A-Z Of Mortgage Terms
Agreement In Principle (AIP)
AIP is an ‘Agreement In Principle’ from a mortgage lender (there are several different names for it, including ‘decision in principle’), describing the funds they will lend you, based on the information you
have given your mortgage adviser and a soft credit search. It is a really good indication before you start making offers on properties of what your affordability is, as well as your credit status. They are typically valid for 30 - 90 days.
An AIP is also known as a Mortgage In Principle (MIP) or a Mortgage Promise.
Annual Percentage Rate (APR)
APR is the ‘annual percentage rate’ and represents the total cost of the mortgage to you, including the loan amount, interest and fees. It is usually based on the assumption that you will have the mortgage for the whole term, so is a helpful guide but should be seen as just that - a guide.
Arrears
‘Arrears’ is the term used to describe your status if you have missed at least a month of mortgage payments - or a credit agreement for that matter. Running into arrears on any credit agreement can adversely affect your credit status and, therefore, your ability to arrange credit in the future.
If you know you are about to head into arrears, get in touch with your mortgage lender as soon as you can.
Bank Of England (BOE) Base Rate
The ‘base rate’ is the rate of interest set by the Bank of England. It’s important because there is often a correlation between the base rate and the interest rate lenders charge.
If you are on a variable rate or tracker rate, your payments might be affected by the base rate. If you are on a fixed rate, your payments won’t change until after your initial rate period ends.
Buildings Insurance
‘Buildings insurance’ is insurance that covers you for damage to the structure of your home; from your roof to the floor and walls.
If you have a mortgage, it is a legal requirement to take buildings insurance out. If you don’t arrange this yourself or with your mortgage adviser before completion, your lender can arrange this for you.
Capital
‘Capital’ is simply the amount of money you borrow to buy a property - your mortgage is made up of the capital, or the amount you’ve borrowed, plus the interest charged on the loan.
Conveyancing
‘Conveyancing’ is the legal process that happens when you buy a property. Your solicitor will conduct local authority and environmental searches as well as searches with other parties to find out more information about the property you are looking to buy.
Finding a good solicitor is paramount for getting into your property sooner rather than later, and avoiding your sale falling through.
We've partnered with Hutchins & Co solicitors, a firm renowned for its expertise and client satisfaction in residential conveyancing.
Deposit
You’ll likely be familiar with this term, having probably saved for it for a number of years! It is, of course, the amount you are required to
put down towards the cost of the property.
The minimum deposit you will usually need is 5%, but you can now get 100% mortgages if you meet certain criteria. It is often the case that a bigger deposit will allow you to get a better rate from a lender.
However, you may want to hold back any extra money that could be used on a deposit to do work to the property once you’re all moved in.
Discounted-rate Mortgage
A ‘discounted-rate mortgage’ is where the interest rate you are charged is less than your mortgage lender’s standard variable rate (SVR). For example, if the lender has an SVR of 5% and the discount is 1%, you will pay 4%.
Early Repayment Charges (ERCs)
These are the penalty fees you have to pay if you want to leave your mortgage during a specified period.
An example of this is if you want to remortgage before your fixed term period (usually of 2, 3 or 5 years) is up. This is usually charged as a percentage of the loan amount. E.g. a mortgage of £150,000 with an ERC of 1% would be a fee of £1,500.
Equity
We like this one! ‘Equity’ is the amount of the property that you own outright. It is made up of the deposit you initially paid plus the capital you’ve paid off on your mortgage, as well as the price the property has hopefully risen by
Equity Release Scheme
An Equity Release Scheme allows homeowners (usually over 55 years old) to release some of the money tied up in their property. Often, you can choose to take the money you release as a cash lump sum, in multiple smaller amounts or, as a combination of these.
Family Offset Mortgage
‘Family offset mortgages’ allow families to help one another get on the property ladder. Your savings are balanced against your family member’s mortgage debt, reducing the amount they owe and paying in interest.
Fixed-rate Mortgage
A ‘fixed-rate mortgage’ is exactly what it says on the tin. Commonly, for the first 2-5 years (depending on your deal), the interest rate for your mortgage loan remains fixed. For that period, you can be confident that the amount you are paying on your mortgage each month will stay the same, even if the Bank of England’s base rate doesn’t. A fixed rate mortgage is a good bet if your budget is tight and you need to know exactly what your monthly repayments will be.
Read our blog on Fixed vs. Variable Rates.
Flexible Mortgage
A ‘flexible mortgage’ allows flexibility in how you pay back your mortgage. It means that you can overpay, underpay or even take a holiday from your monthly mortgage payment. The benefits of this is that you can pay off your mortgage early and save money on interest but, for the privilege of flexibility, you’ll likely pay more than a ‘normal’ mortgage.
Freehold
Buying a ‘freehold’ property means that you will outright own both the building and the land it sits on.
Guarantor
A ‘guarantor’ is that fabulous third party who agrees to pay your monthly mortgage repayments in the event you are unable to. A guarantor is most common with first-time buyers and is usually the parent or guardian of the buyer.
Higher Lending Charge (HLC)
A ‘higher lending charge’ can be set by your mortgage lender if you are borrowing more than 75% of the property’s value. It protects the lender against you being unable to make the mortgage repayments and going into arrears. Higher lending charges are almost unknown nowadays.
Interest-Only Mortgage
With an ‘interest-only mortgage’ you only pay the interest on your mortgage each month - not the capital. It makes your monthly payments a lot lower but you will, of course, still need to pay off the loan at the end of the mortgage term.
Often this route is taken if you are building up money to pay off your mortgage at the end of your term through investments, pension endowments or another property sale.
Joint Mortgage
A ‘joint mortgage’ is taken out by two or more people. It’s often used by couples, when you are buying a house with a friend or by parents helping their children buy a property.
Land Registry
The ‘land registry’ is His Majesty’s official government body responsible for maintaining details of who owns what property and land.
Leasehold
Opposite to freehold, ‘leasehold’ is when you own the building but not the land it sits on. You also only own the building for a certain amount of time - anything up to 999 years. It might be more of a challenge to get a mortgage on a leasehold property, depending on how long is left on the lease.
Loan-To-Value (LTV)
‘Loan-to-value’ relates to your mortgage as a percentage of the property’s value. The cheapest mortgage deals are often available to people who borrow 60% or less of their property’s total value.
Monthly Repayment
Your ‘monthly repayment’ is the amount you pay your mortgage lender each month. If you’re on a repayment mortgage (the most common kind), the payment will cover a percentage of your mortgage and the interest.
Mortgage In Principle (MIP)
This is the same as an AIP - refer to this section.
Mortgage Offer
This is the formal contract between yourself and your mortgage lender, outlining your legal obligations as well as the rights your lender has if you fail to make a repayment and go into arrears. It also outlines all the details of your mortgage, from your interest rate to ERC and any benefits or features (such as payment holiday breaks) that might be included.
Mortgage Promise
This is the same as an AIP - refer to this section.
Mortgage Term
Your ‘mortgage term’ is the amount of time you are taking the mortgage out for. The average mortgage term is currently around 25 years, but more and more are taking out a mortgage for longer.
Negative Equity
You don’t want ‘negativity equity.’ This is when the value of your home falls below the amount left to be paid on your mortgage.
Relevant Life Insurance
Relevant life insurance is tax-efficient life insurance for contractors and company directors which can be used to protect your mortgage (and more!). It is worth reviewing your life insurance, and making it tax-efficient with relevant life insurance when taking out a mortgage.
It is worth reviewing your life insurance, and making it tax efficient with relevant life insurance, when taking out a mortgage. Often, the amount of life cover we take out is based on the value of our home, so it should be reviewed when taking out a new mortgage.
Repayment Mortgage
A ‘repayment mortgage’ is the most common type of mortgage we process. It simply means that each month, you’ll pay off the mortgage interest and part of the capital of your loan.
Assuming you don’t miss any payments, you are guaranteed to have paid off your mortgage by the end of the term.
Repayment Vehicle
A ‘repayment vehicle’ is required by lenders when you are looking to take out an interest-only mortgage. It shows the lender how you will pay off your mortgage at the end of the term - your investment portfolio or other properties, for example.
Stamp Duty
Whether you are buying a freehold or leasehold property, buying it outright or with a mortgage, if your property costs more than £125,000 (£40,000 for second homes) then you will need to pay ‘stamp duty’ (sometimes called SDLT, meaning ‘stamp duty land tax’). If you are a first-time buyer and have never owned a property, the stamp duty is waived and only payable if you purchase a property of over £300,000.
Standard Variable Rate (SVR)
The ‘standard variable rate’ (SVR) is the default mortgage interest rate that your lender will charge you after your initial fixed rate term has passed.
This could be higher or lower than your original rate and, while they tend to follow the base rate, they are at the lender’s discretion and, there is a variation between lenders.
Sub-prime/non-conforming mortgage
If you are considered a high risk to lenders you want to borrow from, because of a poor credit rating or other past repayment challenges, you may be offered a ‘sub-prime mortgage.’ They are hard to get and usually have a higher interest rate but, with the right advice, they are an option.
Tie-in Period
A ‘tie-in period’ is the time in which you are locked into your mortgage - usually the fixed rate duration. If you want to get out of your mortgage when you are still in the tie-in period you will have to pay an early repayment charge.
Watch out for mortgages that tie you for any period after your fixed term has ended.
Tracker Mortgage
A ‘tracker mortgage’ is when the interest rate on your mortgage tracks the Bank of England’s base rate, at a set percentage either above or below it. With a tracker mortgage, you lose out when the base rate increases and can make savings when it is reduced.
Valuation Survey
Lenders will carry out a ‘valuation survey’ of the property you want to buy to ensure that the property is roughly worth the amount you are paying for it. They can do a desk valuation or one in person, but it is sometimes worth conducting your own survey to check for any major problems before you invest in it too.
Options include a ‘homebuyers report’ or a full structural survey; they simply help you understand, in much greater detail, the property you wish to purchase.