Getting your foot on the property ladder often means getting a hefty mortgage. Dealing with a mortgage provider can be a bewildering and overwhelming experience. To take some of the pain out of the experience and explain some of the terms you'll be encountering we've created a handy guide to explain mortgage jargon.
Below are some of the key mortgage terms you may hear. This list is not exhaustive but should assist you in picking the right deal. For a list of property jargon read our Property Jargon Explained .
Arrangement Fee - The amount that the lender will charge to set up the loan. These vary hugely. Some lenders will allow you to add them on to the loan but you will pay interest and lose equity in your property by doing this. Normally low rate deals have higher arrangement fees often making them worse than higher rate deals. There may also be booking fees, valuation fees and other miscellaneous fees.
Benefit Period - A period at the start of a mortgage where you get a ‘special’ rate offered by a lender, normally lower than their standard variable rate.
Buy to Let – When an individual purchases a property with the sole purpose of renting it to another party. This has been increasingly popular in recent years with specialist lenders springing up. Most lenders will have internal lending criteria and a certain rent will be needed to make a loan viable. Some lenders ask for minimal rental coverage eg 100% of payments. Others demand that the rent covers 130% of the mortgage payment. If using property as an investment make sure it is thus viable.
Capped - A mortgage product that will not increase above a certain percentage. For example "capped at 4%” would mean the rate could never be above this. This gives the borrower some peace of mind.
Cashback - When a lender offers a certain amount of cash on completion to the customer as an incentive to take out their product. It is important that this is taken for what it is. You should ensure that this is financially worthwhile and the deal does not suffer as a consequence.
Collared - A mortgage product that will not fall below a certain percentage. For example "collared at 4%” would mean the rate could never be below this. This gives the lender financial security but may allow them to offer a slightly better rate.
Completion/ Settlement (Scotland) - The date when a mortgage comes into force, normally dictated by the solicitor.
Deferred interest - Allows a borrower to make payments at a later date. However, the capital owed will increase during the deferred period. E.g. deferred for 6 months means that you would only have to pay the capital element of the mortgage with the interest being added on each month.
Discount - When a mortgage is set at a specific % below the lenders Standard Variable Rate (SVR) e.g. if the lender has an SVR of 7% and the discount is -2% you would actually pay 5%.
Early Repayment Penalty (ERP) - The amount it will cost to either pay off your mortgage or leave a provider. These are often 2-3% of the value of the loan during an initial benefit period and are used by lenders to keep borrowers with them.
Equity – The value of your house minus any mortgages and secured lending that you have on it leaves what is called the equity. Remember this can also be negative if house prices fall.
Flexible - A mortgage with special additional features e.g. paying more or less than was initially agreed, making lump sum payments (overpayments), temporarily stopping payments (payment holiday). Each lender will have their own definition so make sure it meets your needs.
Guarantor - An agreement by a third party to pay a mortgage if the main applicant is unable to do so, often a parent for a first time buyer. This is a binding legal contract and should not be entered into without seeking legal advice. It can however, assist in reducing any Capital Gains Tax Liability because the guarantor only has an obligation to guarantee the loan rather than owning the property.
Homebuy - A government sponsored scheme that assists existing tenants, Keyworkers and those in need, to get on the property ladder.
Islamic Mortgages - Under the law of the Koran, the charging of interest is forbidden. There are special types of Islamic mortgage to circumvent this problem. The two most common are Ijara under which the bank buys the property for the client and the client then leases it back from the bank, making monthly payments and Murabaha where the bank buys the property and the client then buys it immediately back for a higher price, paying off the debt over a specified term e.g. 15 years. For advice on lenders offering these service please see the following website Islamic Mortgages
Joint Tenancy - A type of ownership which entitles both owners to 100% ownership of the property. What this really means is that upon the death of either party ownership passes entirely to the survivor. By changing this ownership into 'Tenants in Common' under which each individual owns a % of the property you can make significant IHT savings. You should seek specialist legal advice on how to do this.
Key Features – This should be provided by a mortgage broker and provides details of charges made by the broker, rates and fees as well as other information.
Let to Buy – Otherwise known as shared ownership. Involves buying only part of a property and paying rent on the remainder. These allow some people otherwise unable to do so to get a foot on the property ladder but are surprisingly uncommon.
Lifetime Mortgages - A means of older homeowners releasing money from their property. Normally called home reversion or equity release schemes there will be no monthly payments or fixed repayment date. However, the lender will expect money back when the house is sold reducing any potential inheritance or money available to buy a new house. The fees on these arrangements are often high and the value you will receive for your house may be below that of the market.
Mortgage Deed - The contract between the lender and the borrower. It sets down the legal obligations of the borrower and the rights of the lender.
Offset - A Special type of mortgage run side-by-side with a bank account. These are not appropriate for everyone. The way it essentially works is as follows: cash in your bank account does not receive interest but the amount of interest you pay on your mortgage is also reduced. E.g. If your Mortgage was £150,000 and you had £50,000 in the bank you would only pay interest on £100,000 of your mortgage. This can, dependent on the lender, be used to reduce your monthly payment or the term of the mortgage, saving huge amounts.
Porting/ Portable - This is a feature that allows a borrower to transfer borrowing from one property to another. This may mean that charges and fees are avoided or a special rate is retained. You can often "port" just part of a mortgage onto a new property.
Redemption Statement - Issued by your existing lender it shows exactly what you would need to pay, including all fees and interest owing, to pay off your mortgage.
Right-to-Buy - Allows tenants in council houses to purchase their homes with a big discount.
Self-Cert - Often used for self-employed people, this means a lender agrees that the applicant can confirm their own income rather than providing all the necessary evidence i.e. P60, payslips, accounts.
Sub-prime, non-confirming, non-status - A Mortgage geared towards those with County Court Judgements (CCJs), poor credit history, or for those clients who have been bankrupt or in arrears. Rates are likely to be higher than those available in the market as a whole.
Term - The term chosen for the loan. The longer the term the more you will pay to the lender overall.
Valuation - Most lenders will request a basic valuation to ensure that a property is fit for mortgage. There will be a fee for providing this service. It is also possible to request a more detailed homebuyers valuation or a structural survey. These are more thorough investigations, performed by a specialist surveyor, of the state of the property and can ease your mind as a buyer. There is of course a charge for these types of survey and you should liaise with the lender to find out what each type of survey will provide.
To understand exactly what mortgage brokers do, read our user-friendly Mortgage Broker Guide.