FAQ’s

There is a lot of ‘jargon’ used when when buying and selling a property, and arranging a mortgage. Here is an explanation of most of terms that you may come across during the mortgage process.

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Arrangement Fee

These are usually charged by the lender when arranging a loan on certain products.

APR

APR is the commonly used acronym for the Annual Percentage Rate of the total charge for credit: this is the standard way (as laid down by the Consumer Credit Act 1974 and the Financial Services Authority) of working out the true interest rate.

All lenders are legally obliged to show the APR alongside quoted interest rates for each mortgage term, this enables you the potential borrower to accurately compare mortgages from different lenders to work out exactly how much you will repay on your loan each month.

Bank of England Base Rate

The Bank of England Base Rate determines how much other banks and building societies pay for the loans that they take out from the Bank of England. These base rates will in turn affect the interest rate paid for loans including the loan on your mortgage.

Bridging Loan

This is a temporary loan which enables you to complete the purchase of your property before completing the sale of your existing house. A typical example of when you may need one would be if you wanted to buy a second property before you’d sold your first.

Booking Fee

These are charged by the lender when arranging a loan on certain products. Usually payable upfront with the mortgage application.

Buy To Let mortgage

This is a type of mortgage used to buy property that will be used solely for the purposes of renting to a third party i.e. you as the owner never intend to live there.

Capital and Interest

Another name for capital repayment

Capital Repayment

There are two ways of repaying a mortgage, either by the capital and interest repayment or interest only methods.

With a capital repayment mortgage, the capital and interest elements of the loan are paid off with each monthly instalment, with the balance reducing over the length of the loan.

By the end of the mortgage term, assuming all mortgage payments are made, the balance is repaid in full and you own your property outright.

Capped Rate Mortgage

This is a type of variable rate mortgage where a maximum rate of interest is set at the start of the mortgage term. During the capped rate period the interest rate can fall below the capped rate but will never rise above it.

The borrower knows how high the mortgage payments could rise but are guaranteed the rate will not go any higher, therefore making home loan budgeting easier.

CAT Mortgage (Charges Access Terms)

This is a mortgage that complies with specific guidelines laid down by the Labour government in April 2000 for people who wanted to set out basic and transparent conditions for all mortgage products, particularly in terms of the charges applied, the flexibility of the mortgage, and the terms applicable to it. The aim is to make mortgages more straightforward and easier to understand.

They have not been very popular since they were launched, and are largely ignored by most mortgage borrowers.

Commercial Mortgages

This is a mortgage used by businesses for the purpose of buying their own business premises, or for financing for investment purposes.

A commercial mortgage is used to buy business premises, such as a shop, factory, offices or industrial premises.

 

Completion

This is the point at which the money to buy the new property is released to the seller, ownership is then transferred to the buyer, who now owns the property.

Conveyancing

This is the legal process of buying or selling a property. Most people use a solicitor or a licensed conveyancer when buying or selling a property because there’s quite a lot of detailed work to do when transferring ownership of a property. If you are obtaining a mortgage to buy a property with, your lender will insist that you use a solicitor approved by them.

Decreasing Term Assurance

Decreasing Term Life Insurance (sometimes called mortgage protection assurance) is where the policy’s sum assured decreases over the term of the policy. matching the reduction in the mortgage balance over its term. This type of policy is typically purchased by people who want to protect their repayment mortgage in the event of death.

As the outstanding mortgage balance reduces every year, so does the level of insurance. The purpose of this type of plan is to repay any capital you owe if you died.

Deposit

A deposit is the money that you use as a down-payment on a property that you intend to buy. It should secure that you are the preferred buyer, and the property removed from future marketing.

Disbursements

These are the fees your solicitor has to pay on your behalf (e.g. Stamp Duty, HM Land Registry fees and search fees) which will be added to your conveyancing bill from the solicitor on completion of the buying and/or selling of a property.

Discount Mortgage

A discounted rate mortgage offers you reduced repayments for a given term. This interest rate is discounted from the lender’s standard variable rate, for an agreed period from the start of the mortgage.
The lender’s standard rate will be different from the bank of England Base Rate.

The borrower is guaranteed to pay a set amount below the standard variable rate for the period of the discount. The standard rate can go up and down, but the discount amount remains fixed during the agreed period.

Early Redemption Charge

If a mortgage is repaid in full, or over-payments in excess of the amount agreed by your lender at the outset of the mortgage, you may be liable to pay an early repayment charge by the lender.

This charge is raised in order to recover any losses or costs incurred by the lender as a result of early payment.

It usually only applies during the initial period of a new mortgage.

Endowment Assurance

This is a form of life assurance policy that should produce a cash sum at the end of the policy term, whilst providing life assurance to the policy holder.

If the Endowment is linked to an interest only mortgage, the lump sum from the endowment policy is designed to repay the mortgage, subject to investment returns.

Endowment Mortgage

An endowment mortgage is a type of Interest-Only mortgage designed to repay the mortgage using an Endowment life assurance policy, which builds up its value and is subject to investment returns. The mortgage is split into two parts, the first is the monthly interest payment to the mortgage lender, and the second is the monthly payment into an endowment policy, which that is mainly invested in stocks and shares. It includes life cover for the amount of the mortgage.

What this means is that you are only paying off the interest on the loan during the term on the mortgage so the balance of your mortgage never changes. The mortgage is designed to be repaid at the end of the term with the proceeds of the endowment policy, subject to investment returns.

Endowment mortgages have lost their popularity in recent years following the down-turn in stock market returns, which produced shortfalls in the endowment policy, and leaving people with a shortfall in the policy they entrusted to repay their mortgage.

Equity

This is the positive difference between the value of your property and the amount of any outstanding loans secured against it.

For example if your home is worth £300,000, and the mortgage on your property is £100,000, your equity is £200,000.

Exchange of Contracts

This is the stage in England, Wales and N.Ireland when both the buyer and seller have legally committed themselves to the sale and purchase of a property and are legally bound to complete the transfer.

First Time Buyer

This is the term for a person taking out their very first mortgage. Some lenders may offer first time buyers a mortgage with certain incentives, such as a free valuation, or a cashback.

First Time Buyer Mortgage

There are mortgages available exclusively for first time buyers which may have some special features such as assistance towards legal fees, a cash-back and/or a free valuation.

Fixed Rate

This is a mortgage rate where the interest rate is agreed at the start of the mortgage and will not change during the term of the fixed rate period.

This allows you to know exactly how much your monthly payment will be each month during the fixed rate period.

Freehold

Owning the freehold on a property this means that you solely own the property and the land it is situated on, and the air above.

Gazumping

This happens when another potential buyer puts in a higher offer for a property after your offer on the same property has been accepted, and your original offer is then rejected. This can happen, because under English law, the seller is not legally committed to go ahead with the sale until the point at which contracts are exchanged.

Higher Lending Charge

This is the term used for insurance for the lender for you defaulting on your payments when your property is worth less than the loan or in some cases this charge is payable when you are only able to pay a small deposit. There are many mortgages that do not carry this charge and based on your situation it is possible that this type of charge can be avoided altogether.

Interest Charges

These are the charges made on a loan, calculated as a percentage of the total amount that you borrowed on your mortgage.

Interest Only

There are two types of mortgage, interest only or capital repayment. With an interest only mortgage, the balance of your mortgage stays the same throughout the mortgage term.

Interest and, if taken, the cost of a suitable investment vehicle are paid monthly. At the end of the term, the proceeds from the investment vehicle are intended to repay the mortgage. This amount will depend on the performance of the investment vehicle.

If you do opt for an interest only mortgage you are responsible for ensuring that you have sufficient funds available to repay your mortgage at the end of the term.

Leasehold

This is a system used mainly in England where you own the property for a set period before ownership reverts to the freeholder. When you hold a leasehold on a property, it remains the property of the freeholder.

The leasehold contract will set out the details of obligations of the leaseholder for repairs and maintenance of the property.

Legal Fees

These are the fees charged by a solicitor or other qualified individual to carry out the legal work associated with buying a property.

Level Term Assurance

This is a life assurance policy which will repay your mortgage should you die during the term of the loan. Used with Interest-Only mortgages, the death benefit sum assured is set as the balance of your mortgage at the start of your loan; this doesn’t change during the term of the mortgage, as the balance does not reduce over the mortgage term. Should you survive the whole mortgage term, the policy ends, as does the death benefit. There is no investment factor in this kind of policy.

Mortgage Rate

This is the interest rate charged by the lender on a mortgage loan.

Mortgages

This is the term used for the type of loan used to buy a property.

Mortgagee

This is the creditor or lender i.e. your bank or building society, that lends you the money for your mortgage.

Mortgagor

This is the person who borrows money, usually to buy a property.

Negative Equity

This situation occurs when a mortgage is greater than the actual value of the property. This can occur due to a decline in the value of the property after it is purchased.

For example, if the mortgage on the property is £300,000 but the value of the property is only £270,000 there is negative equity of £30,000.

Offer of Loan

This is the formal document approving the mortgage you have requested. This document details the terms and conditions that will apply during the whole term of your mortgage.

Pension Plan Mortgages

This is a type of interest only mortgage where the loan is designed to be repaid by a lump sum from a pension plan on retirement. If you have a personal pension, you can link your mortgage loan to a pension plan. At the end of the mortgage term, part of the tax-free proceeds (the tax free lump sum) of the pension fund is used to repay the capital outstanding.

It is worth noting however, that a pension plan mortgage will reduce the amount available to providing you with a pension in retirement. However, tax relief is available on your pension plan contributions. Having paid off your mortgage with your pension fund, the remainder of your pot of money will then be used to provide you with retirement income via an annuity.

Re-mortgaging

This is the term used when moving your mortgage from one lender to another without actually moving house. You may do this to save money.

This might be possible by switching to another mortgage product with the same lender or by switching your mortgage to a competitor. But remember, if you move lenders, the saving you make on the interest rate you pay may be partially or wholly eaten up by the transaction charges associated with moving your loan.

So, if you are thinking about remortgaging it is advisable to do your sums carefully and take good advice from a mortgage adviser. If you get this wrong, you could have to paye the equivalent of several months’ mortgage payments which could wipe out any of the benefits of re-mortgaging.

Right to Buy Mortgages

These are mortgages specifically tailored for public sector tenants who qualify to buy their home under the Government’s Right-to-Buy scheme. You may be eligible to qualify to buy your council home if you are a secure tenant of either; a London Borough council, a district council, a non-charitable housing association, or a housing action trust.

Discounted rates are usually offered to council tenants for their homes. So if you are a council tenant wanting to buy your home, the rate you will pay will depend upon how long you have lived there. The amount of discount you will receive is roughly in proportion to the number of years you have been paying rent.

Searches

These are the enquiries made, usually by your solicitor, at the Land Registry, the Land Charges Register and Local Authorities to ensure there is nothing to cause concern about title to the land and the property you intend to buy.

Self Build Scheme

This is a package for people looking to build their home themselves. The mortgage can be taken in stage payments, at certain points of the build process.

Stamp Duty

This is a charge levied by HM Government on house purchases.
There is a sliding scale of stamp duty depending upon the value of the property you are buying:
Up to £125,000 – nil
£125,001 to £250,000 – 1% of the purchase price of the property
£250,001 to £500,000 – 3% of the purchase price of the property
£500,000 to £1,000,000 – 4% of the purchase price of the property
£1,000,001 to £2,000,000 – 5% of the purchase price of the property
£2,000,001 or more – 7% of the purchase price of the property
Over £2 million (purchased by certain persons including corporate bodies) – 15% of the purchase price of the property

Subject to Contract

This is the provisional agreement made between the buyer and the seller, before contracts on a property are actually exchanged. This allows either side to back out of the agreed sale without any financial penalty.

Survey

This is an evaluation of the condition and value of a property, carried out by an approved surveyor and usually paid for by the buyer, or possibly by the lender as an incentive.

Term

This is the length of time over which your mortgage loan is repaid.

Title

This is the legal right to the ownership of your property.

Title Deeds

These are the legal documents showing the ownership of your property.

Tracker Mortgage

This is a variable rate mortgage where the interest rate is linked directly to the Bank of England Base Rate. Therefore as the Base Rate changes, the rate on your tracker mortgage changes by the same amount.

Transfer Deed

This is the legal document which transfers ownership of registered land from the seller to the buyer.

Valuation

This is an independent assessment of the value of a property carried out by an approved surveyor and paid for by you the customer. All lenders insist that a valuation is carried out on a property. The valuation is used by the bank or building society to decide how much they are willing to lend you.

Variable Rate

This rate can go down as well as up during the course of your mortgage and is usually based on The Bank of England Base Rate, but can also be based on the lender’s own standard variable rate that they can determine.