What is a mortgage?
You'll come across a lot of jargon looking into research. Here are some useful explanations of some popular terms used for mortgages and insurances.
Annual Percentage Rate of Charge (APRC)
A way of comparing the rates charged by different mortgage lenders. A percentage figure is calculated by using a standard formula including interest rates and associated costs over the term of the mortgage. Although mortgage lenders are legally obliged to quote the APRC in any mortgage schedules they provide, its usefulness is questionable as more sophisticated repayment methods are introduced by lenders, and as mortgage borrowers become accustomed to remortgaging every few years.
Base Rate (BBR)
The Bank of England Base Rate, set by its Monetary Policy Committee every month, determines lending rates in the UK.
A mortgage for a property that is, or will be, let to tenants. This is semi-commercial lending, reflected in the higher set-up costs and marginally less attractive rates available. Income multiples are of secondary importance with this type of lending; mortgage lenders are more concerned with the relationship between rental income and mortgage payments.
Another term for a repayment mortgage.
Capped rate mortgage
A mortgage that provides protection against rising rates by setting a maximum payable rate (the cap) for a set period. You won’t pay more than the capped rate but if rates fall and your mortgage lender’s standard variable rate drops below the cap, you will pay less. There are usually early repayment charges during the capped rate period.
With this type of mortgage, the lender refunds a percentage of the advance – the cashback and you are then usually tied by way of an early repayment charge to the standard variable rate for a set number of years. Early repayment charges are likely to apply during the time you are obligated to pay the standard variable rate.
Critical illness insurance
A policy that pays a lump sum in the event of the policyholder being diagnosed as having one of a list of life threatening and/or disabling illnesses.
Current account mortgage (CAM)
Essentially, a flexible mortgage with daily interest calculation that has a bank account attached to the mortgage account. This can be a tax-efficient option for some borrowers. Money in the bank account is offset against the outstanding balance of the mortgage on a daily basis, so in effect is earning a net rate of interest equivalent to the payable rate on the mortgage.
Discounted rate mortgage
This gives a discount off a mortgage lender’s standard variable rate for a set period of time. The advantage of having a discount is that your payable rate will fall if rates generally fall. The disadvantage, however, is that if rates generally rise then your payable rate will rise too – without a ceiling. There are often early repayment charges during the discounted period.
Early repayment charge
The fee you would have to pay for fully repaying your mortgage or making a lump sum reduction of the balance within the product term. Borrowers may feel that the charges often in place with mortgages – discounts, fixed rates, capped rates etc, – are acceptable during the product term. Flexible mortgages tend to have minimal early repayment charges.
An endowment policy is a form of life assurance that pays a tax-free lump sum at the end of its term or a guaranteed amount – usually the mortgage debt – in the event of the policyholder’s death. Because of changes in the economic climate since they were sold, many endowments are not now expected to reach their original targets on maturity.
Equity is the difference between the current value and the current debts held against the property. If your house is worth £200K and you have a mortgage for £100K and no other secured loans, you have £100K equity.
Fixed rate mortgage
A style for mortgage product, offering a fixed payable rate for a set period. This type of mortgage gives protection from rising rates and allows for easy monthly budgeting, but if rates were to fall during the period of the fix you will not benefit from the rate reductions. Most fixed have early repayment charges if you choose to clear the mortgage during the product term.
Flexible mortgages provide more options for borrowers than traditional mortgages. The features available vary from lender to lender. The defining characteristics of flexible mortgages are their monthly or daily interest calculation, plus the ability to make overpayments without an early repayment charge at any time. They tend to have a lower standard variable rate than traditional mortgages, and many allow you to underpay, defer paying by taking payment holidays, drawback overpayments, and to drawdown further advances at a beneficial rate. Generally, flexible mortgages are for borrowers who intend to repay their mortgage early.
Higher lending charge
A one-off premium that mortgage borrowers may be charged. It is generally payable when you want to borrow a high percentage of a property’s value —usually above 75% loan to value; but it is common practice for mortgage lenders to carry the cost of this insurance themselves between 75% and 90%. The premium pays for the lender to insure against potential losses should the house be repossessed and sold for less than the outstanding mortgage. It is important to note that the insurance protects the mortgage lender, not the borrower. Irrespective of who pays the premium (lender or borrower), the insurer providing the cover retains the right to pursue the defaulting borrower for any loss made as a result of a lender’s claim on the policy.
Individual Savings Account (ISA)
ISA’s provide a way of repaying an interest-only mortgage. As such one should remember that the future value will be dependent upon investment growth and investments can go down as well as up. ISA’s enjoy significant tax breaks with no capital gains tax on growth, reduced tax on dividend income and no tax levied upon withdrawals. Whilst contributions can be amended at any time, there is an upper limit on the amount you can pay into an ISA.
Monthly payments consist entirely of the interest due on your mortgage, so that the balance you owe is not reduced during the term. Interest-only mortgages are usually set up in conjunction with investment vehicles such as personal pensions, ISAs or endowment policies designed to repay the loan at a given date assuming specified levels of growth.
Letting your property
Lenders have different mortgage schemes for residential and let properties. If you intend to let your property you should let your lender know or otherwise you will be in contravention of your mortgage deed.
A policy designed to repay your mortgage in the event of your death. Term assurances taken in conjunction with a repayment mortgage are sometimes called mortgage protection policies – these are not to be confused with payment protection insurance, which protects against accidents, sickness and redundancy.
Loan to value (LTV)
A percentage figure indicating the size of the mortgage on a property in relation to its value. Thus, a house worth £120K with a mortgage of £60K would have a loan to value of 50%. Better mortgage deals are available for lower loan to values – 75% and below. At higher loan to values – usually from 90% to 95% you are likely to find yourself paying a higher lending charge.
Every lender has their own criteria on mortgage term. Mortgage Term is the numbers of year the client has to pay off the mortgage. Most common term are between 5 years and 40 years. The term of the mortgage is also controlled by age.
A portable mortgage is one that can be transferred without penalty from one house to another during a rate-control period. If you increase your mortgage the rate available for additional borrowing depends on what schemes are available at that time. If you reduce your mortgage, a pro-rata early repayment charge may apply. Most mortgages nowadays are portable.
Also referred to as a capital-and-interest mortgage. Part of each monthly payment you make goes towards repaying the capital amount and part goes towards paying interest charged on the loan. At the end of the term the entire debt will be repaid. In the early years payments consist largely of interest; as time goes on the capital-repayment proportion increases.
A mortgage that has some of the loan set up on an interest-only basis and some on a repayment basis.
Standard variable rate (SVR)
Mortgage lenders’ SVRs fluctuate at the discretion of the lender. When the initial product period finishes the client reverts to SVR. (Some mortgages nowadays have special lower SVRs linked directly to the Bank of England Base Rate.)
This is a land tax payable when purchasing a property or land in the UK. The amount payable depends upon the purchase price and if the property is an investment home or second property.
These are mortgages with a variable rate set above or below the Bank of England Base Rate. Tracker mortgages are similar to discounted mortgages, in that they fluctuate in accordance with prevailing economic conditions without an upper limit on their payable rate; but they have the advantage of being linked to a rate set by an independent party – the Bank of England – rather than the mortgage lender.
Valuations and surveys
When you take out a new mortgage on a property, the mortgage lender needs to value property in order to ensure that it offers sufficient security. There are three levels of valuation/survey:
1) Basic valuation
is carried out purely on behalf of the mortgage lender even though you may have to pay for it. Most lenders charge valuation fees on a scale depending on the value of properties. The report is basic, and all lenders disclaim any responsibility for the condition of the property. You have no comeback against the surveyor for any defects or problems overlooked in the report.
2) Homebuyers’ report
a more detailed but still limited report to a set format on the readily accessible parts of the property. It may offer you some limited recourse should the surveyor, who is acting on your behalf rather than the lender’s, be negligent.
3) Full structural survey
the most thorough (and most expensive) report. If the property is defective, the surveyor should discover this. If major defects are not discovered then the surveyor acting for you would have some legal liability, and you would be able to claim redress.
Applicants should always check with mortgage lenders before instructing their own valuation or survey. Lenders tend to work with panels of surveyors, and if your surveyor is not known to your lender you may find yourself paying again for a valuation by one who is known.