A.S.U. – Accident, sickness and unemployment insurance (sometimes referred to as A.S.R. – accident, sickness and redundancy insurance). This is an insurance policy which is taken out by the borrower and protects against the borrower being unable to work for the stated reasons. The policy will usually pay a percentage of the normal monthly mortgage repayment (plus insurance) if the borrower is unable to work due to accident/sickness or unemployment/redundancy. These payments will normally only be made for a limited period of time – typically 6/12 months or until the borrower returns to work. The terms of these policies and the cost vary considerably from company to company.
Administration Fee – This is a fee charged by some lenders which is not refundable if the mortgage application does not proceed. The Administration fee will often form part of the valuation fee but will be retained by the lender even if the valuation has not been carried out.
Annual Percentage Rate – This is meant to show the true cost of borrowing and adjusts the notional interest rate to take account of all the initial fees and ongoing costs to reflect the real cost of borrowing throughout the entire mortgage term. Unfortunately there is currently some disagreement over how this rate should be calculated and some distortions occur. Whilst this could be a good way to compare relative deals care should be taken to ensure that the rates being compared have been calculated on the same basis.
Annuity Mortgage – (See Repayment Mortgage)
Arrangement Fee – This is a fee charged by some lenders in order to access particular mortgage deals. Arrangement fees particularly apply if you are looking for a fixed rate or discounted rate mortgage and these may either be payable up front, added to the loan on completion, or deducted from the loan on completion (check with the chosen lender which situation applies).
Arrears – Contracted mortgage payment not made by the due date. Applicants who have arrears on a current mortgage may experience problems if attempting to arrange a new mortgage through the mainstream lenders. A number of lenders do, however, specialise in this area of the market and their details can be found in the arrears section of the Moneynet site (www.moneynet.co.uk).
Buy to Let – A term used to describe the purchase of a residential property for the sole purpose of letting the property to a tenant. Whilst the majority of lenders will not provide mortgage finance for this purpose a number do specialise in this niche area of the market. The details of these lenders and the terms on which they will grant a mortgage can be found in the Buy to Let section of the Moneynet site (www.moneynet.co.uk).
Capital and Interest Mortgage – (see Repayment Mortgage)
Capital Raising – Normally refers to a re-mortgage when additional funds are taken over and above the amount required to repay the existing mortgage debt which is then used for personal finance purposes.
Capped Rate – A capped rate is a mixture between a fixed rate and a variable rate. The interest rate is guaranteed not to rise above a set level within the capped rate period but if the normal variable mortgage rate is below the capped rate then the variable rate is charged. This gives the ‘best of both worlds’ as the interest rate can fall but will not rise above the capped rate. However, the level at which the cap is fixed is usually higher than for a fixed rate mortgage for a comparable period of time. Sometimes ‘Cap and Collar’ mortgages are offered and these impose a minimum payment rate (the collar) in addition to the maximum rate (the cap). The lender will normally impose early redemption penalties if the mortgage is redeemed within the first few years (see Redemption Penalties).
Cashback – This is the arrangement whereby a cash sum of money is repaid to the borrower at the start of the mortgage. The amount of the cashback will vary considerably from lender to lender with the highest amounts being paid where the borrower is willing to forego any fixed or discounted rate offers and pay the normal variable mortgage rate. Cashback deals are also available in conjunction with some fixed or discounted rates but the amount of the cashback will normally be reduced in these circumstances. If a large cashback is being considered then it could, in some circumstances, be liable to Capital Gains Tax (refer to the lender, your accountant or local tax office for clarification). The lender will normal impose early redemption penalties if the mortgage is redeemed within the first few years (see Redemption Penalties).
Centralised Lender – This refers to the group of lenders, other than high street banks and building societies, who operate without a branch network, normally from one location.
Conditional Insurance – This refers to insurance products which some lenders will impose as a condition of their mortgage offer. This could mean that the lender insists that accident, sickness and unemployment cover is taken out or that combined buildings and contents insurance is taken. If looking for a fixed or discounted product then these conditions should especially be watched for.
County Court Judgement (CCJ) – A judgement for debt recorded at a County Court. These judgements will be shown when the lender carries out a credit search. If the debt has been repaid, subsequent to the judgement being recorded, then the entry will be marked ‘satisfied’. The appearance of CCJ’s on the credit register will greatly reduce mortgage options and nearly all lenders will insist thatJudgements. However, there are some lenders who specialise in this market details of which can be found under the Arrears/CCJ section of the Moneynet site (www.moneynet.co.uk).
Discounted Rate – The lender agrees to give a fixed discount off the normal variable rate for a guaranteed period of time. The discounted rate will move up and down with the normal variable rate but the payment rate will retain the agreed differential below the variable rate for the agreed period of time. If a discounted rate is taken the lender will normally impose early redemption penalties if the mortgage is repaid within the first few years (see Redemption Penalties).
Endowment Mortgage – An interest only mortgage supported by an endowment policy. During the term of the mortgage only interest on the mortgage is paid to the lender. At the same time premiums are paid into an endowment policy which is designed to mature at the end of the mortgage term. The proceeds of the endowment policy are designed to repay the mortgage debt, although with a low cost endowment policy it is not guaranteed that the proceeds will be sufficient to repay the debt. In addition to providing the investment to repay the mortgage debt the endowment policy will also include life assurance which will repay the mortgage debt in the event of the death of the policyholder within the policy term.
Exchange of Contracts (NOT SCOTLAND) – This is the stage in the property transaction at which legally binding contracts are exchanged between the buyer and the seller. Once contracts are exchanged the vendor becomes legally obliged to sell and the purchaser to buy on the terms agreed.
Existing Liabilities – This term is used by lenders to define all other finance commitments apart from the existing mortgage. This will take into account such items as bank loans, HP, credit cards, maintenance payments (to ex-spouse) etc. Most lenders will take these items into account when assessing how much they are prepared to lend and will usually deduct 12 months payments from gross annual income before applying their normal income multipliers.
First Time Buyers (FTB or FTP) – lenders differ in their definition of a First Time Buyer. Some lenders will include in this someone who has owned a property before but has no property to sell (i.e. may be renting temporarily after selling) and other lenders will include joint borrowers where just one party is a FTB. Other lenders will take a more literal definition and only include someone who has never owned a property before.
Fixed Rate – The lender will fix the interest rate that they charge at a set level for a fixed period of time. There are normally a whole range of fixed rate products available from different lenders and these vary in terms from very short periods (3 – 6 months) up to the whole 25 year mortgage term. The lender will normally charge early redemption penalties if the mortgage is redeemed within the fixed rate period and often beyond the initial period (See Redemption Penalties).
Flexible Schemes – This is a term that describes a number of new mortgage schemes and is based on the fact that some of these lenders calculate the interest on the mortgage on a daily – rather than annual basis. This offers the lenders the opportunity to be more flexible with the management of the account than would otherwise be the case. That said, there is a wide range of lenders advertising that they are flexible in outlook. These will range from lenders who will offer you one account from which to base all your savings and borrowings. From this one account you will operate your mortgage, savings accounts, current account and any other borrowings. However, not all ‘Flexible Schemes’ are as flexible and this and some will simply offer payment holidays or an ability to overpay each month to either build up a fund to draw on at a later stage or to help redeem the mortgage early.
Freehold (NOT SCOTLAND) – This describes the tenure of a property where ownership of the property and land is held indefinitely. This compares with leasehold property where the property is held for a limited period of time.
Further Advance – This is an additional loan made by the existing mortgage lender and secured by the first charge on the property. The Further Advance can be used for a variety of purposes (subject to the lenders approval) such as home improvement, purchase of freehold or personal purposes, such as debt consolidation.
Guarantor – A guarantor is a person other than the borrower who guarantees the mortgage repayments. A Guarantor can sometimes be used to support a borrower who has insufficient income to qualify for a mortgage in their own right. The Guarantor will normally need to have sufficient income to support the new mortgage in its entirety after taking into account any existing mortgage and other commitments they have personally. The Guarantor becomes responsible for the whole mortgage repayment if the borrower defaults.
Home Buyers Report – A type of survey report which is more detailed than a Mortgage Valuation but not as in depth as a Full Structural Survey. A Home Buyers Report is often carried out by the proposed lenders surveyor and the report can then be used for the lender to replace the Mortgage Valuation in addition to acting as a detailed report for the borrower. A Home Buyers report may not be suitable for certain types of property where a Structural Survey may be more relevant. If in doubt talk to the surveyor you propose to use.
Income Multiplier – Income Multipliers are used by lenders as one calculation in determining how much they are prepared to lend on mortgage. The most common multiplier used is 3 times a single income or 2.5 times joint incomes, whichever gives the higher figure. More generous multipliers are available from some lenders and lenders will be more flexible if the Loan to Value is relatively low.
Insurance Guarantee premium – ( See Mortgage Indemnity Guarantee)
Initial Interest – This figure is usually shown on the mortgage completion statement and refers to the amount of interest charged from the date that the funds are drawn down to the first repayment date. This has the effect of increasing the first mortgage payment and the amount of the initial interest payable will depend on the time in the month when the mortgage is completed. For example, if the mortgage payment is due on the 1st of the month and the mortgage is completed on 18th June then the first monthly mortgage payment will become due on 1st August. That monthly payment will, however, include one months interest from 1st July – 1st August and also 13 days interest from 18th June – 30th June which represents the initial interest.
Interest Only Mortgage – Interest only mortgages have become increasingly popular in recent years. Interest only mortgages can be supported by an endowment policy, pension plan or Pep in which case they are normally referred to as an endowment, pension or Pep mortgage. An interest only mortgage may, however, be arranged without the support of any particular repayment vehicle. Many lenders will now accept payment of interest only on the basis that the borrower makes their own arrangements to repay the capital at or before the end of the mortgage term. This could be done in a number of ways such as inheritance, sale of the property or from the realisation of other assets.
Land Registry Fee – This is a fee charged by the Land Registry to record a change in the registered title of Registered Land. The change will normally be notified to the Land Registry by the solicitor acting in the house purchase (or re-mortgage) and as such the Land Registry fee will normally be payable to the solicitor and accounted for in his final account.
Leasehold (NOT SCOTLAND) – This is the tenure that applies to most flats and maisonettes in the UK (excluding Scotland). As opposed to freehold property the rights to the property are owned only for a fixed period of time, with the freehold being held by a third party. The lease outlines the responsibilities of the various lessees in a block and determines the arrangements to be adopted for such things as upkeep of the common areas and insurance of the property. Because these cross covenants are required to avoid disagreements and confusion between the lessees only leasehold flats and maisonettes are accepted as mortgage security. This should not be confused with the situation where the freehold is owned by all the lessees in a block and this will commonly be advertised as ‘share of freehold’. Providing individual leases exist for each lessee then this would normally be acceptable to mortgage lenders. If in any doubt always talk legal advice before proceeding.
Legal Completion – This refers to the time at which the legal ownership of the property changes hands. This date will usually be agreed upon at exchange of contracts. This will also be the date at which the mortgage becomes effective (sometimes the mortgage completion date may be a couple of days before this to ensure that the solicitor has funds on the due day).
LIBOR Linked Rate – LIBOR is the London Inter Bank Offered Rate and is the rate at which banks lend money to each other. LIBOR changes daily and a LIBOR linked mortgage will normally be adjusted every three months. LIBOR linked rates are usually quoted as X% above LIBOR.
Loan to Value (LTV) – The loan to value is expressed as a percentage and represents the relationship between the size of the mortgage and the value of the property. For example a mortgage of £30,000 on a property valued at £40,000 would be shown as 75% LTV. This is an important figure to look at when considering the various mortgage options as the higher the LTV required the fewer the options. The Moneynet mortgage search facility will exclude schemes where the LTV requested is too high.
Loan Consolidation – Sometimes referred to as debt consolidation, this simply represents the policy of borrowing on mortgage in order to repay other loans or debts. This can be achieved as part of a re-mortgage or by arranging a further advance from the existing lender.
Mortgage Indemnity Guarantee (MIG) – This is known under many different names which include the following; Higher Lending Charge, Indemnity Premium, Insurance Guarantee Premium, Additional Security Fee, Mortgage Guarantee premium, Mortgage Indemnity Premium amongst others. This is a fee that is payable if a ‘high percentage loan to value’ is required. The MIG fee is used by the lender to purchase insurance to cover them in the event that you default on the mortgage and they make a loss on possession and resale of the property. The policy has no benefit to the borrower and offers no protection – indeed if your property is repossessed and the lender claims on the Mortgage Indemnity Insurance then the insurance company that has paid out the claim to the mortgage lender can still pursue you, the borrower, for repayment of that amount. The actual terms of the MIG will vary considerably from lender to lender and if you are told that this will apply you should check the details. Many lenders will impose this additional fee if you wish to borrow more than 75% of the value of the property and the premium payable will be calculated as a percentage of the amount you wish to borrow over that figure. There are a handful of lenders that do not charge MIG premiums or who charge in a different way.
Mortgage Term – This is the number of years over which the mortgage is arranged. If a capital and interest mortgage is being considered then it is worth looking at shorter terms than the traditional 25 year mortgage as considerable interest savings can be made by reducing the mortgage term by even a couple of years.
Mortgage Valuation – This is the most basic form of survey and is the minimum required by lenders in order to ascertain the suitability of the property as security for their loan. Although the borrower will normally receive a copy of this report it should not be relied upon as a comprehensive report on the condition of the property. A more detailed report (either a Home Buyers Report or Structural Survey) should be commissioned when considering the purchase of a property.
Negative Equity – Appeared in the late 80’s as a result of the slump in property prices. This describes the situation where the value of the property has fallen below the outstanding mortgage debt. Some lenders have particular products and policies to assist people who are trapped by Negative Equity.
Net Monthly Payment – This figure will be shown on both the mortgage offer and mortgage completion statement and shows the actual amount of the mortgage payment after MIRAS tax relief has been taken into account.
Non-Status – Some lenders will offer non-status facilities which allow them to lend without proof of income and sometimes without proof of existing mortgage repayment record. The maximum Loan to Value on these schemes is normally 70% or below and a credit search will usually be carried out.
Part Endowment – This describes a mortgage where only part of it is covered by an endowment policy. The balance could be arranged on an interest only basis or more commonly on a capital and interest basis.
Permanent Health Insurance (PHI) – This is a type of insurance which will pay a proportion of normal income in the event that the policyholder is unable to work due to accident, sickness or disability. These policies are normally used to replace a percentage of full income rather than just the mortgage repayment but the level of cover can be selected up to certain maximum levels. This type of cover should not be confused with ASU/ASR policies which will normally only cover the mortgage payment for a limited period of time. PHI policies can be arranged to pay income until a return to work or normal retirement age.
Portable – This describes the ability to move a particular mortgage product from one property to another in the event of a property move. This is particularly important if a fixed, capped, cash back or discounted product is taken where early redemption penalties are charged. If the product is not ‘portable’ then a house move would involve the payment of early redemption penalties even if another mortgage was taken with the same lender. A portable mortgage means that the same scheme is transferred to the new mortgage for the remainder of the original term e.g. a 5 year fixed rate is taken which has redemption penalties within the first five years. If the borrower decides to move after two years then the same five year rate will apply to the new mortgage for the balance of the remaining three years. If the original product was not portable, however, then redemption penalties would be paid on redemption of the existing mortgage and a new product would have to be taken for the new mortgage.
Redemption Penalty – An additional charge made by the lender if the mortgage is repaid within a pre-agreed period of time. These have become increasingly common with the growth in fixed rate and heavily discounted products. They are generally imposed to stop borrowers hopping from one lender to another simply to take advantage of the latest heavy discount or cheap fixed rate. Normally expressed as a number of months interest within a set period of years i.e. 6 months interest if redeemed within the first seven years but may also be expressed as a percentage of the mortgage debt i.e. 5% of the mortgage if redeemed within the first seven years. Careful attention should be paid to these penalties as they vary considerably from lender to lender and the lower and shorter the penalty the more attractive the deal.
Regional Lenders – This refers mainly to the smaller local Building Societies who restrict their lending to within certain regional locations. This could also be applied to a larger number of lenders who will not lend in Scotland or Northern Ireland and if you are looking for a mortgage in either of these areas you should check at an early stage that the lender will lend in these areas.
Re-mortgage – This is the process by which a mortgage on a property is moved from one lender to another. The new mortgage is used to repay the existing lender and at the same time additional funds may be raised for other purposes. Re-mortgaging has become an increasingly popular way to take advantage of the competitive deals offered by lenders to attract new business. If a re-mortgage is being considered then careful attention should be paid to the costs associated with arranging the re-mortgage as well as the savings to be made on the monthly repayment (the costs can sometimes erode any savings to be made). A check should also be made with the existing lender to ensure that there are no early redemption charges.
Repayment Mortgage – Also called an Annuity mortgage or Capital and Interest mortgage. With this type of mortgage the monthly repayment includes an element of the capital sum borrowed in addition to the interest charged. In the early years of the mortgage the majority of the monthly repayment consists of interest with only a small part repaying the capital. However, as the debt gradually reduces the element of capital increases and the interest element reduces, so although the monthly repayment stays the same (assuming interest rate remain unaltered) the debt starts to reduce more quickly as the term of the mortgage progresses. On a 25 year term mortgage it would not be unusual to still owe over 50% of the original debt after the first 15 years. Providing the correct monthly repayments are made on their due dates this mortgage will guarantee to repay the total mortgage debt at the end of the mortgage term.
Retention – This relates to monies withheld by lenders until certain mortgage conditions are met. This will normally relate to repairs or improvements to the property that the lender is insisting on.
Self-Certification – Several lenders will allow borrowers to self certify their income and no further checks on income are made. This type of scheme is useful to the self-employed who may not have accounts available or any other person who has difficulty in proving their earned income. The lender will normally make checks on previous credit history and will require a clear credit search in addition to a good previous lender’s reference.
Self-employed – This will usually cover anyone who is not paid under PAYE. In addition, for mortgage purposes, most lenders will class controlling directors as self- employed or directors with more than a 20% shareholding. If this applies then the lender is likely to ask to see company accounts and to write to the companies external accountant for proof of income.
Stamp duty – This is a tax which is levied on the purchase of property. The tax is paid by purchasers and is currently levied at the following rates:
1% of property value £60000 – £250000
3% of property value £250001 – £500000
4% of property value £500001 and above.
The appropriate rate is paid on the whole purchase price and not just the excess applying to that band i.e. a purchase price of £300000 will attract £9000 stamp duty, being 3% 0f £300000.
Structural Survey – This is the most detailed type of survey report normally undertaken in connection with a House Purchase. If a Structural survey is opted for then the lender will also need to have a mortgage valuation carried out for their own purposes and the borrower will be responsible for both fees. An alternative may be a Home Buyers Report which will cover both the borrower and the lender but advice should be taken from a qualified surveyor who will be able to advise on individual properties and circumstances.
Term Assurance – This is life assurance that pays out the insured sum on the death of the policyholder providing it occurs within the policy term. This is a common method to protect the mortgage in the event of death and to ensure that the mortgage debt is repaid. The most common types of this insurance are Mortgage Protection or Level Term Assurance. Mortgage protection is normally used in connection with a capital and interest mortgage and the level of the insured cover reduces in line with the reduction in the mortgage debt. Level Term assurance is more likely to be used in connection with an interest only mortgage as the level of cover remains constant as does the mortgage debt. With Term Assurance cover there is no pay out if the policy holder survives the policy term and the policy simply lapses with no value. This factor makes this type of cover relatively inexpensive.
Variable Rate – This is the traditional way that mortgages were arranged before the concept of fixed rates. A variable rate will fluctuate up and down to reflect the true cost of borrowing. Some variable rates may be discounted for a period of time (see Discounted Rates).