A glossary of mortgage jargon to help you.

A glossary of mortgage jargon to help you.

The mortgage sector uses a host of new words and phrases that buyers may not be familiar with, and this glossary of mortgage jargon is designed to help.

Would-be buyers may find these terms helpful to know.

This isn’t comprehensive, but it should be enough to get you started. Don’t forget that we are always on hand to discuss any of the terms listed and any others that you come across.

Annual Percentage Rate (APR):

The APR shows the total cost, including interest and fees, paid per year on your borrowing. It is usually displayed as a percentage of the loan amount.

Arrangement fee: 

This is a charge for setting up your mortgage. You might also see it as the application, completion, or product fees. You’ll usually have the choice of adding the arrangement fee to your mortgage – but that does mean you’ll pay interest on it – or paying the cost upfront. If you pay upfront, there’s a chance you’ll lose the money if the house purchase doesn’t go ahead.

Arrears: 

If you are in arrears with your mortgage, it means you have missed at least one payment. Continually falling into arrears can put you at risk of losing your home.

Base rate: 

Also known as the ‘bank rate’ (BBR), the base rate is the rate of interest set by the Bank of England, which influences most interest rates.

Specific mortgage deals, such as trackers, are directly affected by the base rate. Similarly, lenders’ SVRs (standard variable rates), while not directly linked to BBR, can sometimes be adjusted as the Bank of England moves its rate.

Booking fee: 

Some lenders may charge a booking fee typically paid when you submit your mortgage application to secure the product. It’s usually non-refundable, even if the property sale falls through and the mortgage is no longer needed.

Buy-to-let: 

A buy-to-let property is one that has been bought to rent out to tenants. Mortgage lenders offer specific buy-to-let mortgages to suit these types of buyers, often at higher rates than standard mortgages.

Credit score: 

You may be familiar with a credit score. This is the score that everyone who borrows money (from mortgages to mobile phone contracts) has, and it is used to assess suitability for lending. Several different credit reference agencies can tell you your credit score. In addition, some lenders will have their own scoring system to assess suitability.

A low or poor credit score is generally a sign of previous missed payments and will make you less appealing to lenders.

Early Repayment Charge (ERC): 

Sometimes, a mortgage deal sets an early repayment charge. This happens if you pay some or all of your mortgage off ahead of the end of your product term or if you transfer to another rate before the end of the product period. Speak to a mortgage adviser for guidance on whether this will affect you.

Equity: 

Equity is the total value of the property, excluding the amount you owe on the mortgage.

Fixed-rate mortgage: 

This type of mortgage deal agrees that the interest rate for the mortgage will remain the same for a set period-usually between two and five years.

Use our mortgage calculator to see what your monthly payments would be.

Guarantor: 

A guarantor is a person—such as a parent—who legally agrees to make the mortgage payments if the borrower is unable or unwilling to make the repayments.

Interest-only mortgage: 

An interest-only mortgage allows the borrower only to pay the interest portion of the sum borrowed.

However, this means that your mortgage balance doesn’t reduce and that you will not be building equity in the property as you make payments. The full mortgage amount will still be due at the end of the mortgage term.

Key facts illustration (KFI): 

This document sets out all the mortgage details that the borrower will need to know.

Loan to value (LTV):

The LTV, usually expressed as a percentage, is the proportion of the property price you borrow when you get a mortgage. If, for example, the property is valued at £100,000 and you borrow £80,000, this is an LTV of 80%. Your lender will request a valuation following the application to determine the property’s market value. 

Mortgage term: 

The mortgage term is the length of time you agree to pay it off. Generally, this is 25 years, but it can be longer or shorter.

Negative equity: 

This is when a house or flat’s current market value is less than the balance of the mortgage. If you’re in negative equity you could find it hard to move house or remortgage. For example, you would be in negative equity if you have a mortgage balance of £220,000 and the property is now worth £200,000.

If you are struggling financially and think you may be heading into negative equity, then please talk to your lender, who is there to help.

Or visit the National Debt line website for more information and help.

Offset mortgage: 

This type of mortgage allows borrowers to use their savings to ‘offset’ their mortgage debt. This means that interest on the mortgage account is calculated using the net of the linked mortgage and savings balances. The savings account will not earn any interest whilst it is being used to offset the mortgage balance, and the customer can access the savings at any time.

For example, if you have a mortgage balance of £80,000 and you have £20,000 in a dedicated savings account, interest will be calculated on £60,000 of the mortgage.

Overpayments: 

An overpayment is any payment toward your mortgage that you make over the agreed amount. Generally, lenders allow up to 10% overpayments per year on your mortgage without resulting in Early Repayment Charges, even if you are tied into a deal. Overpaying can result in less interest overall and shortening the time to clear the full mortgage sum.

Redemption: 

This is when you pay off your mortgage with your current lender by either selling your property or remortgaging to another lender.

Remortgaging: 

This describes arranging a mortgage with a new lender on your current home. This could be due to the maturity of a fixed product rate or to enable you to release equity in your home, for example, to carry out home improvements. There can be multiple reasons to remortgage, and these should be addressed with an adviser.

Repayment mortgage: 

This kind of mortgage is the typical mortgage that you think of, in which you make payments toward both the interest and the capital borrowed to no longer owe anything by the end of your mortgage term.

Repossession: 

This occurs when a borrower has defaulted on their mortgage. A  court has awarded possession of the property back to the lender to recoup the outstanding mortgage balance and any other financial losses.

Tracker mortgage:  

A tracker mortgage is a type of variable rate mortgage where the interest rate tracks (or follows) the Bank of England Base Rate (BBR). This means that the interest you are charged on your mortgage, depends on how the Base Rate changes.

For example, if you have a mortgage that charges an interest rate of BBR + 1%, your interest rate will always be 1% above the BBR, and your rate will automatically change if the BBR changes.

Some lenders implement floors, meaning your total rate cannot fall below a certain level. Your offer document will clearly outline this.

Valuation report: 

This is a basic inspection of the property that will determine its value. There are many kinds of valuation reports, but your broker can guide you through these options in greater detail.

This glossary of mortgage jargon is designed to help you be better prepared to purchase your new home with confidence.

Please feel free to contact us today if you need further information or help understanding the glossary of mortgage jargon.