GLOSSARY

It’s not only first-time homebuyers who struggle to understand the various acronyms scattered throughout the mortgage industry.

Even experienced homebuyers and property investors who have purchased before often approach us with enquiries about the common phrases used during the mortgage process.

We understand that you may not be familiar with terms like LTVs (Loan-to-Value ratios) or DTIs (Debt-to-Income ratios) – that’s why we’re here. However, having a grasp of the fundamentals can streamline your application and provide you with the confidence that you fully comprehend the agreement you’re signing.

To assist you, we’ve compiled a comprehensive glossary, covering everything from A to Z in mortgage jargon. But remember, if you have any specific questions of your own, feel free to reach out to us. We’re always available to provide the answers you need.

ARRANGEMENT FEE

An arrangement fee is what you pay for the lender to set up your mortgage. You can usually choose between paying the arrangement fee upfront or adding it to the mortgage. If you add to your mortgage you will pay interest on it.

BUY TO LET

Buy to let mortgages are designed to help people invest in property. A Buy to Let mortgage is available only on properties you do not intend to live in. Generally they require a larger deposit than a standard residential mortgage.

CHAPS FEE

This covers the lender’s costs when sending the mortgage funds over to your solicitor.

COMPLETION

The point the legal formalities of a property purchase or mortgage ends and sellers receives the money. The buyer cannot take possession before completion.

DECISION IN PRINCIPLE (DIP)

Also known as ‘Mortgage Promise’ or an ‘Agreement in Principle’ (AIP) which is a certificate or statement from a lender to say that ‘in principle’ they would lend a certain amount to a particular prospective borrower or borrowers based on some basic information. This is not a guarantee but it can be helpful when negotiating with sellers and estate agents.

EARLY REPAYMENT CHARGE (ERC)

This is an amount of money (a charge) you may have to pay a lender if you either move your mortgage to another lender during the special deal period or overpay by more than you are allowed within the agreed period.

EXCHANGE OF CONTRACTS

This is the point in the transaction where the buyer is legally bound to buy the property and the vendor to sell.

EXIT FEE

An exit fee is charged for closing your mortgage account, if you switch to another lender or remortgage to another deal with the same lender.

HIGHER LENDING CHARGE (HLC)

This is a fee charged by the mortgage lender where the amount borrowed exceeds a given percentage of the value of the property. It’s designed to cover any increased risk the lender might incur by lending to you. They may use it to buy an insurance policy called a Mortgage Indemnity Guarantee, which protects them if you default on the mortgage.

LEGAL FEES

Legal fees pay for a solicitor to do the legal paperwork for you. This process is known as conveyancing.

LOAN-TO-VALUE (LTV)

This refers to how big your mortgage is in relation to how much your property is worth, expressed as a percentage. If you have a £150,000 mortgage on a house that’s worth £200,000, you have an LTV of 75%.

MORTGAGE OFFER

A Written offer from the lender to the borrower setting out details of the mortgage with a list of conditions. The mortgage offer is usually valid for up to 6 months.

MORTGAGE TERM

The period over which you repay the mortgage.

PORTABILITY

This is a feature of a mortgage that allows it to be transferred between properties when you move house without penalties.

REDEMPTION STATEMENT

If you want to pay your mortgage off in full, or if you’re in the process of re-mortgaging to another provider, then you’ll need a redemption statement. This shows you what you would need to pay, including all fees and interest owing, to pay off your mortgage.

REMORTGAGE

Remortgaging is when you switch your current mortgage to a new lender without moving home. The three main reasons for people wanting to remortgage is to reduce payments, to raise money against the house or to change the type of mortgage they currently have.

REPAYMENT METHODS

INTEREST ONLY MORTGAGE

With an interest only mortgage you make monthly repayments for an agreed period but this will only cover the interest on your loan. You’ll normally also have to pay into another savings or investment plan that will hopefully pay off the loan at the end of the term.

INTEREST RATE DEALS

DISCOUNT

With a discount mortgage, you’ll get a discount on the lender’s standard variable rate (SVR) for a set period of time, typically two or three years. When your discount mortgage deal comes to an end, your lender will typically transfer you automatically onto its SVR.

FIXED RATE

With a fixed-rate mortgage, the interest rate stays the same for a set period of time. This means that for every month during this set period, your mortgage repayments will remain the same. At the end of the deal, the interest rate usually reverts to the lender’s standard variable rate (SVR).

LIBOR RATE

LIBOR (London Inter Bank Offer Rate) deals are not widely available but some lenders do offer them. They track the LIBOR rate for a set period of time and will move up or down with it.

OFFSET

This links your savings to your mortgage debt. Instead of earning interest on your savings, that money is balanced against your mortgage so you pay less interest on it. Offset mortgages are typically suited to people who also have large, stable amounts of savings. For example, if you have a £100,000 mortgage and £20,000 in savings, you would only be charged interest on £80,000 of the mortgage. This can save you a significant amount in interest and clear your debt more quickly.

STANDARD VARIABLE RATE

With a variable rate mortgage your payments go up or down with the lender’s standard interest rate. This often changes following Bank of England base rate changes.

STEPPED RATE

Stepped rate deals are available on all of the other types and usually start low in the first year and will increase each year until the end of the deal, usually there are penalties to exit these deals early.

TRACKER RATE

With a tracker mortgage, it moves directly in line with another interest rate – normally the Bank of England’s base rate plus a few percent. Usually they have a short life, typically two to five years, though some lenders offer trackers which last for the life of your mortgage or until you switch to another deal. If your tracker mortgage rate is low, you can take the opportunity to overpay on your mortgage, shortening the total length of time it will take you to pay off your mortgage, and cutting the amount of interest you pay.

VARIABLE RATE

With a variable rate mortgage, your monthly payments can go up or down, according to movements in interest rates at any time. You will need to ensure you have some savings set aside so that you can afford an increase in your payments if rates do rise.