Mortgage Jargon Buster
A lot of the language around mortgages can be confusing. In this glossary you'll find definitions and explanations of key terminology, so that you can spend less time looking up unfamiliar phrases and more time finding the best mortgage deal for you.
A – E
Affordability checks – A series of checks that a lender will carry out to determine whether they can offer you a mortgage. See our guide to affordability checks for a full description.
Annual percentage rate (APR) – Lenders are obliged to state this figure alongside any advertised mortgage rates. It is intended to help you compare different mortgage deals by summarising an approximate annual interest rate. APR is calculated with a formula that takes into account the initial interest rate, the subsequent rate the mortgage will revert to after that expires, and any compulsory fees that might apply, such as an application fee or product fee. This calculation assumes you will stay on the same mortgage deal until it is repaid in full. Because of this, the APR may not be terribly useful as a comparison measure for borrowers who intend to remortgage in the future – however, it is required for all mortgages to display a representative APR.
Application fee – also known as a booking fee, this is an upfront charge to reserve a particular mortgage for you. It is normally non-refundable, so if you don't proceed with your mortgage you won't get your money back and if you decide to go for a different deal, you might have to pay it again. Fees are in the range of £99 to £150 whereas product fees tend to be much higher. Some mortgages have both an application fee and an product fee; in our mortgage tables we add these together to indicate the total fees for the product.
Arrears – If you go into arrears it means you are behind on your mortgage payment schedule. This usually results from missing one or more of your monthly payments, or being able to pay only part of what's due. Mortgage arrears can put your home or rental property at risk of repossession – the same applies if you are in arrears on any loan secured on the property. However, the situation can often be negotiated with the lender to avoid repossession.
If you are affected by mortgage arrears, this National Debtline factsheet might be helpful.
Base rate – A reference rate that is used as a basis for your mortgage rate. Usually this is shorthand for the Bank Of England Base Rate, which is set by the Monetary Policy Committee of the Bank of England. Many tracker rate mortgages move in line with this rate. Occasionally, "base rate" could refer to a bank's own reference rate – check the mortgage offer document or ask your mortgage adviser to be sure.
Buy-to-let – Buying a property with the intention of renting it out. You can't do this with a normal residential mortgage. If you need to borrow, you'll need a buy-to-let mortgage.
There have been a number of recent tax changes affecting buy-to-let investors. For more information, visit our detailed guide.
Cap – Some variable rate mortgages have a "cap" (sometimes called a "ceiling"), which is a set level beyond which the interest rate cannot rise. A cap will normally only apply during the initial rate period, usually between two and five years.
Collar – Some variable rate mortgages have a "collar". This is a set level which the interest rate cannot fall below, regardless of changes in the market. For example, if you have a tracker or variable rate mortgage collared at 2%, your interest rate cannot fall below this level, even if the lender's Standard Variable Rate (SVR) falls lower.
Completion date – The date when a property becomes legally yours.
Credit rating – Your credit rating is made up of any previous borrowing you've done, as well as other factors like whether you're on the electoral roll at your current address. If, for example, you've defaulted on a loan, your credit rating will be lower. Lenders will check your credit rating to make sure you're a viable person to lend to, and may be less willing to lend to those with poorer credit ratings. However, different lenders will score your application in different ways, according to their own criteria, so if one turns you down it doesn't mean that others necessarily will.
Decision in principle (DIP) (also known as "Agreement in principle" or "Mortgage in principle") – A statement from a mortgage lender setting out how much they are prepared to lend you, provided they approve the rest of your application and the property you want to buy. It's the first step in applying for a mortgage, and can be used to demonstrate to estate agents and sellers that you are a serious buyer. To get a DIP you usually have to demonstrate your income and outgoings so that the lender can estimate how much you can afford to repay. The lender will also usually carry out a credit check. Some lenders let you apply for a DIP online; others will do so after a telephone interview. Mortgage advisers can also help you obtain a DIP. It will be valid for a certain length of time, often six months, allowing you time to find a property and complete your mortgage application.
Discount mortgage – A mortgage offering a discount off the lender's SVR for a limited period of time. For example: a lender has an SVR of 5% and offers a discount of 2%. You will pay 3%.
Early repayment charge (ERC) – You will usually have to pay this fee if you attempt to leave your mortgage deal or pay off the loan before the end of any introductory term. The fee is typically 1-5% of the amount of the loan outstanding, and usually depends on how far into the introductory term you are. For example, a 5-year fixed rate mortgages might have an ERC structured as follows: 5% in the first year, 4% in the second year, 3% in the third and fourth years, and 1% in the final year. So repaying a mortgage with £100,000 outstanding in year 3 of a deal like this would cost you £3,000 (in addition to any exit fee). If you overpay your mortgage
Equity – The amount of the property you own, which will increase over time as you make repayments. For example if your flat is worth £150,000 and the remaining mortgage balance is £90,000, you have 40% equity (valued at £60,000) in the property.
Equity release schemes – Schemes which allow older homeowners to access some of the money tied up in their property. You will need to take financial advice before using one of these schemes.
Exchange of contracts – Swapping of contracts between the buyer and seller. After this date both parties are legally bound into the transaction. In Scotland this is called the "conclusion of missives".
Exit fee – A fee that may be charged by a lender when you pay off a mortgage, for example when switching to another deal. It is also known as a "deed release fee", "sealing fee", "final administration fee" or "discharge fee". This can cost anything from £75 to around £300, depending on your deal.
F – L
Financial Conduct Authority (FCA) – This is the body that regulates the financial sector, including mortgage lenders. Any company under FCA regulation must adhere to a strict set of guidelines when it comes to selling. Buy-to-let mortgages are not regulated by the FCA.
Financial Ombudsman Service (FOS) – If a financial institution mis-sells a product to you or gives you bad advice, you can contact the FOS and they will take your case forward.
Fixed rate mortgage – A mortgage with an interest rate which stays the same for a fixed period. This means that your mortgage payments will stay the same for a given period of time, usually 1-5 years.
Freehold – You own the property and the land it is built on, and are responsible for the maintenance of both. Most houses are freehold, with the exception of some shared ownership schemes. The alternative to freehold is leasehold.
Guarantor – Someone (e.g. a parent) who agrees to make the monthly payments if the borrower is unable to. Guarantor mortgages, sometimes also called "Family Assist" or "Lend A Hand", are intended to help first-time buyers into the property market if they are unable to save up a large enough deposit.
Help to Buy – A set of government-backed schemes aimed at helping first-time buyers to get a mortgage with a small deposit. Visit the Help to Buy website for more details.
Higher lending charge (HLC) – A fee to cover the cost of insurance that the lender takes out in case you go into negative equity. This is usually only payable on LTVs of 90% or above.
Interest calculated daily – Your interest is calculated every day, rather than weekly, monthly or annually. Daily interest is usually the best value, because as your loan balance decreases, so does your interest.
Interest-only mortgage – Your monthly payments only go towards the interest on the loan, not the loan amount itself. If you take out an interest-only mortgage you must have a plan in place to repay the full balance at the end of the term.
Intermediary – A mortgage broker or adviser, who can help you to find and arrange a mortgage.
Leasehold – You own the property and its land for the length of the lease agreement with the freeholder (landlord). You will pay a service charge to the freeholder for the maintenance of communal areas, and will also need to pay ground rent. Most flats and apartments are leasehold, except in Scotland where very few properties are. Compare freehold.
M – Z
Mortgage deed – The legal agreement which transfers the legal deed (ownership document) for your property to the mortgage lender. If you default on your payments the bank can take possession of the deed.
Mortgage term – The length of time you'll be paying your mortgage for. Typically this is 25 years although it depends on your age; lenders usually require that you will have paid off your mortgage before you retire. If you're a younger borrower, lenders might offer you a longer repayment term in order to make your monthly payments more affordable, although this means you'll pay more interest over the whole term.
Negative equity – When the amount you owe on your mortgage is greater than the value of your property. This is particularly at risk of happening in the early years of a mortgage, when the majority of your monthly payment consists of interest owed and you have not built up much equity in the property. The higher the loan-to-value of your mortgage, the greater the risk.
For example: you buy a property for £200,000 with a mortgage of £180,000 (90 per cent loan-to-value). In two years the value of the home falls around 20% to £165,000. You have made two years' mortgage payments but you still owe £171,263 on your mortgage. This means you now owe around 104% of what your property is worth. This is negative equity. It would make it difficult to move home, unless you moved to a property worth significantly less, or found a lump sum to repay the difference, as well as a deposit for the home you are seeking to buy.
Offset mortgage – Links your savings balance to your mortgage loan, so that you only pay interest on the difference between the two. This can help you to clear your mortgage faster.
Overpayments – When you make a payment of more than the required monthly amount, or pay a lump sum, in order to reduce the term of the mortgage, the interest you owe or the size of your monthly payments. Some lenders may charge a fee if you do this.
Payment holiday – When you arrange with your lender to take a break from mortgage payments for a few months. You will still accrue interest during this time, but you won't fall into arrears. This facility is usually available with mortgages described as "Flexible Mortgages". Some lenders offer it on a number of their other deals as well, without necessarily advertising the fact. If it's important to you, check when you apply. In most cases you'll need to have made overpayments before you can qualify for a payment holiday, so that you don't fall into arrears.
Porting – Transferring your current rate from one property to another when you're simultaneously buying and selling.
Product fee – A fee charged by a lender for arranging your mortgage. It is also sometimes called the “arrangement fee” or “completion fee”. See also application fee.
Remortgage – A mortgage that allows you to switch to a new deal without moving home, usually because you've found a better rate or your fixed rate is about to expire.
Repayment mortgage – Your monthly payments go towards both the balance of the loan and the interest, so you own more equity in your property with each monthly payment.
Stamp Duty – A tax payable when you purchase a property worth £125,000 or more in England, Wales or Northern Ireland. The Scottish equivalent is called Land & Buildings Transaction Tax and the minimum threshold is £145,000. Use our stamp duty calculator to work out how much you will have to pay. From April 2016, buy-to-let properties and second homes have a 3% surcharge – read our guide to Stamp Duty for more detail.
Standard Variable Rate – A lender's basic mortgage rate, which applies to your mortgage if you're not on a special deal (e.g. after your fixed rate has expired). Lenders can raise or lower their SVR at any time. Usually the SVR is significantly higher than the base rate and rarely as competitive as fixed or variable rate offers. If you have a discount mortgage, its interest rate is pegged to the lender's SVR.
Tracker mortgage – A mortgage with an interest rate which tracks a base rate, and moves up and down parallel to it.
Variable rate mortgage – Any mortgage with a rate that can change. The most common type is a tracker mortgage.
Last updated: 28 June 2016