Deciding on the right mortgage can be a big enough headache as it is, understanding all the terminology will at least help decipher the ‘jargon’ and help you understand the advice you are giveAn and how your mortgage will work for you.
Here are some of the more commonly used terms and their meanings to help you.
Adverse credit mortgage
A mortgage for people with a poor credit history. Also see Sub-prime.
Calculation used to determine your ability to maintain your mortgage repayments – check out the Quantum Advisers mortgage affordability calculator here
Annual percentage rate. The overall cost of a mortgage, including the interest and fees. It assumes you will have the mortgage for the whole term, so may not be a useful way to compare deals.
A set-up fee for your mortgage.
Most mortgage lenders will allow you to add this fee to the loan, but you should avoid this as you will end up paying interest on it for the life of the loan. Read more on mortgage fees in our guide to how to get the best mortgage deal.
If you go into arrears it means you have ‘defaulted’ at least once on your mortgage repayments, i.e. you have missed a month’s payment.
Contact your lender as soon as possible if you think you may go into arrears. Read more in our guide to avoiding repossession.
A rate of interest set by the Bank of England, which tracker rates and lendersb standard variable rates usually follow.
A type of mortgage set-up fee.
Insurance which covers you for damage to the structure of your home. A lender will require you to have buildings insurance in place when you take out a mortgage.
A buy-to-let property is bought with the sole intention of letting it to tenants. Most mortgage lenders offer special ‘buy-to-let’ mortgage deals for this purpose.
As this type of lending poses a greater risk to the lender, it is usually more expensive than a residential mortgage.
The amount of money you borrow to buy a property.
The mortgage interest rate charged by your lender will never exceed the upper ‘capped’ limit, regardless of increases to the Bank of England base rate.
Your lender gives you a certain amount of cash on completion, which could be useful to spend on decorating, for example. You should factor this money into the total cost of your mortgage over the initial period to decide whether itb s a good deal.
County Court Judgement. These are made against you for non-payment of debt, and could make it harder for you to get a mortgage.
If your mortgage deal has a collar, your interest rate will not fall any lower than the specified amount. So if rates drop to 3.75% and your deal is collared at 4%, you’ll miss out on the savings this lower rate will bring.
The legal process of buying and selling property. This can be done by a solicitor or specialist licensed conveyancer.
Current account mortgage (Cam)
Your mortgage, credit card and loan debts, and your current account and savings balances are combined into one account. Your credit balances offset your debts so you only pay interest on the difference.
These are usually more expensive than conventional mortgages, so whether they are worth it for you depends on your circumstances.
If you cannot meet your minimum required monthly mortgage repayment and go into arrears on your mortgage, this is known as ‘defaulting’.
Speak to your lender as soon as possible if you think this is going to happen to you.
This is the amount you are required to put down yourself towards the cost of the property. Most mortgages require you to pay at least 10% of the propertyb s value as a deposit. The cheapest deals are available if you can pay a deposit of at least 40%.
A discounted-rate deal is one where the interest rate you are charged is a set amount less than your mortgage lender’s standard variable rate (SVR). For example, if the lender has an SVR of 5.5% and the discount is 1%, then you will pay 4.5%.
Early repayment charges (ERCs)
Penalty fees you have to pay if you want to leave your mortgage during a specified period, usually the period of the initial deal. They can be charged at around 1-3% of the amount of the loan you have left to pay off.
A form of interest-only mortgage where you also pay money into a type of investment called an endowment to pay off the mortgage at the end of the term. There is a risk that the endowment may not grow enough to pay off the mortgage, leaving you with a shortfall.
The amount of money you would have left after subtracting the amount outstanding on your mortgage from the value of your property.
Equity release scheme
There are two types: lifetime mortgages and home-reversion schemes.
An equity release scheme allows older homeowners to release the cash tied up in their property. There is a minimum age limit to take out one of these products – usually between 55 and 65 years old, depending on the provider.
These schemes should only be taken out after getting independent financial advice. Read our equity release guide for more information.
The mortgage interest rate stays the same for the initial period of the deal, usually two to five years. This means you can be sure of exactly what you will be paying on your mortgage each month, as your rate won’t go up – or down – with the Bank of England base rate as it would with a variable-rate mortgage.
A flexible mortgage deal allows you to overpay, underpay or even take a ‘payment holiday’ from your mortgage. This can help you pay your mortgage off early and save money on interest, but flexible mortgages are usually more expensive than conventional ones.
You own the property and the land it stands on.
A third party who agrees to meet the monthly mortgage repayment if you are unable to. This is more common with first-time buyers, with the guarantor likely to be their parent or guardian.
Higher lending charge (HLC)
This is sometimes charged by your mortgage lender if you are borrowing more than 75% of the propertyb s value. It protects the lender against you defaulting on your mortgage.
These are government schemes designed to help existing tenants, key workers such as nurses and teachers, or other first-time buyers get onto the property ladder.
You pay just the interest on your mortgage each month. You should pay money into an investment each month too so that you can pay off the loan at the end of the term, but there is no guarantee you will end up with enough.
A mortgage broker or adviser. They can help you arrange a mortgage, although many of the best deals are only available directly from the lender.
The official body responsible for maintaining details of property ownership.
You own the property, but not the land it stands on. Flats are usually owned on a leasehold basis. You may find it hard to get a mortgage if there are fewer than 70 years left on the lease of the property you want to buy.
See Equity release schemes.
The size of your mortgage as a percentage of the propertyb s value. The cheapest deals are currently available if you are borrowing 60% or less.
The amount you pay your lender for your mortgage each month. Work out your monthly repayments here with our Quantum Advisers Mortgage Cost Calculator
Mortgage agreement in principle
A document from a mortgage lender to show you will be able to borrow a certain amount. You can use this to prove to a seller that you can afford to buy their property.
Mortgage payment protection insurance (MPPI)
Insurance that covers your mortgage b usually for a year b if you are unable to work due to accident, sickness or unemployment. It is also know as ASU insurance. An income protection policy could be a better way to protect your income than MPPI.
The amount of time you are taking the mortgage out for; 25 years, for example.
A formal contract between lender and borrower, outlining the legal obligations of the borrower and the rights the lender has should the borrower fail to make a repayment (see Defaulting).
When the value of your home falls to a level which is below the amount remaining on your mortgage.
An offset mortgage links your mortgage with your savings and, sometimes, your current account. Your credit balances are offset against your mortgage debt so you only pay interest on the difference.
These are usually more expensive than conventional mortgages so whether they are worth it for you depends on your circumstances.
A portable mortgage will allow you to transfer your borrowing from one property to another if you move, without paying any extra fees.
Your expert mortgage advisers
The cost of rebuilding your home for insurance purposes if it is destroyed.
When you change your mortgage without moving. You can do this to save money, to change to a different type of mortgage or to release equity from your home.
You pay off the mortgage interest and part of the capital of your loan each month. This is the only type of mortgage which guarantees that you will pay off the mortgage by the end of the term.
An investment or bank account you pay money into each month, to try to build up the amount of money you need to pay off the mortgage at the end of the term.
Also known as ‘self-cert’, these mortgages are designed mainly for self-employed people as it is difficult for them to prove their income. These mortgages have now virtually disappeared.
Shared ownership schemes are designed to allow people who would otherwise be unable to get a foot on the property ladder to do so.
The home buyer takes out a mortgage on a share of a property from a local housing association and pays rent to it for the rest.
A government tax you have to pay when you buy a property for more than B#125,000, or B#250,000 if you are a first-time buyer. For more information on stamp duty visit our tax guide.
Standard variable rate (SVR)
The default mortgage interest rate your lender will charge after your initial mortgage deal. When your ‘tie-in’ period is up, your interest rate will move to the lender’s SVR, which could be higher or lower than your initial rate.
See whether you could save money by remortgaging at this point using our mortgage comparison tool.
A sub-prime, or non-conforming, mortgage is geared towards people who have had credit problems. It is now much harder to get a sub-prime mortgage than before the credit crunch.
This is the period during which you are ‘locked in’ to your mortgage deal, and would have to pay an early repayment charge to move your mortgage elsewhere.
You should avoid mortgages that tie you in after your deal period has ended.
The interest rate on your mortgage tracks the Bank of England base rate at a set margin above or below it.
Lenders require you to carry out a valuation to verify that the property is worth the amount you want to borrow.
You should also get a survey done, such as a home condition report or building survey, to find out about the condition of the property.
The interest rate on your mortgage can go up or down according to your lenderb s standard-variable rate.
We hope you find this useful. If you need any further clarification or guidance through the mortgage jungle then Quantum Advisers are here to help and always dedicated to explaining things in jargon-free terms.