UK Mortgage Jargon Buster, Dictionary or Glossary

The Mortgage Advice Jargon Buster (Dictionary or Glossary)

APR - This stands for Annual Percentage Rate and should be used to compare the costs of credit. Rather than just being an interest rate, it includes up front and ongoing costs of taking out a mortgage. Lenders use different ways to work it out, and until there is a standard you cannot rely on it completely.

Capital and Interest Mortgage - This is when your monthly payments go to pay off the outstanding mortgage in addition to the interest on the mortgage. At the end of the term you will have no more to pay. Also called a repayment mortgage.

Capped rate - This is a mortgage where a maximum interest rate is agreed which the rate cannot go above. This deal lasts for a set period of months or years. Should the variable rate go below the maximum, the pay rate falls with it.

Cashback - An amount, either fixed or a percentage of a mortgage, which you can opt to receive when you complete your mortgage. The lender will likely claw back this money through a higher interest rate.

CAT marks/standards - CAT stands for Fair Charges, Easy Access and decent Terms. They were created by the government in an attempt to provide consumers with simple, clear financial products with straightforward, easy to understand terms. A CAT mortgage will have no arrangement fees, no redemption fees, and will have interest calculated daily. It will also have a minimum loan of only £5000, offer you repayment flexibility and the products should be portable should you need to move home whilst keeping the same mortgage. Finally, you will not have to buy the lender's insurance products and there will be no penalties should you find yourself in arrears but can make it up.

Completion - This is end of the mortgage process, when the contracts are signed, all questions have been answered and the keys are handed over and the funds transferred. Happy moving!

Contract - A contract is a binding agreement between two and more parties. In the context of house buying, a contract is signed by both the buyer and the seller and then 'exchanged' between the respective solicitors, at which point the house sale is binding on both sides.

Conveyancing - This is the legal process in which property is bought and sold. You can do it yourself or hire a solicitor or licensed conveyancer to perform the tasks for you. The buying of a freehold is much less complicated than the buying of a leasehold.

Discounted rate - This is where the lender makes a guaranteed reduction off the standard variable rate for an agreed period of time. After the period ends, the borrower will go onto the Standard variable rate. Watch out for redemption penalties that overhang the discount period.

Early redemption charges - Redemption is when the borrower pays off the capital and the interest on the mortgage and thus has full rights to the property. Early redemption fees are the charges incurred for paying off the mortgage early, either to buy the house outright or when you re-mortgage. Always ask about these before you take out a mortgage.

Endowment - Endowments are life assurance policies with an investment element designed to pay off the outstanding capital on an interest-only mortgage. There are a few types of endowments, such as 'with profits', 'unitised with profits' and 'unit-linked'. in the 1980s, these were sold to customers by salesman who promised that they would be guaranteed to pay off the mortgage at the end of the term. This is not the case, and many endowment holders are having to bump up their premiums.

Equity - In housing terminology, equity is the difference between the value of the property and the money owed on the property. So if the property is valued at £200,000 and you owe £150,000 on the mortgage, you have equity of £50,000. If you sold at that moment, you would receive £50,000. Should the value of the home be less than the mortgage outstanding then you are in negative equity. Not to be confused with the stock market use of the word "equity", which is completely different.

Freehold - Owning the freehold means that you own both the property and the land on which it is built. Usually, with a block of flats, the flat-owners own leaseholds on their flats and there is a freeholder who charges service costs and ground rents to the occupants. These days, however, leaseholders who live at the property are gaining the right to buy the freehold. Freeholders owning properties in which the lease has run out take over ownership of the property.

Homebuyers report - A property survey aimed at providing more information than a mortgage valuation but less information than a full structural survey. It will help the borrower to decide whether to purchase and help the lender to decide how much to lend.

Interest only - This is a mortgage where your monthly repayments go towards paying off only the interest on the mortgage. You need to have a separate investment vehicle into which you make payments aimed at building up a fund capable of paying off the mortgage capital at the end of the term. The investment vehicle could be an ISA, a pension or an endowment.

IFAs - Stands for Independent Financial Advisor. These advisors should be able to offer you the full range of products from all of the financial product providers or from a panel of provider that they believe to be the best. Can be one man bands up to multi-national companies. IFAs should carry out fact finds on you in order to help them recommend the best courses of action for your finances.

ISA - An ISA is an Individual Savings Account, which is a tax-free method of owning shares, building up a cash savings account or a life assurance policy. You can use an ISA to repay the capital sum on an interest only mortgage.

Leasehold - If you buy a lease holding, you own the property for a set number of years, after which the freeholder owns the property. Most flats in England are leasehold. Legislation has recently been brought in to enable leaseholders to club together to buy the freehold.

Lock-In period - This is the number of years that you have agreed to stay with the lender. Depending on the deal, it could be as low as six months up to the whole of the term. Should you attempt too pay off the mortgage or remortgage during the lock-in period, you may be liable to pay redemption penalties. Always make sure you know how much you are locked in for with your mortgage.

LTV - Literally means Loan to Value. This is a measurement of the mortgage amount against the value of the property or the price that you are actually paying. A £157,500 mortgage on a property for which you paid £175,000 would be a LTV of 90%. Lenders tend to charge a Mortgage Indemnity Premium on mortgages with a loan to value of anything about 75%. Some don't so ask about this.

MIG - This is the Mortgage Indemnity Guarantee. It is a type of insurance aimed at covering the lender should you default on your mortgage payments at a time when the value of your home is less than the value you have borrowed. The insurance only covers the lender, not you, and can cost thousands of pounds. Try to avoid this at all costs.

Mortgage - A mortgage is a loan taken out in order to buy a home. The property that you buy is the security against which your repayments are held, so if you don't repay the loan, the home is repossessed.

Negative Equity - You go into negative equity when the value of your home is less than the amount that you owe on your mortgage. Can happen very easily if you take out a 100% mortgage or if property prices fall.

Portable - This is a measure of how easy it is to move a mortgage from one property to another should a property move be required. This is vital if you are moving during your lock-in-period, and do not want to be liable for redemption penalties for doing so.

Repayment - This is the same as the Capital and Interest mortgage and is when you make monthly mortgage payments which go partly towards paying off the capital amount and partly towards paying off the interest on the mortgage. At the end of the term, you will not owe anything.

Searches - Part of the conveyancing process, this is an application to the local authority in order to receive a certificate that provides information relating to the property. The certificate will show if the property is affected by road building or any sanitary notices, planning permission for any building work that was previously carried out, and connections to sewerage. Very useful to stop you buying a home only to see a motorway built outside your back garden three years later.

Self-certification - Should your income be difficult for a lender to assess through normal methods, you may need a self-certification mortgage. If you receive high bonuses, or work seasonally or on commission, or are self-employed this may be your only option. You will declare your income, usually backed up by a certificate from your accountant if you have one. Lenders want to see as much guaranteed income as possible. To compensate the lender for the increased risk on this mortgage, you are likely to be charged a higher interest rate for it.

Stamp Duty - This is a tax that you pay when you buy properties costing over £60,000. You pay 1% of the property price if it is under £250,000, 3% for properties between £250,000 and £500,000 and 4% for properties over 5%. Stamp Duty was originally created by William of Orange when he was King of England, purely to get more taxes in.

Structural survey - The most thorough report you can get on the condition of the property you looking to buy. The surveyor will look at the inside and outside of the property and will tell you if the property is structurally sound. All major and minor defects in the building should be listed, and should tell you what maintenance work may be needed either now or in the future. You should make sure you know exactly what the scope of the survey is before you commission it. Should the survey point out problems, use them as a negotiating tool before exchange of contracts.

Term insurance - The most straightforward and cheapest of life insurance. Term insurance covers you for a certain amount of money over a certain period of time. Should you die during that term, your beneficiaries will receive the sum for which your life is insured. If not, no benefit is received. There is no surrender value either. This results in very cheap premiums for a large amount of cover, depending on your age, health, amount of cover and term required.
Decreasing term insurance is used by those who have mortgages. The sum assured decreases over the term as portions of the mortgage are paid off. Should the life assured die during the term, the remainder of the mortgage is paid off. This is also called mortgage protection.

Variable rate - This is when the interest rate that you pay on your mortgage goes up and down depending on the lender's standard variable rate, with your interest payments changing accordingly on your mortgage.

Valuation - This is when the lender makes a simple check of a property carried out in order to find out how much it is really worth and thus whether the bank should lend money to buy the property. The Borrower usually pays the bill, and will usually receive a copy of the report.

The Mortgage Advice Jargon Buster (Dictionary or Glossary)

© AskFinancially.com 2008

Mortgage Advice

Insurance & Loans

Copyright

The Mortgage Advice Jargon Buster (Dictionary or Glossary)

© AskFinancially.com 2008

Mortgage Advice

Insurance & Loans

Copyright