Finance - Mortgage

Practically every new home these days is purchased with the aid of a mortgage. Mortgage jargon is often the detail of the terms for the loan and needs to be understood by the householder.

Failure to understand the implications of the mortgage jargon could render the homeowner with excessive repayment terms or penalties for early repayment if they are able.

Mortgage jargon is very complex and Regulators have insisted over the years that more explanation and examples are given to the applicant which is great news. However, it is still shrouded in jargon and often not as transparent as one would first believe.

Mortgage Jargon.

Annual Percentage Rate (APR)

A way of comparing the rates charged by different lenders. A percentage figure is calculated by using a standard formula that takes into account interest rates and associated costs over the term of the mortgage. Although lenders are legally obliged to quote the APR in any mortgage schedules they provide, its usefulness is questionable as more sophisticated repayment methods are introduced by lenders and as borrowers become accustomed to remortgaging every few years.

Base Rate

The Bank of England Base Rate, set by its Monetary Policy Committee every month, determines lending rates in the UK. Directly or indirectly, all mortgage rates are linked to the present or past Base Rate.

Buy-to-let mortgage

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; lenders are more concerned with the relationship between rental income and mortgage payments.

Capital-and-interest mortgage

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 lender’s standard variable rate drops below the cap, you will pay less. Unless your cap is combined with a discount, a substantial fall in rates is required before your payable rate is reduced. There are usually early repayment charges during the capped rate period.

Cashback mortgage

With this type of deal 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 lender’s standard variable rate for a particular length 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 a particular period. Borrowers may feel that the charges often in place with deals – discounts, fixed rates, capped rates etc, – are acceptable during the rate-control period, but that early repayment charges tying them in for a number of years to a lender’s standard variable rate thereafter are unfair. Flexible mortgages tend to have minimal early repayment charges.

Endowment

A popular method of repaying an interest-only mortgage until its recent disfavour. 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

The value of property in excess of charges on it. If your house is worth £150K and you have a mortgage for £90K and no other secured loans, you have £60K equity.

Fixed rate mortgage

A name for deals offering a fixed payable rate for a set period, during which there will almost certainly be early repayment charges. This type of scheme gives shelter from rising rates and allows for easy monthly budgeting, but if rates were to fall substantially during the period of the fix you would be left paying a relatively high rate.

Flexible mortgage

A generic name for a fairly recent arrival in the UK market. Flexible mortgages provide more options for borrowers than traditional mortgages. The features available vary from lender to lender. The defining characteristics of flexis are their monthly or daily interest calculation (instead of the annual interest calculation methods of traditional mortgages) 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 so called payment holidays, drawback overpayments, and to drawdown further advances at a beneficial rate. Generally, flexis are for borrowers who intend to repay their mortgage early. Current account mortgages embody a further refinement of the principle of flexibility.

Higher lending charge

A one-off premium that 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 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 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.

Income multiples

The factors by which lenders will multiply the gross annual income of applicants to determine their maximum borrowing capability. Multiples vary among lenders.

Individual Savings Account (ISA)

ISAs provide a way of repaying an interest-only mortgage. The government has guaranteed that they will be in place until at least 5 April 2009. The type of ISA most suitable for mortgage repayment purposes is the equity (stocks and shares) based one. As such one should remember that the future value will be dependant on investment growth and investments can go down as well as up. ISAs 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.

Interest calculation

The frequency with which lenders calculate the outstanding balance on mortgages – annually, monthly or daily – is an important consideration if you have a repayment mortgage. The annual calculation systems of traditional mortgages mean that you are paying interest on capital repayments already made during the course of that calendar year. The daily or monthly interest calculations used with flexible mortgages enable payments (and overpayments) to have a quicker impact on the outstanding balance. Other things being equal, daily or monthly as opposed to annual calculation saves borrowers money.

Interest-only mortgage

Monthly payments consist entirely of the interest due on your loan, 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 (they are sometimes generically known as endowment mortgages) 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.

Life assurance

A policy designed to repay your mortgage in the event of your death. Interest-only mortgages linked to endowments have in-built life cover, but if you have an ISA-linked interest-only mortgage or a repayment mortgage, life cover should be arranged separately. 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% (or some lenders will go to 100%) – you are likely to find yourself paying a higher lending charge.

Other charges

Notwithstanding any charges notified with your recommendation or covered elsewhere in this brochure, you should be aware that you may be liable for certain other standard charges. Namely:

1. Buildings and Contents Insurance

Insuring your home is essential. All lenders insist you have adequate buildings insurance, in order to safeguard the money they are lending. Most lenders now do not insist on your taking their own block insurance. They do, however, reserve the right to charge an administration fee (typically £25) for checking that your policy is adequate if you elect to arrange insurance elsewhere.

2. Legal fees

Unless the scheme recommended specifically states that the product carries free basic legal work, you will be liable to pay any such costs in relation to your mortgage application. The solicitors acting would normally be working on both your and the lender's behalf and you would ordinarily be responsible for all costs. If the recommendation carries free basic legal work, please note that this covers only the very basic work. The cost of additional work carried out on your instruction or incurred as a result of unusual circumstances will be your responsibility. If you have any doubts as to the implications of this, please call us.

3. Release fee (sealing fee)

An administrative charge imposed by lenders for releasing the title deeds of your property when you redeem your mortgage (repay in full). This fee is payable because remortgaging involves redeeming the mortgage with one lender and transferring it to another. It varies considerably from lender to lender: it can be up to £300 - and although it is not strictly speaking an early repayment charge, borrowers may well feel penalised by fees at the higher end of the scale.

Payment protection insurance

Policies that ensure mortgage payments are met for a given period (usually 12 months) if you are unable to work because you become sick, have an accident or are made redundant. Income Support for Mortgage Interest (ISMI) is no longer payable for the first 9 months that you are unable to work, and the government has urged homeowners to protect their homes with this type of cover. Mortgage payment protection insurance is also known as accident, sickness and unemployment (ASU) cover. (Confusingly, some types of life assurance taken in conjunction with a mortgage may be called mortgage protection policies.)

Permanent health insurance (PHI)

A form of cover that pays the policyholder an income for a specified time (usually after a preliminary deferment period) in the event of prolonged illness resulting in loss of earnings.

Portability

A portable mortgage is one that can be transferred without penalty if you move house during a rate-control period. If you increase your mortgage the rate available for additional borrowing depends on what schemes the lender is prepared to offer you. If you reduce your mortgage, a pro-rata early repayment charge may apply. Most mortgages nowadays are portable.

Redundancy

The DSS gives no assistance to borrowers for nine months following redundancy, and qualification for help with paying mortgage interest thereafter is means-tested and restricted to interest on the first £100,000 of the loan. If you are anxious about being able to maintain payments in the event of redundancy or long-term illness, you should consider taking out mortgage payment protection insurance.

Repayment mortgage

Also referred to as a capital-and-interest mortgage. Part of each monthly payment you make goes towards repaying the capital amount you owe and part goes towards paying interest charged on the loan.

At the end of the term (typically 25 years) the entire debt will be repaid. In the early years payments consist largely of interest; as time goes on the capital-repayment proportion increases.

Split loan

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)

Lenders’ SVRs fluctuate at their discretion as economic conditions change. When the initial rate-control period on a mortgage finishes the SVR will be the payable rate. (Some flexible mortgages nowadays have special lower SVRs linked directly to the Bank of England Base Rate.)

Tracker mortgage

These are schemes with a variable rate set above or below the Bank of England Base Rate. Trackers are similar to discounts, 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 (whether you are purchasing or remortgaging), the lender concerned needs to value it 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 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.

With any level of survey, if there are potential or actual defects found the surveyor may suggest you obtain additional specialist reports, which could be at your expense and may be time-consuming. If you opt for a homebuyers’ report or full structural survey, you will sign a contract with the surveyor to formalise his responsibilities to you.

Applicants should always check with 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.

ADD YOUR OWN JARGON TO THIS SECTION:-