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.
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 or Mortgage in Principle) 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 it gives you an idea of your budget and can strengthen 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 keep in mind that any changes to your mortgage terms may affect the APR.
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 and compare options to determine which works best for you.
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. Buy-to-let 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 refers to the original amount of money you borrow to buy a property. As you repay your mortgage, you’ll be repaying both the capital and interest. Some mortgages allow interest-only payments during the term, with the capital repaid 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.
CCJ (County Court Judgment)
A CCJ is a court order that can be issued if you fail to repay money you owe. Having a CCJ can negatively impact your credit score, making it harder to get approved for a mortgage, though some lenders specialise in CCJ-friendly mortgage deals.
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, which improves your mortgage eligibility.
Early Repayment Charge (ERC)
An early repayment charge (ERC) is a penalty fee for paying off all or part of your mortgage before the agreed term ends, typically during a fixed-rate period. This fee compensates the lender for the interest they will lose due to the early repayment.
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
With a fixed-rate mortgage, your interest rate stays the same for an agreed period (e.g., 2, 5, or 10 years). This means your monthly repayments remain consistent, providing stability and protection from interest rate increases during the fixed period.
Freehold
Owning a freehold property means you own both the building and the land it sits on. Unlike leasehold agreements, where you own the property but not the land, a freehold gives you full ownership, which can offer more control over the property.
Guarantor
A guarantor is someone (often a family member) who agrees to take responsibility for your mortgage payments if you can’t meet them. Guarantor mortgages are often used by first-time buyers or borrowers with poor credit, as they reduce 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
With an interest-only mortgage, your monthly payments cover just the interest on the loan, not the loan balance (capital). At the end of the mortgage term, the full loan balance is still owed, which usually means you’ll need to sell the property or have another repayment strategy in place.
Joint Borrower Sole Proprietor (JBSP)
A JBSP mortgage allows multiple people (often family members) to apply for a mortgage together, with the aim of increasing borrowing power. However, only one person (the proprietor) is the legal owner of the property. The other borrower(s) help with the mortgage repayments but do not own the property.
Loan-to-Value (LTV)
Loan-to-value is the ratio of your loan to the value of the property. For example, if you borrow £90,000 on a property worth £100,000, your LTV is 90%. A lower LTV usually means better mortgage rates, as there’s less risk for the lender.
Mortgage Offer
A formal offer from a lender outlining the terms and conditions of your mortgage, including the amount you can borrow and the repayment terms. Once you accept the offer, the lender will release the funds for the property purchase.
Negative Equity
Negative equity occurs when the value of your home falls below the amount you owe on your mortgage. For example, if you have a mortgage balance of £200,000 but your property’s current market value is only £180,000, you are in negative equity by £20,000. This can make it difficult to sell or remortgage your property, as you would still owe money to the lender even after the sale. Negative equity often arises when property prices fall, and it may impact your ability to switch mortgages or move home without covering the difference yourself.
Overpayment
A mortgage overpayment is when youy pay more than the required monthly mortgage payment, either regularly or as a one-off. Overpaying can help reduce the balance faster and lower the amount of interest you pay over the mortgage term.
Product Transfer
A mortgage product transfer is when you switch from one mortgage product to another with the same lender, usually at the end of your initial fixed-rate period. It’s a way to avoid reverting to the lender’s standard variable rate (SVR), which is often higher.
Repayment Mortgage
With a repayment mortgage, you pay off both the capital (the loan amount) and the interest with each monthly payment. Over the course of the mortgage 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 designed for individuals who receive a stipend as their main source of income, such as PhD students or clergy. Traditional lenders may not accept stipends as income, but some lenders offer special mortgage products to accommodate these borrowers.
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.
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.
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.
