Jargon buster
APR
APR stands for Annual Percentage Rate of charge. The APR is the standard way of measuring the cost of borrowing and allows people to compare mortgage deals more easily. An APR calculation is made assuming the mortgage will run its full length without the interest rate changing.
Arrangement Fee
An arrangement fee is a fee often charged by mortgage lenders for arranging the loan. Most mortgage lenders will allow this fee to be added to the mortgage amount. It’s important to check arrangement fees properly when looking at mortgages, as some lenders may offer attractive low interest rates but go on to charge high arrangement fees.
Capital and Interest Mortgage
A Capital and Interest mortgage is also sometimes referred to as a Repayment mortgage. In this type of mortgage the monthly payment goes towards both the actual loan and the interest charged on the outstanding amount. For this reason monthly payments are usually more than they would be on interest only, but it does give the assurance that at the end of the loan period all debt to the lender will be fully repaid.
Capped Rate
A capped rate is where the interest rate on a mortgage will have an upper limit. Customers will pay a variable rate but, despite fluctuating interest rates, will never be charged above an agreed upper limit – known as the ‘cap’. You may also come across a ‘cap and collar’ mortgage, which means that there is a fixed lower limit as well as a fixed upper limit.
Cash Back Mortgage
Many lenders now offer cash back mortgages. It is used as an incentive to tempt people away from competitors, or as a loyalty bonus to encourage existing clients to stay put.
A cash back is where a lump sum is paid to the customer after the completion of the mortgage. It can be either a fixed amount or a percentage of the advance. Usually the cash back is higher if the loan to value ratio (LTV) is lower.
Completion
Completion is the final stage in the process of purchasing a property. It happens once legal documentation is finalised and the lender has sent mortgage funds to the buyer’s solicitor. The buyer then officially owns the property after the funds are transferred from their solicitor to the seller’s solicitor.
Conveyancing
Conveyancing is a term used to describe the extensive legal and admin work that must be done when buying a home. Most people employ a solicitor or licensed conveyancer to do this for them as it can be very complicated as well as time consuming. Conveyancing begins once an offer has been accepted and buyer and seller have exchanged solicitor details. It is important to make sure conveyancing is done properly and professionally to ensure nothing serious goes wrong during the purchase of a property.
Credit Crunch
The ‘credit crunch’ refers to a period when the UK economy was badly affected by the collapse of the mortgage lending market in America in 2007. It triggered a recession in Britain which started in the spring of 2008 and ended in autumn 2009.
This sparked fears and even actual restrictions on wholesale funding; making it very difficult for people to obtain any kind of credit around that time – including mortgage loans, personal loans, car finance and credit cards.
Credit Scoring
Creditors use credit ratings, also known as credit scoring, to decide whether they are prepared to lend you money. Creditors ‘score’ you on your credit history and publically available information such as the electoral roll and insolvency register to anticipate how you might behave. This would happen when applying for things such as a mortgage, overdraft, credit card, contract phone, certain general insurances and most current accounts.
Detailed Building Survey
A building survey is an in-depth report on a building and its structure. In order to compile one a comprehensive internal and external inspection takes place, noting things like method and materials of the structure, technical assessment and market valuation.
Discounted Rate
A discounted rate is where a discounted version of the variable rate is paid, for example, 2% below the lender’s standard variable rate for 3 years. This is not postponing the payment of capital and interest payments. However, having a discounted mortgage usually means that there is a restriction on how soon the mortgage can be repaid or some sort of penalty for repaying within a certain amount of time.
Early Repayment Charge
An early repayment charge is a fee that can sometimes be charged by the lender should the customer choose to pay off their mortgage early or switch mortgages before the end of the agreed term. It’s important to look out for ERCs when thinking about getting a mortgage – they usually apply to deals with fixed rates, capped rates and discounts.
Equity
The amount of equity is the difference between the value of the property and the amount still owed on the mortgage. For example, if a property is worth £400,000 and there is £300,000 owed, the owner would be said to have equity in the property of £100,000.
Financial Ombudsman Service
The Financial Ombudsman Service is an independent and impartial organisation, set up by parliament and free to consumers. They exist to sort out individual complaints and resolve disputes between consumers and financial services companies.
Fixed Rate Mortgage
A fixed rate means paying a fixed monthly payment for a set period of time, typically one to five years. After this period consumers will revert to paying the variable rate. It makes it a lot easier to budget precisely, which is why fixed rates are especially popular with first time buyers. However it is important to remember that having a fixed rate will usually involve a substantial arrangement fee as well as restrictions and penalties on changing lender.
Flexible Mortgage
Flexible mortgages are quite a recent thing to come about in the UK. They are effective because they allow the borrower to alter their monthly payments to suit their own circumstances and paying ability. The interest on a flexible mortgage should be calculated on a daily basis.
A flexible mortgage allows consumers to make overpayments at any time without receiving an early repayment charge. It also allows for underpayments to be made within certain parameters agreed at the start of the term, which is beneficial for those facing temporary financial difficulties. It can even allow for a ‘payment holiday’ where payments can be stopped altogether for a limited period. If someone chooses to make reduced payments, or stop them for a short time, they are given the option to ‘borrow back’ from any previous overpayments they might have made.
Higher Lending Charge
A higher lending charge is a fee that some lenders will charge when the amount borrowed on a mortgage exceeds a set percentage of the value of the property. This fee pays for the lender to take out an insurance policy. This protects the lender in case you can’t pay back your loan and they have to sell your house at a loss. The lender can still chase you for the shortfall.
Inflation
Inflation is the upward movement in the average level of prices of everyday goods and services. It is measured as an annual percentage increase.
Interest Only Mortgage
An interest only mortgage means that monthly repayments are only going toward paying interest, and the actual loan amount is not reduced. This means money needs to be invested elsewhere so the loan balance can be paid off at the end of the mortgage term. The idea is that the money invested during this time will grow and that there will be enough money for the mortgage to be paid off; however, all investments carry a risk. There is always a possibility that there won’t be enough money by the end of the term to pay off the outstanding amount.
Key Facts Illustration
A key facts illustration (KFI) is a document detailing the terms of a mortgage, interest rate, total repayment amount and any other additional charges. It is a legal requirement that lenders or mortgage advisors present a KFI before the borrower submits their application.
Loan to Value
Loan to Value shows the amount of money borrowed expressed as a percentage of the value of the property itself. For example if a mortgage was taken out of £150,000 on a house with a value of £200,000 it would mean the LTV (loan to value) is 75%.
Mortgage Deed
A mortgage deed is a legal document between lender and borrower confirming a mortgage and securing the loan on a property.
Mortgage Payment Protection
Mortgage payment protection is insurance which provides protection against hospitalisation, disability, accidents, illnesses and involuntary employment.
Tracker Mortgages
Having a base rate tracker mortgage means interest rates are linked to the base rate set by the Bank of England. These base rates are reviewed every month – reflecting the cost of borrowing from the Bank of England. This allows borrowers to rest assured that their payments will rise and fall in line with base rate changes. However, most lenders will charge a premium above the base rate, for example 0.95%.