Mortgage Terms Made Simple
Additional Borrowing
When you remortgage, you might borrow extra funds on top of your existing mortgage. This could be for home improvements, consolidating debts, or even helping a family member. However, the lender will check if you can afford the new total amount before approving this additional borrowing.
Adverse Credit
Adverse credit refers to a poor credit history, often caused by missed payments, defaults, County Court Judgments (CCJs), Individual Voluntary Arrangements (IVAs), or bankruptcy. Having adverse credit can make it harder to get a mortgage, but specialist lenders offer solutions, often with higher interest rates.
Affordability Check
Lenders carry out an affordability check to ensure you can manage the mortgage payments. This involves reviewing your income, regular expenses, and debts to confirm the mortgage is within your budget. They assess how much disposable income you have after your outgoings to ensure the mortgage repayments won’t stretch your finances too thin.
Agreement in Principle (AIP)
A Mortgage Agreement in Principle (AIP), also called a Decision in Principle (DIP) or Mortgage in Principle (MIP), is an indication of how much a lender is willing to lend you, based on a preliminary check of your credit history and income. It’s not a formal offer but gives you an idea of your budget and strengthens your position when making an offer on a property.
Annual Percentage Rate (APR)
The APR represents the total yearly cost of your mortgage, including the interest rate and additional fees. This makes it easier to compare different mortgage deals. The lower the APR, the less you’ll pay overall, but changes to your mortgage terms may affect the APR.
Agreement in Principle (AIP)
A Mortgage Agreement in Principle (AIP), also known as a Decision in Principle or Mortgage in Principle, estimates the amount a lender might be willing to lend you. This is based on an initial review of your credit history and income. Although it is not a formal offer, it provides you with a budget framework and can enhance your negotiating position when making an offer on a property.
Arrangement Fee
An arrangement fee, also known as a product fee, is charged by lenders for setting up your mortgage. It can either be paid upfront or added to your mortgage balance, meaning you’ll pay interest on it over time. Mortgages with a product fee typically come with lower interest rates, whereas mortgages with no product fee usually have higher interest rates. It’s important to factor this fee into the overall cost of your mortgage.
Arrears
If you miss one or more mortgage payments, you’ll be in arrears. Falling into arrears can result in penalties and, if unresolved, may lead to your lender repossessing your home. It’s important to contact your lender as soon as possible if you’re struggling to keep up with repayments.
Bad Credit
Bad credit refers to a poor credit history, usually caused by missed payments, CCJs, IVAs, or bankruptcies. Having bad credit can make it harder to get a mortgage, as some lenders may view you as high risk. However, there are specialist lenders who offer bad credit mortgages, though often at higher interest rates.
Base Rate
The Bank of England sets the base rate, which influences the interest rates that lenders charge. When the base rate increases, mortgage rates typically rise, especially if you have a variable or tracker mortgage. Keeping an eye on base rate changes is crucial when budgeting for mortgage payments.
Booking Fee
Also known as an arrangement fee, this is charged by the lender to cover the administration of setting up your mortgage. Some lenders let you add this fee to your mortgage balance, but this means you’ll pay interest on it.
Broker
A mortgage broker acts as a middleman between you and lenders. They help you find the best mortgage deal for your needs by searching a wide range of options. Brokers can also assist with the paperwork, submit your application on your behalf, and chase solicitors and estate agents to ensure the process is smooth and hassle-free.
Buildings Insurance
Mortgage lenders require you to have buildings insurance to protect the structure of your home. This covers repairs in case of damage from events like fires, floods, or storms. It’s a vital part of owning a home and is required before the mortgage is finalised.
Buy-to-Let Mortgage
A buy-to-let mortgage is designed for landlords looking to buy property to rent out. These mortgages usually require a larger deposit (around 25%) and tend to have higher interest rates. The lender assesses your ability to cover mortgage payments through rental income.
Capital
Capital is the initial sum of money you borrow to purchase a property. As you progress in repaying your mortgage, you will be paying off both the capital and the interest. Certain mortgage options allow for interest-only payments throughout the term, with the capital amount being settled at the end.
Capped Rate
A capped rate mortgage has a limit (cap) on how high your interest rate can rise. While your rate can fluctuate, it won’t go above this cap. This provides some protection against steep interest rate increases, while still allowing you to benefit from any rate drops.
Cashback Mortgage
A cashback mortgage provides a lump sum payment at the start of your mortgage agreement. While this may be attractive, cashback deals often come with higher interest rates, so it’s important to weigh up whether the initial benefit outweighs the long-term cost.
Completion Date
The completion date is the day when the ownership of the property is transferred to the buyer, and you can officially move in. At this stage, the mortgage funds are transferred from the lender to the seller via a solicitor.
Conveyancing
Conveyancing is the legal process involved in transferring ownership of property. This process is typically handled by a solicitor or licensed conveyancer, who ensures that everything is in order before the transaction is finalised.
Credit Score
Your credit score is a numerical rating that represents your creditworthiness. Lenders use it to assess how risky it might be to lend to you. A higher score means better mortgage deals, while a lower score might result in fewer options or higher rates.
Debt-to-Income Ratio (DTI)
Your debt-to-income ratio compares your monthly debt payments to your monthly income. Lenders use this to assess your ability to manage monthly mortgage payments. A lower DTI indicates that you have a manageable level of debt relative to your income, improving your mortgage eligibility.
Debt Management Plan (DMP)
A DMP is an informal agreement with creditors to repay outstanding debts at a reduced rate. Having a DMP can impact mortgage eligibility, but specialist lenders may still consider applications.
Early Repayment Charge (ERC)
An early repayment charge (ERC) is a fee imposed when you pay off all or part of your mortgage ahead of the scheduled term, usually during a fixed-rate period. This charge compensates the lender for the interest they miss out on due to your early payment.
Equity
Equity is the portion of your property that you own outright. It’s the difference between the market value of your home and the remaining balance on your mortgage. As you pay off your mortgage, your equity increases. You can also build equity if the property’s value rises.
Equity Release
Equity release allows homeowners, typically aged 55 or over, to unlock the value tied up in their homes without having to sell. There are two main types of equity release: lifetime mortgages and home reversion plans. This is often used to supplement retirement income.
Releasing Equity
Releasing equity refers to accessing the value you’ve built up in your property. This can be done through remortgaging, equity release, or taking out a loan against your home. Many homeowners release equity for home improvements, paying off debts, or supplementing their income. It’s important to consider how releasing equity will affect your future finances, as it can increase your overall debt or reduce the value of your estate.
Fixed-Rate Mortgage
A fixed-rate mortgage ensures that your interest rate remains unchanged for a predetermined period, such as 2, 5, or 10 years. This stability means your monthly payments will be consistent, providing you with financial predictability and shielding you from potential interest rate hikes during this fixed term.
Freehold
Owning a freehold property means you have complete ownership of both the building and the land it occupies. Unlike leasehold arrangements, where you own the building but not the land, a freehold provides you with full ownership rights, granting you greater control over your property.
Guarantor
A guarantor is an individual, often a family member, who agrees to assume responsibility for your mortgage payments if you are unable to meet them. Guarantor mortgages are frequently utilised by first-time buyers or borrowers with less-than-perfect credit, as they help mitigate the risk for lenders
Help to Buy
The Help to Buy scheme offers financial assistance to first-time buyers, enabling them to purchase a new-build property with a smaller deposit (typically 5%). The government provides a loan to boost your deposit, helping you access better mortgage rates.
Homebuyers Survey
A homebuyers survey is a more detailed property inspection than a basic valuation. It checks for issues like damp, structural damage, or repairs that could affect the property’s value or require costly fixes after purchase.
Indemnity Insurance
This is insurance that protects you or your lender against specific risks related to property ownership, such as missing planning permission for past building works. It’s often used in cases where a legal or structural issue may impact the value of the property.
Interest-Only Mortgage
An interest-only mortgage requires you to pay solely the interest on the loan each month, leaving the principal amount unchanged. Consequently, at the conclusion of the mortgage term, the entire loan principal remains outstanding. To settle this balance, you’ll typically need to sell the property or implement an alternative repayment plan.
Joint Borrower Sole Proprietor (JBSP)
A JBSP mortgage enables multiple individuals, often family members, to jointly apply for a mortgage to enhance borrowing capacity. In this arrangement, only one individual (the proprietor) holds legal ownership of the property, while the other co-borrowers contribute to the mortgage repayments without possessing ownership rights.
Loan-to-Value (LTV)
The loan-to-value ratio compares the amount of your loan to the property’s value. For instance, borrowing £90,000 against a property valued at £100,000 results in an LTV of 90%. Generally, a lower LTV is associated with more favorable mortgage rates, as it presents a reduced risk to the lender.
Mortgage Offer
A mortgage offer is a formal proposal from a lender that details the terms and conditions of your mortgage, including the approved loan amount and the repayment schedule. Upon accepting this offer, the lender will disburse the funds necessary for your property purchase.
Negative Equity
Negative equity arises when your property’s market value falls below the remaining balance on your mortgage. For example, if you owe £200,000 on your mortgage but your property is currently worth £180,000, you have negative equity of £20,000. This situation can complicate efforts to sell or remortgage the property, as proceeds from a sale would not fully cover the outstanding mortgage debt. Negative equity often occurs due to declining property values and can affect your ability to switch mortgages or relocate without personally covering the shortfall.
Overpayment
Overpayment involves paying more than your required monthly mortgage amount, either on a regular basis or as a one-time payment. Making overpayments can accelerate the reduction of your loan principal and decrease the total interest paid over the mortgage term.
Product Transfer
A product transfer refers to switching from one mortgage product to another with the same lender, typically at the end of your initial fixed-rate period. This strategy helps you avoid transitioning to the lender’s often higher standard variable rate (SVR).
Repayment Mortgage
With a repayment mortgage, your monthly payments are allocated towards both the principal loan amount and the accrued interest. Over the mortgage term, this approach gradually decreases the loan balance until it is fully repaid by the end of the term. you’ll gradually reduce the loan amount until it’s paid off in full by the end of the term.
Stamp Duty
Stamp Duty Land Tax (SDLT) is a tax payable when you purchase a property over a certain value. The amount of stamp duty you pay depends on the purchase price and whether it’s your primary residence or a second home.
Stipend Mortgage
A stipend mortgage is tailored for individuals whose primary income comes from a stipend, such as PhD students or clergy members. While traditional lenders might not recognise stipends as a valid income source, some lenders provide specialised mortgage products to meet the needs of these borrowers.
Tracker Mortgage
A tracker mortgage follows the Bank of England base rate, plus a set percentage. This means your mortgage repayments can go up or down depending on changes to the base rate, providing flexibility but also some unpredictability.
Tenure
Tenure refers to the type of ownership rights you have over a property, whether it’s freehold, leasehold, or shared ownership. The type of tenure affects the responsibilities you have, such as maintenance and ground rent payments.
Title Deeds
The legal documents that prove ownership of a property and the land it sits on. These deeds are held by your lender if you have a mortgage, and once the loan is fully repaid, they’ll be transferred to you.
Underwriting
Underwriting is the process lenders use to assess your mortgage application. It involves reviewing your credit score, income, outgoings, and other financial details to determine whether you are a suitable borrower.
Valuation Survey
A valuation survey is carried out by your lender to confirm the property is worth the amount you’re paying for it. This helps protect the lender’s investment. It’s different from a full property survey, which checks for structural issues.
