Glossary of Mortgage Terminology

Accident, Sickness and Unemployment Insurance (ASU): In the event of an accident, sickness or involuntary unemployment befalling a borrower, this insurance is designed to cover their mortgage repayments. Some Lenders attach mandatory insurance cover to their most attractive rates, although this is increasingly uncommon. Also known as: Mortgage Payment Protection Insurance (MPPI).

Additional Security Fee: See Higher Lending Charge.

Adverse Credit: This is an umbrella term used of applicants with poor credit history. This may include mortgage arrears, defaults, County Court Judgments (CCJs), bankruptcy, Individual Voluntary Agreements (IVAs) and house repossession. Borrowers with elements of adverse credit are offered higher rates than standard Full Status applicants are, usually with terms and conditions relating to the extent of their adverse credit history. Often, adverse credit mortgages are Libor-linked rates.

Annual Percentage Rate (APR): The APR is a rate calculated using a generic formula applicable to all Lenders, which includes all the costs associated with a mortgage. This allows for easy comparisons to be made between the different mortgage products offered by each Lender.

Arrangement fee: This fee may be charged on specific products and is either payable in advance, added to the loan or deducted from the advance on completion. It covers the administrative expenses incurred whilst processing an application by the Lender.

Base Rate: Every month the Monetary Policy Committee sets the Bank of England Base Rate, to which all mortgage rates are linked either directly, as Tracker mortgages, or indirectly, in all other cases.

Booking fee: This fee may be charged on specific products and is either payable in advance, added to the loan or deducted from the advance on completion. It is normally payable in order to reserve funds when a product is likely to sell out quickly.

Buildings and Contents Insurance: This insurance is designed to cover damage to the mortgaged property and/or its contents in a variety of specified scenarios. Most Lenders insist on at least Buildings Insurance being taken out. If the Lender's own insurance is not taken they will often charge an administration fee. Some Lenders attach mandatory insurance cover to their most attractive rates, although this is increasingly uncommon. It is usual to place buildings insurance “on risk” from exchange of contracts.

Buy-to-Let mortgage (BTL): This is a mortgage for property that will be let by the borrower to other tenants. When Lenders calculate how large a loan the borrower can afford to repay on BTL they do so primarily on the basis of projected rental income, rather than salary income multiples. BTL loans are not regulated by the Financial Services Authority.

Capital and Interest mortgages: With this method the monthly mortgage repayments pay off both the initial loan amount and the interest that is charged upon it. At the end of the loan term the entire debt will be repaid in full provided that the repayments to the Lender have been made in full and on time. Also known as: Repayment mortgage.

Capital Rest Period: This is the regularity with which a Lender calculates the outstanding balance on mortgages, and hence the size of monthly repayments. It is usually annually, monthly or daily. With Capital and Interest mortgages this can be important; an annual interest calculation means that the borrower will pay interest on capital repayments that have been made in the course of that year. In contrast a daily or monthly interest calculation means that the balance, and consequently the interest charged, will reduce with every capital repayment made.

Capped rate mortgage: This is a mortgage that is guaranteed not to rise above a specific rate (the 'cap') within a set period. Unless this is combined with another rate, such as a Discount or Tracker, the Lender's SVR will be charged if it is lower than the capped rate; if it rises above this ceiling the rate charged will remain at the capped level. There are often early repayment charges applicable if the loan is repaid within the capped period. At the end of the set period the rate will return to the Lender’s SVR which may mean higher payments.

Cashback mortgage: This is a mortgage in which the Lender refunds a sum of money, either as a percentage of the loan or a flat figure, to the borrower upon completion. With this type of offer the borrower will typically be tied to the Lender's SVR by early repayment charges necessitating repayment of the cashback if the loan is repaid within a set period.

Completion: This is the moment when a transfer of property has legally taken place, after all legal documentation has been completed and funds have been transferred from the buyer's solicitor to the seller's solicitor.

Contents Insurance: See Buildings and Contents Insurance.

Conveyancing: This is the legal process whereby ownership of a property is transferred. Your Legal Adviser will usually undertake various searches and make charges for this.

Critical Illness Cover (CIC): A form of life assurance that usually pays out a lump sum upon diagnosis of a serious illness. The lump sum can be set at a level to repay the mortgage.

Current Account mortgage: This is a fully Flexible mortgage combined with a current account. Money in the current account is automatically set against the mortgage balance and interest is only charged on the outstanding amount, meaning interest payments are reduced. This type of product is usually for the more financially astute client.

Discounted rate mortgage: This is a variable mortgage that is discounted from a Lender's SVR by a set percentage within a set period. There are often early repayment charges applicable if the loan is repaid within the discounted period. At the end of the set period the rate will return to the Lender’s SVR which may mean higher payments.

Discounted Tracker rate mortgage: This is a variable mortgage that is discounted from the Bank of England's Base Rate by a set percentage within a set period. There are often early repayment charges applicable if the loan is repaid within the discounted period. At the end of the set period the rate will return to the Lender’s SVR which may mean higher payments.

Early Repayment Charge (ERC): This is a penalty charged on traditional (i.e. non-Flexible) mortgages when the loan is repaid in full within a set period. Usually it applies on a pro rata basis when capital repayments are made outside of the agreed monthly payments. Many Early Repayment Charge periods are linked to those of offers, such as Capped, Discounted or Fixed rate periods. However, some mortgage rates have extended Early Repayment Charges which tie-in borrowers even while they are paying the Lender's SVR. Also known as: Early Redemption Penalty (ERP); Redemption Penalty.

Early Redemption Penalty (ERP): See Early Repayment Charge (ERC).

Endowment: A repayment vehicle associated with Interest Only mortgages.

Exchange of Contracts: This is the stage in England, Wales and Northern Ireland that the deposit money is paid and both parties are legally bound to fulfill the agreed conditions of sale and purchase.

Exclusive mortgage: This is a mortgage only available to intermediaries through a specific packager, in conjunction with a Lender who provides the funding.

Fixed rate mortgage: This is a mortgage that is charged at a fixed rate within a set period. There are often early repayment charges applicable if the loan is repaid within the fixed period. At the end of the set period the rate will return to the Lender’s SVR which may mean higher payments.

Flexible mortgage: As its name suggests, this is a type of mortgage that offers considerably more flexibility than traditional mortgages. Typical interest rates are often not as keenly priced as a standard mortgage. This type of product is usually for the more financially astute client. Although specific details vary between Lenders, the core features of Flexible mortgages are:

• daily or monthly capital rest
• ability to make overpayments at any point of the loan term without an early repayment charge

In addition, many Flexible mortgages allow borrowers to:

• defer payment by taking payment holidays
• drawback overpayments
• drawdown further advances
• underpay without penalty (often only to the amount of any previous overpayments)

Freehold: The buyer of a Freehold property owns both the property and the land it stands on indefinitely. See also Leasehold.

Full Status: This term describes borrowers with a good credit history who are not self-certifying their income.

Gazumping: This is when a prospective purchaser has an offer for a property accepted, before another potential buyer puts in a higher offer for the same property.

Higher Lending Charge: This is a premium charged by Lenders in order to indemnify themselves, and NOT the borrower, against any financial shortfall they may incur in the event of repossessing a property, which must then be sold at a loss. It is applicable if the amount required is higher than a certain percentage of the property value, usually 75% LTV; often the Lender will pay the cost of this insurance themselves between 75% and 90% LTV. The charge may either be added to the loan or deducted from the advance on completion. Under subrogation, the borrower may then be pursued directly by the insurance company for the loss that the insurer has paid to the Lender. Also known as: Additional Security Fee; Indemnity; Mortgage Indemnity Guarantee (MIG).

Homebuyers' Report: See Valuation Fee.

Income Multiples: These are the multiples that Lenders apply to borrowers' income in order to determine the maximum loan they will offer them.

Indemnity: See Higher Lending Charge.

Individual Savings Account (ISA): A repayment vehicle associated with Interest Only mortgages.

Interest Only mortgages: With this method the initial loan amount remains the same throughout the term of the loan, while the monthly mortgage repayments only pay off the interest being charged on this amount. For this reason, Interest Only mortgages are tied to investment in one of a number of different repayment vehicles, which, ideally, should cover the initial loan amount at the end of the loan term. These repayment vehicles include endowment policies, personal pensions, ISAs etc.

Introducer fee: See Procuration Fees.

Joint & Several Liability: Should there be more than one party to the mortgage you should be aware that each is jointly and severally liable for the whole loan should the other default.

Land Registry Fee: This is a once-only charge to reimburse your Legal Advisers who carries out the registration work on your behalf.

Leasehold: The buyer of a Leasehold property owns the property for a set number of years, but doesn't own the land on which it stands. See also Freehold.

Let to Buy mortgage (LTB): This is a mortgage where the borrower's current property is let to other tenants and the rental income is used to cover the mortgage repayments on a new property, bought as the borrower's main residence. When Lenders calculate how large a loan the borrower can afford to repay on LTB they do so primarily on the basis of projected rental income, rather than salary income multiples.

Libor-Linked mortgage: This is a variable mortgage that is either above or below the London Inter-Bank Offered Rate by a set percentage within a set period. The Libor rate is set independently every 3 months. It is often associated with Lenders that offer loans to borrowers with elements of adverse credit.

Life Policy: See Term Assurance.

Loan to Value (LTV): This is a percentage figure of the loan amount in relation to the property value. For instance a £100,000 property bought with a mortgage of £70,000 has an LTV of 70%. The higher the LTV, the higher the interest rate charged will be; above certain LTVs a Higher Lending Charge comes into effect.

Mortgage Indemnity Guarantee (MIG): See Higher Lending Charge.

Mortgage Payment Protection Insurance (MPPI): See Accident, Sickness and Unemployment Insurance (ASU).

Non-Conforming: See Adverse Credit.

Negative Equity: Property prices fluctuate according to market conditions and the value of your property may go down as well as up. In the future, this could mean that your mortgage exceeds its market value.

Offer of Advance: If a lender is prepared to lend you money, they will send you an offer letter setting out certain charges, calculations etc. which you should read carefully and understand. If you have any question, please contact us or your legal advisor immediately.

Offset mortgage: This is a fully Flexible mortgage, which allows a borrower to keep balances (such as mortgage debt, savings account and current account) in separate accounts, but, for the purposes of interest calculation, all balances are aggregated. Money in savings or current accounts is set against the mortgage balance and interest is only charged on the outstanding amount, meaning interest payments are reduced. Typical interest rates are often not as keenly priced as a standard mortgage. This type of product is usually for the more financially astute client.

Overpayment: This is when an unscheduled capital repayment is made or when monthly payments are increased, in order that the mortgage is repaid before the end of the mortgage term, saving considerable sums in interest. Many traditional (i.e. non-Flexible) mortgages include early repayment charges if overpayments are made within a set period. In contrast, Flexible mortgages allow unlimited overpayments without penalty and, increasingly, mortgages are semi-Flexible, allowing borrowers to overpay a certain percentage of their loan each year without incurring early repayment charges.

Pension: A repayment vehicle associated with Interest Only mortgages.

Personal Equity Plan (PEP): A repayment vehicle associated with Interest Only mortgages.

Portability: A portable mortgage is one that can be transferred to another property without penalty if the borrower moves house within an early repayment charge period. The new interest rate that the Lender will be prepared to offer depends on whether the loan amount increases or decreases. If the latter, early repayment charges may apply.

Procuration Fee: This is commission paid by Lenders to intermediaries for introducing business to them. If the intermediary receives more than £250 they are obliged to disclose to the borrower the exact amount they received. Also known as: Introducer Fee.

Redemption Penalty: See Early Repayment Charge (ERC).

Repayment mortgage: See Capital and Interest mortgages.

Right to Buy (RTB): This is when a tenant living in a council-owned property purchases it at a discount, the size of which depends on the length of their tenancy.

Self Build: This is a mortgage for property under construction. The loan is paid out in stages as the property is completed, in order to ensure the LTV does not rise too high at any point.

Self Certification mortgage (S/C): This is a mortgage where a borrower states their income and signs a confirmation of their ability to repay a loan, without having to provide evidence such as accounts, payslips or bank statements. Consequently, S/C rates are often higher than standard Full Status mortgages.

Shared Ownership: This is a scheme operated by a Housing Association where the borrower owns part of a property, and pays the mortgage on this, while a Housing Association owns the rest of the property, and the borrower pays rent on this.

Split Loan: This is a mortgage that is taken partly on a Capital and Interest basis and partly on an Interest Only basis.

Stamp Duty: This is a government tax charged on the purchase of a property. 1% up to £250,000, 3% from £250,000 to £500,000 and 4% above £500,000. Remortgages, properties valued £120,000 or less and certain disadvantaged Post Code areas not more than £150,000 are exempt. You can search these on http://www.inlandrevenue.gov.uk/so/disadvantaged.htm

Standard Variable Rate (SVR): This is a variable rate determined entirely at each Lender's discretion. Unless linked to Libor or the Bank of England Base Rate, the SVR is the reverting rate at the end of any special offer period, such as a Capped, Discounted or Fixed rate.

Telegraphic Transfer Costs: It is usual for the Lender to transfer your mortgage fund to your Legal Adviser’s bank by telegraphic transfer which will be added to your final account.

Term Assurance: This insurance repays the mortgage in the event of the insured person's death. Also known as: Life Policy.

Tracker mortgage: This is a variable mortgage that is either above or below the Bank of England's Base Rate by a set percentage within a set period.

Valuation Fee: Whether purchasing or remortgaging the Lender undertakes a valuation of the property to ensure it provides adequate security. The charge is borne by the borrower and increases exponentially with the valuation/purchase price. There are 3 levels of valuation: in order of increasing detail these are Basic, Homebuyers' Report, and Structural survey. The more detailed the valuation, the higher the fee.

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