Mortgages can be complex, and navigating through the jargon associated with them can be overwhelming for many homebuyers. To help you better understand the language of mortgages in the UK, we’ve put together an A-Z list of commonly used mortgage terms and their meanings. Let’s decode the jargon!
A – Agreement in Principle (AIP):
Also known as a Decision in Principle (DIP) or Mortgage in Principle (MIP), an AIP is a written confirmation from a lender stating how much they are likely to lend you based on an initial assessment of your financial situation.
B – Base Rate:
The base rate is the interest rate set by the Bank of England, which serves as a benchmark for other interest rates, including mortgage rates. Lenders may offer mortgage deals that are based on the Bank of England’s base rate, typically expressed as a percentage above or below the base rate.
C – Completion:
Completion refers to the final stage of the homebuying process when the purchase of the property is completed, and ownership is transferred to the buyer. This is also the time when the mortgage funds are released to the seller or their solicitor.
D – Deposit:
The deposit is the amount of money that a buyer puts towards the purchase of a property. It is usually expressed as a percentage of the property’s purchase price, and the higher the deposit, the lower the loan-to-value (LTV) ratio, which can affect the mortgage rate and terms.
E – Equity:
Equity refers to the difference between the current value of a property and the amount of mortgage owed on it. For example, if the current value of a property is £250,000, and the mortgage owed is £200,000, the equity would be £50,000.
F – Fixed Rate Mortgage:
A fixed rate mortgage is a type of mortgage where the interest rate remains unchanged for a set period, typically 2, 3, 5, or 10 years. This allows borrowers to have a predictable monthly payment, regardless of any changes in the base rate or lender’s rates during the fixed rate period.
G – Gazumping:
Gazumping occurs when a seller accepts a higher offer from a different buyer after already accepting an offer from another buyer. This can result in the original buyer losing the property, even if they had already started the mortgage process.
H – Help to Buy:
Help to Buy is a government scheme designed to help first-time buyers and home movers get onto the property ladder with a smaller deposit. There are different Help to Buy schemes available, including Help to Buy Equity Loan, Help to Buy ISA, and Help to Buy Shared Ownership.
I – Interest-Only Mortgage:
An interest only mortgage is a type of mortgage where the borrower only pays the interest on the loan each month and does not pay down the principal amount. At the end of the mortgage term, the borrower will need to repay the full amount of the loan, which can be a significant lump sum.
J – Joint Mortgage:
A joint mortgage is a mortgage that is taken out by two or more borrowers, typically a couple or family members. All borrowers are jointly responsible for repaying the mortgage and are jointly named on the mortgage agreement. This can affect the affordability assessment and credit history of all borrowers.
K – Key Facts Illustration (KFI):
A Key Facts Illustration, also known as a Mortgage Illustration or European Standardised Information Sheet (ESIS), is a document provided by the lender that details the key features and costs of a mortgage offer. It includes information such as the interest rate, fees, estimated monthly payments, and total amount payable over the term of the mortgage.
L – Loan-to-Value (LTV) Ratio:
The LTV ratio is the percentage of the property’s value that the mortgage covers. For example, if you’re borrowing £180,000 for a property valued at £200,000, the LTV ratio would be 90%. Lenders often use the LTV ratio to assess the risk of a mortgage application, with lower LTV ratios typically considered less risky and may result in better mortgage rates.
M – Mortgage Offer:
A mortgage offer, also known as a mortgage offer in principle or mortgage offer of loan, is a formal document from a lender stating that they are willing to lend you a specific amount of money to buy a property, subject to certain conditions being met. Once you receive a mortgage offer, it’s an important milestone in the mortgage process as it confirms that the lender is willing to provide you with a mortgage.
N – Negative Equity:
Negative equity occurs when the outstanding mortgage on a property is higher than the current value of the property. This can happen if the property’s value decreases or if the borrower has a high LTV ratio. Negative equity can be a concern for homeowners as it may limit their options to sell or remortgage their property.
O – Overpayment:
Overpayment refers to making additional payments towards your mortgage, on top of your regular monthly payments. Overpaying your mortgage can help you pay off your mortgage faster and potentially save on interest payments over the long term. However, some mortgages may have restrictions on overpayments, so it’s important to check your mortgage terms and conditions.
P – Porting:
Porting is the process of transferring your existing mortgage to a new property when you move home. If your mortgage is portable, you may be able to transfer your existing mortgage deal, including the interest rate and terms, to the new property without incurring early repayment charges. However, porting is subject to the lender’s approval and may not always be possible.
Q – Qualifying Criteria:
Qualifying criteria are the requirements that borrowers need to meet in order to be eligible for a mortgage. These criteria may include factors such as credit history, income, employment status, age, and the property’s value. Lenders use qualifying criteria to assess the risk of a mortgage application and determine the terms and conditions of the mortgage.
R – Remortgage:
Remortgaging is the process of switching your existing mortgage to a new mortgage deal, either with the same lender or a different lender. Remortgaging can be done to take advantage of lower interest rates, release equity, or change the mortgage terms. It’s important to carefully consider the costs and benefits of remortgaging, including any early repayment charges and fees.
S – Standard Variable Rate (SVR):
The SVR is the default interest rate that a mortgage reverts to after the initial fixed or discounted rate period ends. The SVR is set by the lender and can vary over time based on changes in the base rate or the lender’s own rates. Borrowers on the SVR may have higher monthly payments compared to the initial rate period.
T – Term:
The term of a mortgage is the length of time over which the mortgage is repaid. Mortgage terms can vary, with common terms in the UK ranging from 25 to 35 years. A longer mortgage term may result in lower monthly payments but can also result in higher overall interest payments over the life of the mortgage.
U – Underwriting:
Underwriting is the process that lenders use to assess the risk associated with a mortgage application. It involves evaluating factors such as credit history, income, employment status, and property value to determine whether a borrower is eligible for a mortgage and what terms and conditions will apply.
V – Variable Rate Mortgage:
A variable rate mortgage is a type of mortgage where the interest rate can change over time. This can be based on changes in the lender’s standard variable rate (SVR), the Bank of England’s base rate, or other factors. Variable rate mortgages can offer flexibility, but the monthly payments may go up or down depending on changes in the interest rate.
W – Wharfage:
Wharfage is a fee charged by some lenders when you transfer your mortgage to another lender before the end of the mortgage term. It’s also known as a mortgage exit fee or early repayment charge. Wharfage can vary depending on the lender and the terms of your mortgage, and it’s important to understand the potential costs before considering switching your mortgage.
Y – Yield:
Yield is a term used in the context of buy-to-let mortgages and refers to the potential return on investment for a property. It’s calculated as a percentage of the property’s value and is based on the expected rental income compared to the mortgage costs. A higher yield indicates a potentially better return on investment for a buy-to-let property.
Z – Zero Deposit Mortgage:
A zero deposit mortgage, also known as a 100% mortgage, is a type of mortgage where the borrower does not need to provide a deposit towards the purchase of a property. Instead, the lender provides the full amount of the property’s value as a mortgage.