Foreign terms and 5 letter abbreviations. We’ve all been in situations where we’re left scratching our heads looking at a words which might as well be in another language. Below we outline some of the most commonly requested Mortgage terms, and phases, which should help you understand your Mortgage better and the options available to you.
What does ‘Buy-to-let’ mean? This is a type of property bought for the purpose of letting it to tenants, and mortgage lenders offer buy-to-let mortgages to fit these borrowers. These tend to be at higher rates than standard mortgages, as these mortgages are more expensive than a residential mortgage.
What is Capital? The amount (your mortgage) you borrow to buy a property.
What is my Credit score? This is a score that every borrower has and is used to help assess their suitability for borrowing. A poor credit score is typically a result of past missed repayments on loans or credit cards, for example. You can discover your own credit score online by visiting websites such as Clearscore.
What is APR? This is an abbreviation for Annual Percentage Rate and is calculated by taking the total interest cost over the term of the mortgage (including fees).
Early Repayment Charge: Some mortgage deals levy an early repayment charge if you pay some or all of your mortgage off before the end of the term, or transfer to another rate before the end of the product period.
What is a Base rate? A rate of interest set by the Bank of England which is used to base some mortgage deals on, such as trackers, which are pegged at a certain percentage above the base rate.
Fixed rate mortgage: This is a mortgage deal over a period of years (typically between two and five) that offers a fixed interest rate for the security of regular monthly repayments.
What is a Guarantor? This is somebody (for example a parent for a child) who guarantees to meet the mortgage sum if the borrower is unable or won’t meet repayments.
Can you explain Arrears? This means you have ‘defaulted’ at least once on your mortgage repayments, so you have missed one. If you continually fall into arrears you’re at risk of losing your home.
What is an ‘Interest-only’ mortgage?: This mortgage enables the borrower to only pay the interest on the capital sum. However, this means your mortgage balance doesn’t reduce and will still have to be repaid at the end of the term.
Higher Lending Charge: A fee sometimes charged by lenders if you borrow a particularly high LTV of around 90%, although these fees are less common these days.
Mortgage term: The time in which you agree to repay your mortgage. This is usually 25 years but can differ depending on the individual mortgage rate you choose.
Offset mortgage: This is a particular type of mortgage which allows borrowers to ‘offset’ their savings against their mortgage debt.
Overpayments: A payment in excess of what is due. With mortgages, lenders will allow typically allow you to make 10% overpayments every year on your mortgage debt penalty-free, even if you are tied into a deal.
Loan-to-value (LTV): This is the proportion of the property price that you borrow when you take out a mortgage. This is influenced by your deposit. For example, if you have a mortgage of £150,000 on a house that’s worth £200,000, you have a loan-to-value of 75% – therefore you have £50,000 as equity.
Remortgaging: When you arrange a new mortgage on your current property.
Negative equity: An unfortunate situation when the amount you owe on your mortgage is greater than the value of your property. It can be an issue when you want to move house or remortgage. This arises when the market value of a property falls below the outstanding amount of a mortgage secured on it.
Repayment mortgage: This is a mortgage when you pay the interest as well as a portion of the capital debt, so by the end of the mortgage term you will no longer owe the lender anything provided you keep up repayments.
What is a ‘Tracker’ mortgage? With a tracker mortgage, the rate of interest you pay is directly linked to the Bank of England base rate, meaning your monthly repayments will fluctuate with any changes. For more information on the different types of mortgages read our article here.
What is Equity? This is the amount of the property value aside from the sum you owe on the mortgage – this is known as the ‘equity’ in your property.