Title:
Glossary of
common terms used during the mortgage process.
Word Count:
2332
Summary:
A layman's
glossary of 34 terms commonly used during the process of arranging a mortgage
in the UK.
Keywords:
mortgages,glossary,apr,interest,survey,variable,rate,repayment,equity
Article Body:
APR - This stands
for Annual Percentage Rate. It enables you to compare the full cost of the
mortgage. Rather than just being an interest rate, it includes up front and
ongoing costs of taking out a mortgage. The formula for calculating APR is set
by Government Regulations and therefore enables direct comparison of the cost
of mortgages.
Capital and Interest Mortgage - This is when part of your monthly payment
contributes to paying off the outstanding mortgage in addition to paying the
interest on the mortgage. The payments are structured so that at the end of the
term, your mortgage will have been completely paid off. For this reason this
type of mortgage is also called a Repayment Mortgage.
Capped Rate - This is a mortgage where the lender agrees that the interest
charged will never exceed a specific percentage. This deal lasts for a set
period of years. After the set period, the rate usually reverts to the lenders
standard variable rate. During the capped period, the interest charges can move
up and down with the lenders interest rate - but cannot exceed the capped
rate.
Cashback - An amount, either fixed or a percentage of a mortgage, which you can
opt to receive when you complete your mortgage. The lender may well claw back
this money through a higher interest rate.
CAT marks/standards - CAT stands for Fair Charges, Easy Access and decent
Terms. They were created by the Government in an attempt to provide consumers
with simple, clear financial products with straightforward, easy to understand
terms. A CAT mortgage will have no arrangement fees, no redemption fees and
will have interest calculated daily. It will also have a minimum loan of just
£5000, offer you repayment flexibility and the mortgage should be portable
should you move home. Finally, you will not have to buy the lender's insurance
products and there will be no penalties should you find yourself in arrears but
can subsequently catch up.
Completion - This is end of the house buying process, when the funds are
transferred and the keys are handed over. Happy moving!
Contract - A contract is a binding agreement between the buyer and seller. In
the context of house buying, after the contract is signed by both the buyer and
the seller it is then 'exchanged' between the respective solicitors for a set
completion date. At that point, the contract is legally binding on both
parties.
Conveyancing - This is the legal process in which property is bought and sold.
You can do it yourself or hire a solicitor or specialised conveyancer to
perform the tasks for you. The buying of a freehold is much less complicated
than the buying of a leasehold.
Discounted Rate - This is where the lender makes a guaranteed reduction off the
standard variable rate for an agreed period of time. After the discounted
period ends, the mortgage usually moves to the lenders' standard variable rate.
Watch out for redemption penalties that overhang the initial discount
period.
Early Redemption Charges - Redemption is when the borrower pays off the capital
and the interest on the mortgage and thus owns the property outright. Early
redemption fees are the charges incurred for paying off the mortgage early,
either to buy the house outright, move or re-mortgage. Always ask about early
redemption charges before you agree a mortgage.
Endowment - Endowments are life assurance policies with an investment element
designed to pay off the outstanding capital on an interest-only mortgage. There
are a few types of endowments, such as 'with profits', 'unitised with profits'
and 'unit-linked'. In the 1980s, these were sold by salesman who seemly
suggested that these policies were "guaranteed" to pay off the
mortgage at the end of the term. However, the investment returns on these policies
have fallen to below what was previously considered to be the norm.
Consequently, many policies are not worth what was originally forecast and may
not fully repay the money borrowed at the end of the mortgages' term.
Equity - In housing terminology, equity is the difference between the value of
the property and the money owed on the property. So if the property is valued
at £200,000 and you owe £150,000 on the mortgage, you have equity of £50,000.
If you sold at that moment, you would receive £50,000. Should the value of the
home be less than the mortgage outstanding then you have negative equity.
Freehold - Owning the freehold means that you own the total rights to the
property and the land on which it is built.
HLC - This is the Higher Lending Charge (it was previously known as a Mortgage
Indemnity Guarantee). It is levied by around three quarters of all lenders on
clients who cannot afford to put down a deposit of 10% of the price of the
property. In practice it is a type of insurance aimed at protecting the lender
should you default on your mortgage when the value of your home is less than
the capital you borrowed. The insurance only provides cover for the lender, not
you, and typically costs £1,500.
Homebuyers Report - A property survey aimed at providing more information than
a mortgage valuation but less information than a full structural survey. It
will help the borrower to decide whether to purchase and help the lender to
decide how much to lend.
Interest Only Mortgage - This is a mortgage where your monthly repayments only
pay the interest on the mortgage. Therefore, at the end of the mortgage you
still have to repay the full sum you borrowed. You are advised to have a
separate investment vehicle into which you make payments aimed at building up a
fund capable of paying off the mortgage capital at the end of the term. Typical
investments include ISA's, a pension or an endowment policy.
IFAs - Stands for Independent Financial Advisor. These advisors are regulated
by the Financial Services Authority. To be classified as
"independent" they have to be able to offer you the full range of
products from all financial product providers. They are not entitled to
describe themselves as "independent" if they can only offer products
from a restricted panel of financial companies. A Financial Advisor can be one
man band or work for very large companies. Before they make any recommendation,
an IFA must carry out a detailed fact find so they fully understand your
financial circumstances. They can then make their recommendations to suit your
personal circumstances.
ISA - An ISA is an Individual Savings Account, which is a tax-free method of
owning shares, building up a cash savings account or a life assurance policy.
You can use an ISA to build up a capital sum to repay an interest only
mortgage.
Leasehold - If your property is leasehold, ownership of the property reverts to
the Freeholder at a set date. Many houses were originally sold on 999 year
leases which means that 999 years after the initial date of the Leasehold,
ownership of the property reverts to the Freeholder. Building in multiple
occupation such as apartments, are always sold on a leasehold and usually have
a much shorter leasehold period - 100 and 125 years is quite common. Often,
with a block of apartments, the apartment owners individually own the
leaseholds whilst a management company, in which they hold shares, owns the
freehold. These days, however, leaseholders who live in the property have the
legal right to buy their freehold under terms laid down by UK law.
Life Insurance - This can also be called Term Insurance or, when specifically
linked to proprty purchase, as Mortgage Protection Insurance. It is designed to
pay a tax free lump sum in the event of your death to enable your mortgage to
be repaid in full. There are a number of variants such as Level Term Life
Insurance and Decreasing Term Life Insurance. At the outset you take out
insurance for the full sum you have borrowed from your mortgage lender and for
the same number of years as you have agreed on your mortgage. These insurance
policies do not have any investment or surrender value. The premiums are based
on a number of factors - the main ones being the amount of cover you need, your
age, health and how many years you want to be insured for.
Lock-In Period - This is the minimum period you have agreed to stay with the
lender. Depending on the deal, it could be as low as six months up to the whole
of the term. Should you wish to repay the mortgage or remortgage during the
lock-in period, you will invariably have to pay redemption penalties. Always
make sure you know how long you are locked in for with your mortgage.
LTV - Literally means Loan to Value. This is a measurement of the mortgage
amount against the value of the property or the price that you are actually
paying. A £157,500 mortgage on a property for which you paid £175,000 would be
a LTV of 90%. Lenders tend to charge a Mortgage Indemnity Premium on mortgages
with a loan to value of anything about 75%. Some don't so ask about this.
MIG - This has now changed its name to HLC. See above.
Mortgage - A mortgage is a long-term loan taken out in order to buy a property
with repayment secured on that property. So if you don't keep to the repayment
terms, the lender can repossess the property, sell it and retain the money they
are owed. Any balance is then paid to you. If the property is sold for less
than you owe your lender, you still remain liable to repay the shortfall.
Mortgage Advisor - On October 31st 2004 the selling of mortgages in the UK came
under the remit of the City watchdog, The Financial Services Authority (FSA).
As from that date any person providing mortgage advice had to be registered
with the FSA and abide by its rules of conduct, methods of operating and
training programmes etc. The objective has been to improve life for the
consumer by offering better protection, clear information and access to redress
for poor advice.
Negative Equity - Negative equity is when the value of your home is less than
the amount that you owe on your mortgage plus any other loans secured against
it. It can happen very easily if you take out a 100% mortgage or if property
prices fall. (Also see Higher Lending Charge)
Portable - This is a measure of how easy it is to move a mortgage from one
property to another should a property move be required. This is vital if you
are moving during your lock-in-period and wish to avoid redemption
penalties.
Repayment Mortgage - This is the same as a Capital and Interest mortgage - see
above.
Searches - During the conveyancing process, the buyer has to be sure that the
seller has title to the property and identify any matters may affect the
prospective owners ownership of the property. For example, whether the property
is affected by any proposed road building, whether there are preservation
orders affecting the property, is it a listed building and has it been built in
accordance with planning conditions and building regulations. Searches will
also show whether there are mines under or close by the property. This
information is obtained by the person undertaking the conveyancing from HM Land
Registry and the relevant Local Authority. These investigations are
collectively known as "Searches".
Self-Certification - Should you have difficulty in providing documentation that
"proves" your income to a prospective mortgage lender, you may need a
self-certification mortgage. In essence you personally certify what your full
income is. If you receive high bonuses, or work seasonally or on commission, or
are self-employed this may be your best option. You declare your income plus
some evidence that your declaration is reasonable. Ideally lenders want to see
as much guaranteed income as possible. To compensate the lender for the
increased risk they are taking on a self-certified mortgage, they will charge
you a higher rate interest, typically 1% over their standard variable
rate.
Stamp Duty Land Tax (commonly known simply as Stamp Duty) - You pay Stamp Duty
Land Tax on property like houses, flats, other buildings and land. If the
purchase price is £120,000 or less, you don't pay any Stamp Duty Land Tax. If
the price is more than £120,000, you pay between one and four per cent of the
whole purchase price, on a sliding scale.
Upto £120,000 - No duty payable
£120,001 to £250,000 - 1% duty payable*
£250,001 to £500,000 - 3% duty payable
£500,001 and over - 4% duty payable
*If you're buying a property an area designated by the government as
'disadvantaged', you don't pay any Stamp Duty Land Tax if the purchase price is
£150,000 or less.
Did you know? Stamp Duty was originally introduced by William of Orange when he
was King of England.
Structural Survey - The most thorough report you can get on the condition of
the property you are considering to buy. The surveyor will look in detail at
the inside and outside of the property and will tell you if the property is
structurally sound. All major and minor defects in the building will also be
listed and should tell you what maintenance work may be needed either now or in
the future. You should make sure the scope of the survey is agreed in writing
before you commission it. Should the survey identify problems, use them to
negotiate a reduction in the price before you exchange contracts.
Variable Rate - This is when the interest rate you pay on your mortgage can go
up or down depending on changes to the lender's standard variable rate. If you
have a variable rate mortgage your monthly mortgage payments will change
whenever the lender changes the interest rate.
Valuation - This is where a valuer appointed by your proposed lender, visits
the property in order to estimate its current value. This value is then used by
the lender as a basis for its security and to calculate its Loan to Value
Ratio. The borrower never sees the valuation. With some mortgage deals the
lender absorbs the cost of the valuation but in many cases the borrower has to
pay upfront.