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Mortgage Terminology Explained
All mortgage lenders use selective words and phrases throughout their terms and conditions, often referred to as mortgage terminology. When you compare mortgages, or seek further advice from a financial advisor, you will hear some commonly used phrases and mortgage jargon. It is important that you ask them to explain these terms before you go ahead with the mortgage. The following are common examples of mortgage jargon that you will come across.
Commonly Used Mortgage Terminology
APR
This phrase is commonly used throughout the financial industry and stands for annual percentage rate. This is the level of interest you will pay on anything borrowed over the course of 12 months. When you are applying for a loan or mortgage you will see the APR percentage included in the quote. Many people opt for a fixed rate mortgage, which can cost significantly more to arrange, while others prefer a standard variable rate, which rises and falls against the Bank of England base rate.
Arrangement Fee
Some mortgage lenders charge a fee to arrange the mortgage, which can vary dependent on the lender. This is known as an arrangement fee. It is generally paid on mortgage completion, although some lenders will allow you to pay this fee upfront.
Base Rate
The base rate is the percentage rate set by the Bank of England. It is used to calculate variable rate and tracker mortgages. The higher the base rate the higher the mortgage repayment.
Buy-to-Let
A buy-to-let mortgage is available for landlords who buy property to let. As long as the property is rented, the monthly mortgage is repaid. In the instances where a property is vacant, landlord insurance can help.
Buildings Insurance
This type of insurance is compulsory and can protect you if your home becomes structurally unsafe, you can ask for further protection such as from floods. Your lender may be able to provide a quote; otherwise you can compare insurance through SoSmart Money. The lender want to ensure that the property is protected because until you have paid off the mortgage they technically own it. If the property burns down or is otherwise rendered uninhabitable, they cannot repossess the house and sell it for the same amount at auction, meaning they would have no way of reclaiming unpaid mortgage capital.
Capital Gains Tax
A tax added to property that is bought for investment purposes, e.g. a buy-to-let property.
Capped Mortgages
This is where the repayment rate of a mortgage is capped at a certain rate. If the base rate is higher than the cap, you only pay the cap rate. However, if the base rate is lower than the cap, your repayments will reduce too.
CHAPS Fee
When the solicitor receives the mortgage funds from the lender, this will be via a CHAPS transfer, the fee of which is either added to the mortgage balance, or deducted from the balance. Fees are approximately £25 to £50.
Conveyancing Fee
The sum paid to your solicitor for the remortgage, purchase, or sale of your property.
Drawdown
Additional monies are available from the lender, but they are kept in a separate account until you require the monies. This type of arrangement is used for home renovations, and there is no interest paid on this amount until it is used.
Early Repayment Fee
It is possible to repay a mortgage earlier than its contract terms, although there will be a fee to pay unless special provision are made within the mortgage terms and conditions. This can be a percentage of the remaining balance, or a percentage of the original amount loaned.
Equity
If you are living in a property that is valued at £200,000 and you have a mortgage of £100,000, you will have 50 percent equity in the home as that is how much you own of the property.
Fixed Mortgage
The repayments remain the same, often for a select number of years. These are useful if you have a set budget that you need to stick to.
Flexible Mortgage
The idea of a flexible mortgage is to pay it off earlier than the original term without incurring a financial penalty. Therefore, you can make additional payments, called overpayments. With some lenders, a payment holiday may be another flexibility option.
Full Structural Survey
This is generally the most expensive of surveys in relation to a property. The surveyor will indicate whether it is structurally safe, and whether any work is required before purchasing or selling the property.
Gazumping
If a property seller has already agreed a rate from a buyer, and then accepts a higher offer, this is known as gazumping.
Gazundering
When a buyer has made a higher offer to purchase a property and then lowers the purchase offer, this is known as gazundering. It is a lengthy process and often attempted during the later stages of the sale process.
Guarantor
Some lenders require a guarantor, who will become liable for the repayments should the mortgagor fail to pay.
Higher Lending Charge
If you're borrowing significantly more than what your property is worth, the lender will add a higher lending charge to cover the extra risk.
Income Multiple
This is the calculation used by the lender to determine how much they can lend you, generally 3x your annual income (sometimes 4x), or 2.5x for joint incomes. Most lenders now require details of both your incomings and outgoings.
Interest Only Mortgage
With this type of mortgage, only the interest is repaid on the borrowed amount over the set term. There is still the original outstanding loan to repay at the end of the mortgage term.
Jointly and Severally Liable
If you take out a joint mortgage, and one of you fails to make the repayment, the other person becomes liable for the repayment.
Key Facts Illustration
Your lender or financial advisor will provide you with a Key Facts Illustration sheet, which explains the terms of the mortgage, including the repayment terms and fees.
Land Registration
The lender puts a legal charge on the property through the Land Registry, should repossession be necessary if you fail to keep up with the repayments.
Life Insurance
A policy that can repay the monthly mortgage fee, or pay off a mortgage in full, if you die while there are still outstanding payments on the property.
Mortgage Deed
The legal document that requires the signature of the mortgagor (borrower) to sanctify the mortgage agreement.
Remortgage
This is where you switch to a new mortgage without actually moving properties. You may remortgage with the same lender by taking a different mortgage, often at the end of a fixed-rate mortgage term, or you can change lenders to find a better mortgage deal.
Repayment Mortgage
A mortgage that repays both the interest and the original sum loaned, so there is nothing to repay when the term ends.
Repossession
If the mortgagor fails to make the monthly repayments, their home could be at risk and sold at public auction.
Right to Buy
Tenants can buy their local authority property at a discount, generally after residing in the property for five years.
Self-Build Mortgages
A specialist mortgage available for self-build projects. The payments are often released in stages to correspond with the various stages of the development.
Self-Certified
The lender will require evidence of your income, usually in the form of bank statements.
Shared Ownership
You purchase part of your property, and rent the remainder.
Stamp Duty
If a home is valued over a certain amount, currently £250,000, you will be required to pay stamp duty set at a certain percentage of the purchase price.
Standard Variable Rate
The rate at which you will repay the mortgage after a fixed term mortgage term ends. This is determined by your lender and is often roughly 4% above the Bank of England base rate.
Surveyor
A person who carries out the surveying and valuation of property.
Title Deed
The important documentation that names the owner of the property.
Transfer of Equity
The legal document to indicate the transference of property ownership to another person.
Valuation Fee
The fee that a mortgage lender will charge you to value the property.
In Conclusion
Mortgage jargon is common amongst lenders. Speak to an advisor for mortgage advice. Find the best mortgage rates using our handy comparison tool or talk to an advisor at SoSmart Money for more information.
The above post is intended to be informative but does not constitute advice - financial, legal or otherwise. Any opinions given are the author's own and do not necessarily reflect the views of SO Media or the Mitchell Farrar Group.
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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