Glossary of Mortgage Terms

Buying a home is stressful enough in itself, so the last thing that you need on top of that is confusion over your mortgage!

Dealing with a mortgage provider is important, but of course, it can also a bit intimidating. We've compiled a glossary of the most commonly used mortgage terminology to help you get to grips with all the jargon - and ultimately help you choose the right deal.

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Arrangement Fee

These fees cover the initial setting up of the loan and they vary massively.  They are usually charged at the beginning of applying for a mortgage: they are described as a fee to "hold" the rate for you and cover the paperwork costs.  If you don't actually go ahead with the mortgage, this fee is usually not refundable.

Of course, arrangement fees don't just cover costs - they are another way the lender can make money.  The average arrangement fee has soared in the last few years: lenders try to keep interest rates low to attract buyers, but instead they include their profit in the fees.

Certain lenders will allow your arrangement fee to be added onto your loan but this means that interest will be payable and equity in your property will be lost.

Benefit Period

This is a discounted rate period at the start of the mortgage where the interest on your repayment will be lower than the lenders standard variable rate.

Buy to Let

This means buying a property with the intention of renting it to somebody else.  Specialist lenders have sprung up in recent years, and buy-to-let purchases have become increasingly popular.

Lenders tend to make sure that the rental income will exceed the mortgage payments before they'll agree to a loan.  So your expected rents will need to be around 130% of the mortgage repayments.

Capped Mortgage Rates

If a mortgage rate is capped, for example at 6%, then the interest will never increase above that rate. This allows for the borrower to budget more effectively, safe in the knowledge that their repayments will not rise above their maximum limit.  These types of mortgage are not too common, but you might come across them here or there.

Cashback

This is an incentive offer for borrowers to receive a cash lump some once the mortgage has been set up.  Usually this appeals to purchasers and first-time buyers who might want to furnish or redecorate the new home.  Lenders offering this type of mortgage offer 4% or 6% cashback once the loan is complete.  However, cashback mortgages are usually not very good deals.  Do check the interest rates and compare the costs of borrowing the extra money some other way, as the cash lump sum is not a gift - it is basically there to entice you!

Collared Rate

A "collared" rate means an interest rate that won't be allowed to fall below a certain percentage. At first glance this can sound like a bad deal for the customer, but it does mean that the lender, as a result of the financial security gained, can offer a slightly better introductory rate.  These types of mortgage are not common, but you might encounter one or two as you shop around.

Completion & Settlement

In Scotland the date when a mortgage comes into force, normally dictated by the solicitor, is known as the completion or settlement date.

Deferred interest

This allows for a borrower to make repayments at a later date.  However, during the deferred period, the capital you owe will increase.

Discount Mortgage

A discount mortgage usually means a percentage reduction on the lender's Standard Variable Rate.  It's usually applied for a fixed time, perhaps two or three years.  For example, a lender with an SVR of 6.5%, offering a 1.25% discount for 2 years, means you will only pay 5.25% interest for that period.

Early Repayment Charge (ERC)

This is the cost of getting out of your mortgage before the pre-determined term is completed.  This usually applies to fixed rate and discount rate mortgages.  ERCs are used by lenders to deter their customers from switching too soon.

Here's an example of a typical ERC structure: on a 5 year fixed rate mortgage, it would cost you 5% of the total balance to exit in the first year, 4% in the second year, 3% in the third, 2% in the fourth and 1% in the final year.  After that, your five year fixed rate period is over and there's no more ERC to pay on ending the deal (although you'd still be liable for a MEAF-see below!)

Equity

This is the value of your house minus any mortgages and secured lending that you have on it.  It's usually expressed as a percentage.

For example, if your house is worth £100,000 at current market rates, and the amount of mortgage you have to repay is £75,000, then you are said to have 25% equity (i.e. £25,000 of it would be yours if you sold the house at £100,000 today!)

In the event of a fall in house prices, your equity can be negative.  "Negative equity" means that the amount of mortgage you have to repay is more than the house is currently worth.  This affects people who have large mortgages when the housing market takes a downturn.  It is a problem because it makes it difficult to sell, remortgage or move house.

Flexible Mortgage

This mortgage option varies between lenders.  In general, it means you have special additional features making it possible to adjust your monthly repayments and repay more or less than was initially agreed.  You can usually only underpay if you have overpaid first.  Flexible mortgages also might give you the opportunity to make lump sum payments (overpayments) or temporarily stop payments for an agreed length of time (a payment holiday).

Guarantor

A guarantor is a third party (usually a parent or a partner) who is named on the mortgage contract and legally bound to make the mortgage repayments if the main applicant becomes unable to pay.  

Guarantor mortgages are usually offered in order to help first time buyers onto the housing ladder.  It is seen as one way to get a mortgage if you do not have high enough deposit or salary to get a conventional mortgage for the house you want.  We'd always suggest seeking legal advice before entering into an agreement such as this.

Homebuy Scheme

This is a government sponsored scheme to help people to get on to the property ladder, such as existing tenants and keyworkers.

Islamic Mortgages

The Qur'an states that the charging of interest is forbidden and so there are specially arranged Islamic mortgages to get around this.

Ijara is one of the most common options, whereby the bank buys the property for the client and the client then leases it back from the bank, making monthly payments.

Murabaha is the other most common option; this is where the bank buys the property only for the client to buy the property from the bank immediately for a higher price, in order to allow for the buyer to make interest free payments without the bank losing out.

Joint Tenancy

This is a shared ownership which entitles both owners to 100% ownership in the event of the death of either of the parties involved.

Tenants in Common ownership, whereby each party owns a percentage of the property, could be more financially viable due to potential savings in inheritance tax. If you are considering changing your ownership status you should seek specialist legal advice.

Key Facts Illustration

The mortgage broker should provide this information and it should include details of charges made by the broker, rated and fees amongst other additional information.

Let-to-Buy

The practice of letting one's existing property with a view to purchasing another property in which to reside.

Lifetime Mortgages

These are normally known as home reversion or equity release schemes and are a means of releasing money from a property. There will be no monthly payments of fixed repayment date but the lender will expect money back once the house is sold.

This of course will reduce any potential inheritance or money available to purchase a new property.

These arrangements often demand high fees and the value that you will receive may be below that of the market value for your property.

MEAF (Mortgage Exit Administration Fee)

This is a charge for redeeming your mortgage, whenever you choose to do it (but which is sometimes waived if the mortgage runs for its full repayment term).  It's different from an Early Repayment Charge which only applies for a fixed time after taking out a mortgage.

There has been some controversy about MEAFs, as they have gone up a lot in recent years.  This meant that many borrowers who paid a MEAF were charged a lot more than their original contracts stated, perhaps by a few hundred pounds.  If this happened to you, you might be able to claim the money back.

Mortgage Deed

This is the contract that describes the legal obligations and rights of the home owner and the lender.

Offset

A special type of mortgage that is run in tandem with a bank account.  It's worth looking at if you have a decent amount of savings or a large cash salary.

Offset mortgages can be used to significantly reduce your monthly repayments or your loan term. If you go for this option you won't receive interest on the cash in your bank account, but you will pay reduced interest on your mortgage.

For example, if you have a mortgage of £200,000 and you have £40,000 in your bank account then you would only pay interest on £160,000 of your mortgage, as if the £40,000 in your bank had been paid off on your mortgage.

Porting / Portable

A portable mortgage can be moved from one property to another. This is a handy feature if you are not sure whether you might move in the foreseeable future - particularly if your mortgage deal has a special rate that you'd like to keep.  It can also help avoid charges that would apply for ending and re-starting a mortgage.

Redemption Statement

This is a statement that is issued by your lender detailing exactly what you would need to pay, to pay off your mortgage, including all fees and interest owing

Right to Buy

This refers to the opportunity for the inhabitant of a council house to buy the property that they are living in for a discounted price.

Self Certification ("Self-cert")

This type of agreement, often used by the self-employed, allows the applicant to confirm their own income as opposed to them needing to provide evidence via a P60, payslip or account history.

Sub-Prime aka Non-conforming/Non-status

This is a type of high-rate mortgage for those who traditionally do not meet the criteria for a loan.

For example, those with County Court Judgements (CCJs) or a history of bankruptcy or poor credit may be limited to this type of mortgage.

Term

The duration of the loan is known as the term of the loan. The longer the term, the more you will ultimately have to pay over and above the amount borrowed.

Valuation

To ensure that a property is fit for a mortgage most lenders will request a basic valuation.

This service will demand a fee and it is also possible to receive a request for a more detailed, more expensive, home-buyers valuation or structural survey.

These types of investigations are more thorough and are undertaken by a specialist surveyor and they serve to ease your mind as a buyer, as well as ease the lenders mind in terms of their financial commitment.

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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

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