can be supported by an endowment policy, pension plan or Pep in which case they are normally referred to as an endowment, pension or Pep mortgage. An interest only mortgage may, however, be arranged without the support of any particular repayment vehicle. Many lenders will now accept payment of interest only on the basis that the borrower makes their own arrangements to repay the capital at or before the end of the mortgage term. This could be done in a number of ways such as inheritance, sale of the property or from the realisation of other assets.

 

J

K

Key Facts Illustration - a document that all mortgage lenders have to produce for every customer. A Key Facts Illustration (KFI) outlines important information about the mortgage you're interested in. It's important to always read and understand the KFI before you apply for a mortgage.

 

L

Land Registry Fee - This is a fee charged by the Land Registry to record a change in the registered title of Registered Land. The change will normally be notified to the Land Registry by the solicitor acting in the house purchase (or Remortgage ) and as such the Land Registry fee will normally be payable to the solicitor and accounted for in his final account.

Leasehold (NOT SCOTLAND) - This is the tenure applied to most flats and maisonettes in the UK (excluding Scotland). As opposed to freehold property the rights to the property are owned only for a fixed period of time, with the freehold being held by a third party. The lease outlines the responsibilities of the various leasees in a block and determines the arrangements to be adopted for such things as upkeep of the common areas and insurance of the property. Because these cross covenants are required to avoid disagreements and confusion between the lessees only leasehold flats and maisonettes are mortgagable. This should not be confused with the situation where the freehold is owned by all the lessees in a block and this will commonly be advertised as 'share of freehold'. Providing individual leases exist for each lessee then this would normally be acceptable to mortgage lenders. If in any doubt always take legal advice before proceeding.

Legal Completion - This refers to the time at which the legal ownership of the property changes hands. This date will usually be agreed upon at exchange of contracts. This will also be the date at which the mortgage becomes effective ( sometimes the mortgage completion date may be a couple of days before this to ensure that the solicitor has funds on the due day).

Loan to Value (LTV) - The loan to value is expressed as a percentage and represents the relationship between the size of the mortgage and the value of the property. For example a mortgage of £30,000 on a property valued at £40,000 would be shown as 75% LTV. This is an important figure to look at when considering the various mortgage options as the higher the LTV required the fewer the options.

 

M

Monthly Payment - This figure will be shown on both the mortgage offer and mortgage completion statement and shows the actual amount of the mortgage payment you will pay.

Mortgage Term - This is the number of years over which the mortgage is arranged. If a capital and interest mortgage is being considered then it is worth looking at shorter terms than the traditional 25 year mortgage as considerable interest savings can be made by reducing the mortgage term by even a couple of years.

Mortgage Valuation - (Sometimes referred to as standard valuation) This is the most basic form of survey and is the minimum required by lenders in order to ascertain the suitability of the property as security for their loan. Although the borrower will normally receive a copy of this report it should not be relied upon as a comprehensive report on the condition of the property. A more detailed report (either a Home Buyer's Report or Structural Survey) should be commissioned when considering the purchase of a property.(You might not always receive a copy of this if your lender offers this as a free service)

 

N

Negative Equity - Appeared in the late 80's as a result of the slump in property prices. This describes the situation where the value of the property has fallen below the outstanding mortgage debt.

Non-Status - This is where a lender may not require income details from you or may accept some previous poor credit history i.e. CCJs or previous mortgage arrears.

 

O

Ombudsman - The person responsible for settling any dispute or complaint that is referred to them or escalates to them because the companies own internal procedures have not resolved the problem. The Financial Ombudsman Service can be contacted on 0845 080 1800 or visit http://www.financial-ombudsman.org.uk/

Overpayment - When monthly payments to a mortgage are increased so that the mortgage is repaid before the end of the mortgage term. Flexible mortgages allow overpayments to be made without penalty allowing significant interest savings over the mortgage term.

 

P

Part Endowment - This describes a mortgage where only part of it is covered by an endowment policy. The balance could be arranged on an interest only basis or more commonly on a capital and interest basis.

Payment Protection or A.S.U. - (sometimes referred to as A.S.R. - accident, sickness and redundancy insurance) Accident, sickness and unemployment insurance . This is an insurance policy which is taken out by the borrower and protects against the borrower being unable to work for these reasons. The policy will usually pay a percentage of the normal monthly mortgage repayment (plus insurance) if the borrower is unable to work due to accident / sickness or unemployment / redundancy. These payments will normally only be made for a limited period of time - typically 6/12 months or until the borrower returns to work. The terms of these policies and the cost vary considerably from company to company.

Personal Loan - A loan secured by way of a legal charge over your property and can be used for personal reasons such as debt consolidation, purchase of a car or a holiday.

Portable - This describes the ability to move a particular mortgage product from one property to another in the event of a property move. This is particularly important if a fixed, capped, cash back or discounted product is taken where early redemption charges are levied. If the product is not 'portable' then a house move would involve the payment of early redemption charges even if another mortgage was taken with the same lender. A portable mortgage means that the same scheme is transferred to the new mortgage for the remainder of the original term e.g. a 5 year fixed rate is taken which has redemption charges within the first five years. If the borrower decides to move after two years then the same five year rate will apply to the new mortgage for the balance of the remaining three years. If the original product was not portable, however, then redemption charges would be paid on redemption of the existing mortgage and a new product would have to be taken for the new mortgage.

 

Q

 

R

Remortgage - This is the process by which a mortgage on a property is moved from one lender to another. The new mortgage is used to repay the existing lender and at the same time additional funds may be raised for other purposes. Remortgaging has become an increasingly popular way to take advantage of the competitive deals offered by lenders to attract new business. If a Remortgage is being considered then careful attention should be paid to the costs associated with arranging the Remortgage as well as the savings to be made on the monthly repayment (the costs can sometimes erode any savings to be made). A check should also be made with the existing lender to ensure that there are no early redemption charges.

Repayment Mortgage - Also called an Annuity mortgage or Capital and Interest mortgage. With this type of mortgage the monthly repayment includes an element of the capital sum borrowed in addition to the interest charged. In the early years of the mortgage the majority of the monthly repayment consists of interest with only a small part repaying the capital. However, as the debt gradually reduces the element of capital increases and the interest element reduces, so although the monthly repayment stays the same (assuming interest rate remain unaltered) the debt starts to reduce more quickly as the term of the mortgage progresses. On a 25 year term mortgage it would not be unusual to still owe over 50% of the original debt after the first 15 years. Providing the correct monthly repayments are made on their due dates this mortgage will guarantee to repay the total mortgage debt at the end of the mortgage term.

Retention - This relates to monies withheld by lenders until certain mortgage conditions are met. This will normally relate to repairs or improvements to the property that the lender is insisting on.

 

S

Stamp duty - This is a tax which is levied on the purchase of property. The tax is paid by purchasers and is currently levied at the following rates :
0% of property value £0 - £125,000
1% of property value £ 125,001 - £250,000
3% of property value £250,001 - £500,000
4% of property value £500,001 and above.
(rates apply only to residential. Please refer to stamp duty and taxation guidelines for further details).
The appropriate rate is paid on the whole purchase price and not just the excess applying to that band i.e. a purchase price of £350,000 will attract £10,500 stamp duty, being 3% of £350,000. The above rates were announced on March 17th, 2005 by the Chancellor in his budget speech.

Structural Survey - This is the most detailed type of survey report normally undertaken in connection with a House Purchase. If a Structural survey is opted for then the lender will also need to have a mortgage valuation carried out for their own purposes and the borrower will be responsible for both fees. An alternative may be a Home Buyers Report which will cover both the borrower and the lender but advice should be taken from a qualified surveyor who will be able to advise on individual properties and circumstances.

Sealing Fee - This is a charge made by lenders when you repay a mortgage.

Searches - These are checks carried out during the conveyancing process. These checks are made with local authorities and other official organisations to check planning proposals and other matters that may affect the value of the property and it's saleability in the future before making a loan.

Self Certified - Normally when a borrower applies for a mortgage he or she will be asked to provide pay slips or company accounts to prove their income. If it is difficult or extremely inconvenient for you to provide this documentation, you can choose to self-certify your income. This involves signing a declaration which states your income sources and amounts. Lenders will charge you higher rates than average and offer you a more limited range of mortgages if you choose to self-certify your income, so it's not a good idea to self-certify just to avoid some paperwork.

Self-Build Mortgages - Self build mortgages, also known as stage payment mortgages, are a specialist type of mortgage that have seen a surge in popularity over the last decade, thanks to the rising number of people building their own home or undertaking a major renovation, extension or conversion project. With a self build mortgage you simply draw down chunks of money as and when you need them such that you carry the minimum finance necessary (and so pay minimum interest).

Shared Equity - A scheme operated by a developer where the developer retains a percentage equity of around 10% in the property. Thus the developer holds a second charge over the property. The 10% owing may be interest free or may incur interest and be added to the total amount owing on the property.

Shared Ownership - A scheme operated by a housing association where a person owns part of the property and pays a mortgage on this, while the housing association owns the rest of the property and the person pays rent on this.

 

T

Term - Length of time for which an account has to be held or for which attracts an agreed amount of interest.

Term Assurance - This is life assurance which pays out the insured sum on the death of the policy holder providing it occurs within the policy term. This is a common method to protect the mortgage in the event of death and to ensure the mortgage debt is repaid. The most common types of this insurance are Mortgage Protection or Level Term Assurance. Mortgage protection is normally used in connection with a capital and interest mortgage and the level of the insured cover reduces in line with the reduction in the mortgage debt. Level Term assurance is more likely to be used in connection with an interest only mortgage as the level of cover remains constant as does the mortgage debt. With Term Assurance cover there is no payout if the policyholder survives the policy term and the policy simply lapses with no value. This factor makes this type of cover relatively inexpensive.

Tie-in period - As a condition of a special mortgage deal, you may have to agree to stay with the lender for a period of months or years after the deal has ended. If you move your mortgage elsewhere during this period, you may have to pay an early repayment charge.

Title Deeds - Documents that show proof of who owns the freehold and leasehold property.

Transfer deed - This is a document that, once you sign it, transfers the ownership of a property to you.

 

U

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.

 

V

Variable Rate - This is the traditional way mortgages were arranged before the concept of fixed rates. A variable rate will fluctuate up and down to reflect the true cost of borrowing. Some variable rates may be discounted for a period of time.

Valuation - A simple check of the property in order to find out how much it is worth and whether it is suitable to lend a mortgage on.

Valuation Fee - A fee paid by a borrower to cover the cost of the lender checking that the property is suitable security for the mortgage loan.

Vendor - The person selling the property.

 

W

 

X

 

Y

 

Z

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