Mortgages

Mortgage Jargon for Mortgages and Loans

When looking for information and advice relating to finances such as loans and mortgages there will be a number of words or terms that you may not have come across before.

So we have put together a glossary of terms that are often used in the finance industry.

Annual Percentage Rate - APR

The APR is a way of showing the true cost of a loan. This is the best way of comparing various loan costs. An APR rate takes into account intrest and also any other charges you have to pay, for example an arrangement fee.

Capital and Interest Mortgage - Repayment Mortgage

A repayment mortgage is where your monthly payments pay the interest due on the loan but also a part of the capital that you have borrowed. A normal period of a loan of this kind is 25 years.

Capped rate

Capped rates of interest are just that. The interest on your loan can not increase above the capped rate a predefined interest rate, e.g 6.5%. Your rate will be variable and so if interest rates fall so does your interest rate but if rates increase you know that they won't increase above your cap rate.

Cashback

This is a lump sum of cash you receive when you complete a mortgage. You receive the cash from your lender after completion. The amount can be a % of the amount of loan or a fixed amount. Often if you accept a cashback incentive with your mortgage product you will be tied into the mortgage for a period of time.

Completion

This is the day that you complate the purchase or sale of your home.

Conveyancing

This is the legal process involved in buying and selling a property. You instruct a solicitor to carry out the legal affairs or you can instruct an online company using a network of solicitors to act on your behalf.

Discounted rate

This is set at a discount from the lenders standard variable rate. This means that the interest rate can vary during the tie in period but is always less than the lenders variable rate.

Early Redemption Payment

A fee charged by your mortgage lender if you decide to move your mortgage away from the lender during a tie in period.

Endowment

This is a savings plan with a life assurance investment policy included that is assigned to the lender. This sum assured is payable on maturity or prior death of the policyholder to the lender and is used to repay the mortgage at the end of its term. There are different types of endowments but the most common is a with profits fund. Endowment policies do not always generate enough money during its term to pay off the mortgage at the end of its term. This is currently the case with many endowment policiesin the UK.

Freehold

When you own both the land and property.

Interest Only

Your monthly payments to your lender are simply made up of interest. You do not pay any of the capital during the term of the mortgage. At the end of your mortgage term you pay off the mortgage using the proceeds of a separate investment vehicle, by way of an endowment, ISA or personal pension or you sell the property.

Investment Vehicle

An investment vehicle is any method in which to invest and is often used when taking out an interest only mortgage to enable at the end of the mortgage period for the lender to be repaid the initial loan taken out. This could be an endowment policy, personal pension or ISA.

ISA - Individual Savings Account

This is a tax free way to own shares or have a cash savings account or life assurance. Depending on the lender you are able to use your ISA to repay an interest only mortgage.

Leasehold

Leasehold generally occurs when your house or flat is on a shared piece of land. It will be for a set period of years. Your property after this period reverts back to the freeholder of the land.

LTV - Loan to Value

The Loan to Value or LTV is the size of the loan/mortgage as a percentage of the value of the property. For example If the house is valued at £200,000 and you make a 20% down payment as the deposit of £40,000 then the LTV is 80%. Different mortgage products are available depending on the LTV required.

MIG - Mortgage Indemnity Guarantee

This is an insurance that some lenders will insist on which covers the lender in the event of you defaulting (failure to pay) your mortgage. It can cost £1000's of pounds and it would be you that pays the premium and not your lender. Before deciding on your mortgage lender check to see if this is a requirement, if it is see if there is another lender that can offer you the mortgage without such a condition.

Mortgage

A mortgage is a home owner loan to purchase a property. The security of this loan is the property you are purchasing.

Negative Equity

Negative equity occurs where the value of the property is lower than the amount of the loan you have secured against it. This normally occurs if there is a decline in the value of properties.

Repayment Mortgage

When you take out a repayment mortgage your monthly payments pay both interest on the amount you borrowed and a part of the capital to repay the outstanding mortgage. These mortgages can also be known as a capital and interest mortgages.

Self Certified - Self Cert

This is where you are self employed or have a controlling interest in a company and are required to self declare what you earn. The lender will generally not require seeing audited accounts, but the more information you provide the more self cert products are available to you.

Tie in period

A tie in period is a length of time that you have agreed to stay with your lender. You will have been given a tie in period if you have opted for a mortgage offer with discounted rates, fixed rates or a cashback option. Should you wish to move your mortgage elsewhere during your tie in period you will be required to make an early redemption payment. After the tie in period mortgage rates normally revert to the lenders standard variable rate.

Tracker rate

Tracker mortgage rates follow changes in the Bank of England base rate for a set period, with a constant margin being maintained between the base rate and the morgage interest rate. So when the Bank of England announces a base rate change, your mortgage rates will follow the movement (up or down).

Variable Rate

This is the lenders standard variable rate and the lenders interest rates go up and down according to the current base rate. Your interest payments therefore change accordingly.

Valuation

The lender will require the property you are looking to purchase to be valued to determine how much it's true market value is, what condition the property is in and whether the property is suitable for the lender to lend a mortgage against. You usually pay the bill and you usually get a copy of the report.

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