Glossary of Mortgage Terms

Annual Percentage Rate (APR)

A way of comparing the rates charged by different mortgage lenders. A percentage figure is calculated by using a standard formula that takes into account interest rates and associated costs over the term of the mortgage. Although mortgage lenders are legally obliged to quote the APR in any mortgage schedules they provide, its usefulness is questionable as more sophisticated repayment methods are introduced by lenders, and as mortgage borrowers become accustomed to remortgaging every few years.

Base Rate (BoE Base Rate)

The Bank of England Base Rate is set by its Monetary Policy Committee (MPC) the first Thursday of every month and determines the lending rates in the UK. All mortgage rates offered are done so based on the current or recent historical Bank of England Base Rate

Buy-to-let mortgage

Buy to Let mortgages are specific to property that is currently or will be let to tenants.

Although this is not strictly a commercial loan it can be called pseudo-commercial; as such you will encounter higher set-up costs and less attractive interest rates. In buy to let mortgages, lenders are not overly concerned by your income multiples as the primary method of mortgage payment will be the tenancy. As such buy to let mortgage lenders will require proof that the rent can meet or come close to the mortgage commitment.

Capital-and-interest mortgage

Another term for a repayment mortgage, you are paying both the ‘capital’ and the ‘interest’ on the loan.

Capped rate mortgage

A mortgage that provides protection against rising rates by setting a maximum payable rate (the cap) for a set period. You won’t pay more than the capped rate but if rates fall and your mortgage lender’s standard variable rate drops below the cap, you will pay less.

In most instances a large drop in rates would be required to see any reduction in interest payable. You may also be subject to early repayment charges during the period your mortgage is capped.

Critical illness insurance

A type of insurance policy that pays a lump sum to an individual (normally the policyholder or their spouse) in the event of the policyholder being diagnosed with one of a list of life threatening or disabling illnesses.

Current account mortgage (CAM)

Essentially a current account mortgage is an offset mortgage where the offsetting is done against a current account as opposed to a savings account or ISA’s. Current account mortgages, as opposed to offset mortgages, have their interest repayments calculated daily.

Discounted rate mortgage

Discount rate mortgages give a discount off a mortgage lender’s standard variable rate (SVR) for a pre-defined length of time. The advantage being your payable rate will fall if rates fall, however, if rates rise then your payable rate will rise too. There are usually early repayment charges during the discounted period.

Early repayment charge

This is the fee you would have to pay to your mortgage lender if you decide to pay all or a large part of your mortgage off in a lump. These charges are usually only applicable during the period of your fixed, tracker etc mortgage, once you are returned to the lenders SVR these fees are usually not applicable.

Endowment

An endowment was a popular method of repaying an interest-only mortgage. It should be noted however endowment policies have of late got themselves a bad name.

An endowment policy is a type of life assurance that pays a tax-free lump sum at the end of its term. It also offers a guaranteed amount, usually equal to the mortgage debt, if the policy holder dies.

Equity

The equity is the value of the property less any mortgages or secured loans. If for example you owned a property worth £200,000 and you had a £90,000 mortgage and a £30,000 secured loan, your ‘equity’ would be £80,000.

Fixed rate mortgage

Mortgages offering a fixed payable rate of interest for a set period. Fixed rate mortgages give protection from rising rates and allows for easy budgeting of the mortgage cost.

Flexible Mortgage

A generic name for a recent product introduction to the UK. Flexible mortgages simply provide more repayment options to the borrower than standard mortgages and the features offered vary from lender to lender.

The defining characteristics of flexible mortgages are their monthly or daily interest calculation as opposed to annual calculation and the ability to accept overpayments without an early repayment charge at any time.
Flexible mortgages are well geared towards those who may pay off their mortgage early or those with a sporadic income.

Higher lending charge

A one-off charge that mortgage borrowers may be charged. It is usually only  payable when you want to borrow a high percentage of a property’s value —usually above 75% loan to value; but it is common practice for mortgage lenders to carry the cost of this insurance themselves between 75% and 90%.

Income Multiples

Income multiples are the description of the ration between borrowing and lending a lender is willing to extend to customers. For example an income multiple of 4 means a lender will lend you a total of 4 times your total income.

Interest calculation (daily, monthly, annually)

This is a description of the frequency with which your interest payable is being calculated. For borrowers making interest only mortgage payments this holds little to no difference; repayment mortgage payers however can see significant savings by more frequent calculation of interest payable.

Interest-only mortgage

Monthly payments consist entirely of the interest due on your mortgage, so that the balance you owe is not reduced during the term. Interest-only mortgages should only be taken up with another product by use of which you will be able to settle the outstanding borrowings upon completion of the mortgage term.

Life assurance

A policy designed to repay your mortgage in the event of your (the policy holders) death. Interest-only mortgages with endowments have in-built life cover, but if you have an ISA-linked interest-only mortgage or a repayment mortgage, life cover must be arranged separately.

Loan to value (LTV)

A percentage figure indicating the size of the borrowings against a property in relation to its market value.

A house valued at £200,000 with a mortgage of £100,000 would have a loan to value (LTV) of 50%. The lower the LTV the better rate you will likely achieve. Borrowing over 75% may trigger a Higher Lending Charge (see above)

Monetary Policy Committee

The bank of England’s panel in charge of monitoring and setting interest rates.

Payment protection insurance

These are insurance policies that cover the policy holder against sickness and illness. If they cannot meet their mortgage commitments due to illness, the policy will pay the mortgage repayments for a predetermined length of time (usually 12 months).

Repayment mortgage

The alternate to an interest only mortgage; mortgage repayments are both capital owed and mortgage interest owed. At the end of the term, usually 25 years, the debt will be repaid.

Split loan

A mortgage that has some of the loan set up as an interest-only mortgage and some on a repayment basis mortgage.

Standard variable rate (SVR)

The standard variable rate or SVR is the rate which, at the end of your products term will be applied to your borrowings. Some of the more modern ‘flexible’ mortgages offer improved SVR’s.

Stamp duty

This is a tax payable on land when purchasing in the UK.  The amount payable depends upon the purchase price. Stamp duty rules have been relaxed in a bid to stimulate the market of late.

Tracker mortgage

Tracker mortgages are mortgages were the rate payable ‘tracks’ the Bank of England base rate. The borrower can therefore experience positive gain from lower interest rates and negative losses from Bank of England rate rises.

Buildings and Contents Insurance

Insuring your home is essential and a contractual obligation upon most mortgaged properties. All mortgage lenders insist you have adequate buildings insurance. If you do not take the lenders own policy, there is often an administration charge to check the insurance policy provides suitable cover.

Legal fees

Unless stated to provide basic legal fees, you will be responsible for the fee of the solicitor arranging the lending. If however you have basic legal fees covered, this does not totally indemnify us against legal fee’s as they only cover the, ‘basic’ enquiries.

Release fee (sealing fee)

An administrative charge imposed by mortgage lenders for releasing the title deeds of your property when you redeem your mortgage (repay in full). This fee is payable because remortgages involve redeeming the mortgage with one lender and transferring it to another. It varies considerably from lender to lender: it can be up to £300 - and although it is not strictly speaking an early repayment charge, borrowers may well feel penalised by fees at the higher end of the scale.

try using an independent Title Deeds search firm such as Land Registry Deeds, who can provide the service at a tenth of the cost.

Redundancy – How it Affects Mortgage Holders

The DSS gives no assistance to borrowers for nine months following redundancy, and qualification for help with paying mortgage interest thereafter is means-tested and restricted to interest on the first £100,000 of the loan. If you are anxious about being able to maintain payments in the event of redundancy or long-term illness, you should consider taking out mortgage payment protection insurance.

News

Nationwide Offers First Time Buyers a Discount

Friday 16th October
The nationwide today has stepped forward with 2 new offers to help open up the market for first time buyers.

The offers are as follows; a £500 discount off any reservation fee’s or a £250 discount off reservation fee’s and no legal’s to pay.

The offers are available on The Nationwide’s 3, 4 and 5 year fixed rate deals and also on its 3 year tracker deal.

Mortgage director at Nationwide, Andy McQueen, said: "We are reducing the amount that [first time buyers] need to pay upfront and so hope we've removed a barrier which may have prevented people from buying a home ."

The move will be welcomed, however the true barrier to first time buyers at the moment is the excessive deposit amounts required by all major lending institutes, making a £500 discount as practically useful as a £5 reduction for most.

Coalition to Fight Stamp Duty Formed

Friday 16th October
The National Association of Estate Agents (NAEA) and the Association of Residential Letting Agents have formed a coalition named “1808 Coalition” after the date Stamp Duty was introduced.

The two groups and of course the coalition they form, believe the reinstallation of Stamp Duty at its normal levels will be detrimental to First Time Buyers and Buy to Let Investors.

Stamp duty, which is normally in place for transactions on residential property above £125,000 in value has for some time sat at £175,000 in a bid to re-light the fire under the housing market, however it is due to return to 125,000 on December 31st this year.

Stamp duty is applied to the total sum paid in consideration for a property where that sum exceeds the threshold. For example on a property transaction of £190,000, £1,900 is due in stamp duty (1%), not as many believe 1% of the sum exceeding the threshold i.e. £15,000 (£190,000 - £175,000) or £150 in stamp duty.

Chief executive of the NAEA, Peter Bolton-King, said: "Stamp duty is a barrier to entry for many first-time buyers and is also prohibitive for those looking for a step up the property ladder . The time has come to re-assess Britain's most unpopular tax."

Whilst we cannot agree that it its the most unpopular tax (recent surveys show 31% of respondents take the most displeasure in paying inheritance tax, compared to a mere 23% loathing Stamp Duty) however we support their call for an extension to the raised threshold as in the current market conditions, all stops should be pulled in efforts to draw in first time buyers, life blood, into the market.