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Mortgage Broker Articles
Glossary Of Mortgage Terms
- Accident, Sickness and Unemployment Insurance (ASU):
In the event of an accident, sickness or involuntary unemployment befalling a borrower,
this insurance will 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 Judgements
(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 (by the Lender) 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.
- 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 (by the Lender) 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 covers damage
to the mortgaged property and/or its contents in a variety of specified scenarios.
It is compulsory for all Lenders, and 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.
- 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.
- 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. 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 mortgaes 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 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.
- 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.
- 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.
- 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.
- 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.
- 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 rate 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 fulfil 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.
- Flexible mortgage: As its name suggests, this is a type of mortgage
that offers considerably more flexibility than traditional mortgages. Although specific
details vary between Lenders, the core features of Flexible mortgages are: . - daily
or monthly capital res. - 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.
- 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.
- Gazundering: The practice of withdrawing a price already offered
and making a lower offer. This is the other side of the coin to gazumping. When
the property market is weak, a buyer may try to reduce his or her bid for a home
prior to the exchange of contracts (when the transaction becomes legally enforceable)..
The verb to gazunder, first made a widespread appearance in the UK property market
in the lat 1980s. It is a blend of gazump and under, denoting the arbitrary reduction
of an offered price by a purchaser, usually near to the date of exchange of contracts,
putting pressure on the seller to accept a lower value rather than look for another
buyer.
- 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. Also known as: Additional Security
Fee, Indemnity and Mortgage Indemnity Guarantee (111G).
- 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.
- 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 (LIB): 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 a 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.
- Offset Mortgages: This is a fully flexible mortgage which allows
a borrower to keep balances (such as mortgage, debt, savings 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.
- 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 under the Mortgage Code to disclose to the borrower the exact amount
they received. Also known as: Introduces 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 sale of properties.
The tax is calculated as a percentage based on the value of the property above a
threshold set in the Chancellor's annual budget. The tax rate is divided into bands
with the percentage increasing with the value of the property. It is not payable
on remortgages.
- 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.
- 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 stringent and
thorough the valuation, the higher the fee.