YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

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Guide and jargon on mortgage rates and repayment

Accident, Sickness and Unemployment Insurance (ASU): In the event of an accident, sickness or involuntary unemployment befalling a borrower, this insurance is designed to protect your mortgage payments against loss of, or a reduction in income.

Adverse Credit: This is an umbrella term used of applicants with poor credit history.  This may include mortgage arrears, defaults, County Court Judgements (CCJ’s), bankruptcy, Individual Voluntary Agreements (IVA’s) and house repossession.  Borrowers with elements of adverse credit are offered higher rates than standard Full Status applicants are, usually with terms and conditions relating to the extent of their adverse credit history.  Often adverse credit mortgages are Libor-linked rates.

Annual Percentage Rate (APR): The APR takes into account all fees and other costs in connection with the mortgage as well as the lender’s interest rate.  The APR is intended to help you compare the terms offered by different lenders and all lenders must quote an APR in addition to the actual rate of interest applied annually to your mortgage.

Arrangement Fee:  This fee may be charged on specific products and is either payable in advance, added to the loan or deducted from the advance on completion.  It covers the administrative expenses incurred whilst processing an application.

Base Rate: Every month the Monetary Policy Committee sets the Bank of England Base Rate, to which all mortgage rates are linked either directly, as Tracker Mortgages, or indirectly, in all other cases. 

Base Rate Tracker Mortgage: Unlike an ordinary standard variable rate mortgage the Tracker tracks or follows the Base Rate set by the Bank of England.  This means all Bank Rate cuts or increases are automatically passed onto the borrower.  The difference between the base and pay rate remains constant for an agreed period and can mean a lower mortgage repayment than an ordinary variable rate.

Booking Fee:  If you wish to take out a special offer mortgage (fixed, capped or discounted rates), a reservation fee may be charged to cover any administration involved and the special arrangements required to secure the funds.  It is either payable in advance, added to the loan or deducted from the advance upon completion.

Bridging Loan:  A temporary loan, which enables you to complete the purchase of a new home, if you need to do this before completing the sale of your existing house.

Buildings & Contents Insurance: This insurance is designed to cover damage to the mortgaged property and/or its contents in a variety of specified scenarios. In some cases if the lender’s own insurance is not taken they will often charge an administration fee.  The buildings insurance must be maintained under a householder’s building policy for a sum not less than specified by the lender’s valuer.

Buy-to-Let Mortgage (BTL):  This is a mortgage for property that will be let by the borrower to other tenants.  When lenders calculate how large a loan the borrower can afford to repay on BTL they do so primarily on the basis of projected rental income, rather than salary income multiples.

Capital and Interest Mortgages: (REPAYMENT MORTGAGE).  The mortgage payments on a repayment mortgage are divided into two elements.  The first is repaying the original capital borrowed and the second is the interest charged on the loan.  In the early years more interest than capital is repaid but as time goes on this will change so that more of your monthly mortgage payment is used to repay the outstanding capital.  At the end of the repayment period you will be guaranteed to have repaid the amount you borrowed providing that you have maintained your mortgage payments.

If you select a capital and interest mortgage then you may need a level term or decreasing term assurance policy to protect your home and repay the outstanding loan should you die before the end of the mortgage paying term.

Capital Rest Period: This is the regularity with which a lender calculates the outstanding on mortgages, and hence the size of monthly repayments.  It is usually annually, monthly or daily.  With capital and interest mortgages this can be important; an annual interest calculation means that the borrower will pay interest on capital repayments that have been made in the course of that year.  In contrast a daily or monthly interest calculation means that the balance, and consequently the interest charged, will reduce with every capital repayment made.

Capped Rate Mortgage:   A capped rate mortgage has a maximum interest rate limit, above which the rate cannot rise during an agreed period, usually 1 to 5 years.  However, should the lenders normal standard variable rate fall below the rate that has been set, then the rate of interest being charged will also reduce accordingly.  Once reduced, this rate could increase if the lender’s normal standard variable rate increases but will not increase above the rate initially set, i.e. the “cap”.

Capped & Collared Mortgage:  This type of mortgage is similar to the capped rate mortgage, except that there will be a minimum rate of interest set i.e. “collar”, below which the rate of interest will not fall.

Cash back Mortgage:  This is a mortgage in which the lender refunds a sum of money, either as a percentage of the loan or a flat figure, to the borrower upon completion.  With this type of offer the borrower will typically be tied to the lender’s SVR by early repayment charges necessitating repayment of the cash back if the loan is repaid within a set period. Such payments are usually made in the form of a lump sum, but can be spread over 1 or 2 years.  Payments called “cash backs” are treated as gifts and are normally subject to Capital Gains Tax.

Completion:  This is the moment when a transfer of property has legally taken place, after all legal documentation has been completed and funds have been transferred from the buyer’s solicitor to the seller’s solicitor.

Conveyancing: This is the legal process whereby ownership of a property is transferred.

Current Account Mortgage:  This is a fully flexible mortgage combined with a current account.  Money in the current account is automatically set against the mortgage balance and interest is only charged on the outstanding amount, meaning interest payments are reduced.

Deferred Rate Mortgage:  This arrangement requires only a portion of the interest charged on a mortgage to be paid for an agreed period, and the unpaid portion will be added to the mortgage balance.  This means that for the agreed period you will pay a lower monthly payment, but the “saving” you made during the initial period will be added to your balance, thereby increasing the amount you owe at the end of the agreed period.  The full monthly payment will be required on the new mortgage balance, which is the original amount plus the “deferred” amount of interest.  The monthly payment you make after the initial period of “deferred” interest will be higher than that on a conventional mortgage arrangement, although the interest rate will be the same.

Disbursements:  The fees your solicitor has to pay (e.g. stamp duty, land registry, search fees etc.) which will be added to your solicitors bill.

Discounted Mortgage: A discounted mortgage will provide you with a guarantee that the interest rate charged to your mortgage will remain at an agreed percentage below the lenders normal standard variable rate, i.e. a discount, for an agreed period usually 1 to 5 years.  This will mean that your monthly mortgage payments will vary during the period, but the interest rate you will be charged will always be discounted by the percentage agreed initially.  Once the agreed period ends your mortgage will revert to the lender’s normal standard variable rate at that time.  There are often early repayment charges applicable if the loan is repaid within the discounted period.

Discounted Tracker Rate Mortgage: This is a variable mortgage that is discounted from the Bank of England’s Base Rate by a set percentage within a set period.  There are often early repayment charges applicable if the loan is repaid within the discounted period. 

Early Repayment Charge:  This is a penalty charged on traditional (i.e. non flexible) mortgages when the loan is repaid in full within a set period.  Usually it applies on a pro rata basis when capital repayments are made outside of the agreed monthly payments.  Many early repayment charge periods are linked to those of offers such as capped, discounted or fixed rate periods.  However some mortgage rates have extended early repayment charges which tie-in borrowers even while they are paying the lenders SVR.
Also known as Early Repayment Penalty (ERP); Redemption Penalty.

Endowment:   This type of plan is generally selected in conjunction with your mortgage and must therefore expire at the same time.  Your regular premiums will be used to purchase units in a chosen fund.  Over the term of the mortgage the more you save the more the number of your units increase.  The value of each of those units increases to reflect the growth in the value of the underlying investment.  However it is important to understand that the value of the units can go down as well as up.

The endowment policy also provides you with life cover so that should you die during the mortgage term there is a guaranteed sum available to repay your loan.  This life cover is paid for by cancelling units, which have been allocated to your plan.

Equity:  The difference between the value of your property and the amount of any outstanding loans secured against it.

Exchange of Contracts:  This is the stage in England, Wales and Northern Ireland that the deposit money is paid and both parties are legally bound to fulfil the agreed conditions of sale and purchase.

Exclusive Mortgage:  This is a mortgage only available to intermediaries through a specific packager, in conjunction with a lender who provides funding.

Fixed Rate Mortgage: A fixed rate mortgage will guarantee the interest rate chargeable for an agreed period.  The interest rate is set at the beginning of the mortgage and will not be affected by any subsequent changes in interest rates.  Under a fixed rate mortgage the interest rate is set for a specified period typically between 2 and 5 years.  Once the agreed period ends, the mortgage interest rate will revert to the lender’s normal standard variable rate at that time.  Some lenders may offer a further fixed rate for another agreed period.

Flexible Mortgage:  This is a method that allows you the flexibility of decreasing either the term or the repayments of your mortgage, by making over or under payments to your lender at anytime, without penalty.  This may also allow you to borrow additional amounts from your chosen lender secured against the property, within certain confines, for a maximum amount usually agreed at the outset, this of course will increase your monthly payment’s or the term of the loan agreed at the outset.

Freehold: The term used to indicate ownership of a property and the land on which it stands where both belong to the owner indefinitely.

Full Status: This term describes borrowers with a good credit history who are not self-certifying their income.

Gazumping:  This is when a prospective purchaser has an offer for a property accepted, before another potential buyer puts in a higher offer for the same property.

Gross:  A term used in connection with a sum of money from which tax has not been deducted.

Higher Lending Charge: If you borrow a high percentage of the purchase price of your property, or value of the property in the case of a re-mortgage, usually more than 90% (but in the case of some lenders 75%), then you may be required to pay a high percentage lending fee.  Some or this entire fee will be used by the lender, at its discretion to obtain mortgage indemnity insurance to act as additional security for its loan.  This insurance indemnifies the lender only and will not benefit the borrower.

Please note that:

1. This type of insurance will not protect you if your property is subsequently repossessed and sold for less than the amount you owe on your mortgage.
2. You will remain liable to pay all sums owing to the lender, including the arrears, interest and your lender’s legal fees.
3. If a claim is paid to your lender under this insurance, then the insurance company has the right to recover this amount from you.

Income Multiples:  These are the multiples that lender’s apply to borrower’s income in order to determine the maximum loan they will offer them.

Interest Only Mortgages:  The interest only Mortgage is arranged so that the capital sum you borrow remains outstanding until the end of the mortgage term and you only pay interest on your loan until that time.  At the end of the mortgage term you will then be required to repay the original loan.  Your lender will usually insist that you save towards the repayment of the loan using some form of investment plan.

There are many different types of investment mechanisms which you may use to repay the balance of your interest only loan. 

ISA (Individual savings account): An ISA is a tax efficient form of savings which allows you to invest your money, either by means of single contributions or monthly contributions into one or both of two areas, cash based deposit account or in equities.  You will be able to choose from a variety of funds in which you can invest your money and at the end of the mortgage term the accumulated fund value will be used to repay your outstanding mortgage.

Whilst the return from equity based ISA’s cannot be guaranteed and the return maybe more or less than the amount you have borrowed, cash based ISA’s are unlikely to achieve a sufficiently attractive return to build up a sufficiently large fund to repay your mortgage.

If you select an ISA mortgage then you may need a term assurance policy to protect your home and repay the outstanding loan should you die before the end of the mortgage term.

If you select an Interest Only mortgage it is YOUR responsibility to ENSURE that a suitable investment product is in place to repay the mortgage loan otherwise your home is at risk.

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 re-mortgage) and as such the Land Registry fee will normally be payable to the solicitor and accounted for in his final account.

Lease:  A document which grants possession of a property for a fixed period of time and sets out the obligations of both parties, landlord and tenant, such as payment of rent, repairs and insurance.

Leasehold:  The arrangement by which a property is let by lease, by a landlord, to a tenant for a fixed period of time.

Legal Costs:  For either a purchase or re-mortgage there are legal fees to pay your solicitor.  It would be advisable to receive from the solicitor you choose a breakdown of all the costs involved.

Libor Linked Mortgage:  Libor is the London Inter Bank Offered Rate at which banks lend money to each other.  Libor changes daily and a LIBOR linked mortgage will normally be adjusted every three months.  LIBOR linked rates are usually quoted as X% above Libor.

Loan Advance: This is the actual amount of money that the lender agrees to lend you.

Loan to Value (LTV):  This is a percentage figure of the loan amount in relation to the property value.  For instance a £100,000.00 property bought with a mortgage of £70,000.00 has an LTV of 70%.  The higher the LTV, the higher the interest rate charged will be; above certain LTV’s a Higher Lending Charge comes into affect.

Mortgagee:  A building society, bank or other company, which lends money against the security of a charge over the property purchased.

Mortgagor: A person who borrows money, usually to buy a property (i.e. the Borrower)

Mortgage Protection:  A life insurance plan with the aim to provide a lump sum if you die.  You can also add other benefits such as critical illness cover and waiver of premium.  The two types of mortgage protection (1) Level cover – the level of cover remains the same throughout the plan term or (2) Decreasing cover – this means that the amount of cover in your plan will reduce as the outstanding amount on your mortgage reduces.

Net:  A term used in connection with a sum of money from which tax has been deducted.

Overpayment:  This is when an unscheduled capital repayment is made or when monthly payments are increased, in order that the mortgage is repaid before the end of the mortgage term, saving considerable sums in interest.  Many traditional (i.e. non flexible) mortgages include early repayment charges if overpayments are made within a set period.  In contrast flexible mortgages allow unlimited overpayments without penalty and, increasingly, mortgages are semi-flexible, allowing borrowers to overpay a certain percentage of their loan each year without incurring early repayment charges.

Pension:  A pension mortgage is arranged so that the mortgage expires at your normal retirement date.  The tax free lump sum from your pension fund is used to repay your outstanding loan.  Your pension contributions will be used to purchase units in your chosen fund.  The value of the funds may go up and down.  At retirement your fund will be assessed to determine its final value.  Your tax free cash sum will be calculated based on this final figure and this may then be used to repay your outstanding loan.  There is no guarantee that the tax free cash sum will be sufficient to repay your loan. 

If you select a pension mortgage then you may need a term assurance policy to protect your home and repay the outstanding loan, should you die before retirement.
 
Personal Equity Plan (PEP):  A repayment vehicle associated with interest only mortgages.

Portability: A portable mortgage is one that can be transferred to another property without penalty if the borrower moves house within an early repayment charge period.  The new interest rate that the lender will be prepared to offer depends on whether the loan amount increases or decreases.  If the latter, early repayment charges may apply.

Procuration Fee:  This is commission paid by lenders to intermediaries for introducing business to them.  The intermediary is obliged to disclose to the borrower the exact amount they received.

Registered Land:  Land for which title is registered and recorded at HM Land Registry, the central registry of title to property in England and Wales.

Right to Buy:  This is when a tenant living in a council-owned property purchases it at a discount, the size of which depends on the length of their tenancy.

Searches:  Enquiries made at the Land Registry, the Land Charges Register and Local Authorities to ensure there is nothing to cause concern about title to land.

Self Build:   This is a mortgage for a property under construction.  The loan is paid out in stages as the property is completed, in order to ensure the LTV does not rise to high at any point.

Self Certification Mortgage:  This is a mortgage where a borrower states their income and signs a confirmation of their ability to repay a loan, without having to provide evidence such as accounts, payslips or bank statements.  Consequently self certification rates are often higher than standard full status mortgages.

Shared Ownership:  This is a scheme operated by a Housing Association where the borrower owns part of a property, and pays the mortgage on this, while a housing association owns the rest of the property, and the borrower pays rent on this.

Split Loan:  This is a mortgage that is taken partly on a capital and interest basis and partly on an interest only basis.

Stamp Duty:  Stamp Duty is a tax levied by the government.  It applies to house purchases over a certain value.  Currently there are different rates applicable dependant on the value of the property.

Standard Variable Rate Mortgage: This type of mortgage sets its interest rates in accordance with the lenders standard variable rate.  If the rate increases or decreases during the lifetime of the mortgage your monthly payments will alter accordingly.

Subject to Contract:  A provisional agreement made between buyer and seller, before exchange of contracts, which allows either side to back out without penalty.

Term:  The length of time over which your mortgage loan is to be repaid.

Title:  The legal right to ownership of a property.

Title Deeds: The documents showing the ownership of a property.

Transfer Deed:  The legal document which transfers ownership of registered land.

Unregistered Land: Land, the ownership of which is established by a bundle of deeds, but is not registered on the registered land system.