Mortgage jargon made easy

Everyone knows what a mortgage is, but the more we get into the subject, the more difficult, incomprehensible and complex the terms become. At Extend Finance, we try to explain all the issues in the simplest possible language, but there’s nothing stopping you from learning some of the vocabulary you’re bound to face at the property buying stage. This article will not only make it easier for you to understand the banks’ offers, but it will also simply take you less time to read the contracts. We warmly invite you to read on!

Mortgage jargon made easy

table of contents

Mortgage types

Capital repayment classification

Other types of mortgages

Interest rates

Interest rates on mortgages

Joint mortgage

Fees and charges

Persons involved in the process of purchasing real estate and applying for a mortgage

Other Key Terms

Mortgage types

Let’s start with the classification of mortgages. This is a very interesting issue because there are really a lot of variants of these financial products in the UK, which makes it a bit easier to match the best offer to your individual needs. On the other hand, it’s very difficult to point to a single, one-size-fits-all mortgage.

Capital repayment classification

• Repayment mortgage: This is the most typical form of mortgage. When you choose this solution, you pay back a portion of the borrowed amount plus interest to the bank every month. In return for a fairly high instalment, at the end of the borrowing period you become the sole owner of the property and the bank no longer has any control over it. This is the most common choice of our clients.

• Interest only mortgage: In this variant, you only pay interest on the amount you have borrowed and, consequently, your debt does not change. In some cases, after a few years, repayment of the capital begins and the said facility starts to resemble a “normal” one, but there are also variants in which the capital is never repaid. In such a situation, at the end of the mortgage term you either have to buy the property back for cash or take out another loan to finance this buyback.

Other types of mortgages

• Pension mortgage: A pension mortgage is also a mortgage, but the bank pays you, rather than you paying it. In practice, in return for receiving your property when you die, the bank pays you a set amount each month as additional income to your pension. UK law treats a pension mortgage as an investment and the money from it is tax-free.

• Buy to let mortgage – A Buy to Let facility is only provided if the property being purchased is to be rented out. Such financial products are quite specific: the interest rate and deposit will be slightly higher, and the instalments will depend on the projected rental income. Important: a property covered by a regular mortgage cannot be rented out, unless you get permission to do so, called Consent to Let.

• Holiday Let Mortgage - A holiday Let is a special type of Buy to Let mortgage. Unlike standard investment financing, a holiday let mortgage is dedicated to funding properties that are rented exclusively on a short-term basis, for example through Booking.com or Airbnb. It is a relatively expensive form of borrowing—the interest rate is often up to 2% higher than standard home loans, and financial guarantees are often required.

• **Cashback mortgage – **Some banks try to persuade customers to take out mortgages with financial bonuses. In practice, this is between £200 and £1000, while sometimes the cashback is based on the value of the property. Unfortunately, there is nothing for free - the interest rates on such products are often higher and it is worth calculating well whether such a cashback is worthwhile in any way.

• Second charge mortgage: a second charge mortgage is a product aimed at people who have already paid off part of their borrowed capital and would like to borrow an additional sum of money, securing it with the property they own. This is a way to raise relatively cheap cash, but it is worth remembering the negative consequences - delays in repaying the second charge mortgage can result in seizure of the property for debt.

• Retirement interest-only mortgage: Retirement interest-only mortgage is dedicated to people over the age of 55 who have already paid off a standard mortgage, but with an eye on retirement would like to reduce their expenses. RIO mortgages are, as a rule, perpetual, the contract expiring only upon the death of the borrower.

You can find out more about special offers of financial products on the government’s Moneyhelper website

Interest rates

Interest rates are probably the most important criteria when deciding on a mortgage. They also have the biggest impact on the overall cost of borrowing (APRC) and determine whether a specific facility is expensive or cheap.

• **Reference rate- **the base rate of interest that is set by the Bank of England. Although it is essentially the most important economic indicator, the reference rate does not reflect the actual interest rate on loans.

• Base rate - This is the reference rate plus a percentage. This is known as the cost of money, as the base rate is the interest rate on loans that banks make to each other. Examples of base rates are LIBOR, WIBOR and EURIBOR. When the base rate is low and the risk of it rising is low, tracker mortgages are very attractive.

Interest rates on mortgages

• **Variable Rate- **if the facility has a variable interest rate, the amount of the installment fluctuates smoothly. The interest rate depends, among other things, on the current base rate. For more information on variable rate and fixed rate mortgages, see our article Fixed vs. variable rate.

• Fixed Rate – in this situation, the interest rate stays the same for 2, 3 or 5 years. After this time, the rate reverts to what is known as the standard variable rate (SVR). In the UK, fixed rate mortgages are by far the most common. However, greater security is not free - the interest rate at the time of origination will be higher than for a variable rate mortgage, and the longer you want to freeze the interest rate, the more you will come to pay.

• **Tracker rate – **This is the base rate plus a percentage. The tracker interest rate follows the base rate as it fluctuates. When the base rate is low, as it has been for several years, tracker mortgages are an excellent alternative.

• **Standard Variable Rate (SVR) – **The standard variable rate is the interest rate on loans at the end of a fixed, variable or discounted rate contract. The SVR is usually quite high, so if possible, it is worth considering remortgaging when your preferential mortgage comes to an end.

• **Discount Rate - **the discount interest rate is set lower than the standard variable rate (SVR) and is at the bank’s discretion. In principle, this is a cost-effective option, but it offers less certainty than fixed loans. The installments paid can vary each month, although usually, changes occur much less frequently.

Joint mortgage

Joint mortgage is a type of mortgage that is paid by between two and four people. This solution is used by both spouses and people who want to benefit from the support of relatives, such as parents. Depending on the arrangements made, shares in the ownership of the property can be distributed evenly, as well as put one person in a privileged position.

Fees and charges

It’s important to remember that the cost of a borrowing is not just the interest and capital repaid in instalments. When taking out a mortgage, you need to be prepared for a number of additional expenses and it’s worth bearing these in mind so you don’t get disappointed later. The most important ones include:

• Arrangement/product/booking fee- this is the amount charged by the lender for providing you with a mortgage. This fee is usually due when you complete your application and can be added to the amount you pay back by installments.

• Early repayment charge- if you decide to repay your debt early, for example after receiving a large inheritance or after winning the lottery, you can of course do so. However, you must bear in mind that every contract provides an overpayment limit - you can give up, for example, 10% of the total value of the loan without any commission. If you want to pay more, the bank will charge a fee, usually between 1 and 5% of the amount you deposit, although some lenders do not charge it at all. It is worth taking this detail into account at the property purchase stage and asking your adviser for details.

• Survey/Valuation fee- in order to lend you money, the bank needs to be sure that the price of the property is in line with current realities. To do this, a specialist is called in to estimate the value of the house and issue a report accordingly. In some cases, the lender does not charge this fee, but it is worth bearing in mind.

• Broker’s fees – the fees payable to the broker for their services in helping you find a suitable mortgage. Their amount depends on the company you use, the value of the property and the number of things that need to be taken care of.

It is only possible to determine the exact fees and commissions after analysing a specific case. Nevertheless, we encourage you to read our article, in which we describe the costs of purchasing property in the UK in as much detail as possible.

Persons involved in the process of purchasing real estate and applying for a mortgage

The process of purchasing a property is very complex and requires many discussions and signatures to be successfully completed. Below, we explain a few terms used to describe some of the people involved in the entire process:

• Solicitor or Conveyancer - a solicitor is a lawyer who is responsible for the process of transferring ownership of a property (conveyancing). By definition, the two words differ - as a rule, a solicitor is more qualified and has broader powers, while the work of a conveyancer focuses solely on the transfer of title deeds. In practice, however, these two professions often overlap and the solicitor and conveyancer are the same person.

Other Key Terms

• Stamp Duty land tax (SDLT) - isa tax on the purchase of property in England and Wales, the amount of which depends on the price you end up paying for your home. As this is quite a complex issue, we encourage you to read our article: Stamp duty land tax- calculator and rate table.

• **Loan to Value (LTV)- **the loan to value ratio measures the value of the loan against the value of the property. For example, if you buy a house for £200,000 and borrow £150,000, 75% of the purchase amount comes from the bank, so the LTV is 75%. The maximum LTV is currently 95%.

• Deposit (own contribution) - no bank will give you a mortgage for 100% of the value of the property. If you want to buy a house, you need to prepare a certain amount of money, a minimum of 5%. In most cases, the deposit is between 10 and 15%.

• Remortgage - remortgaging is the process by which we take out a mortgage to pay off our current commitment. We can do a remortgage with either the same or a new lender. Why is such an operation carried out? For example, to release some of the capital from our property, to consolidate debts, or to reduce the instalment by changing our current mortgage to one with a lower interest rate. For more information, see our article Remortgage, what it’s all about.

• Negative equity– if the value of your loan is higher than the value of the property, you have what is known as negative equity. This is most often the result of a decline in property prices.

• Mortgage deed – a legally binding document that lists the terms of the mortgage and shows the transfer of ownership. It states that the person who owns the house transfers ownership to the lender as collateral for the mortgage.

• Title deeds - These are official legal documents that contain information about the owners of the property and their rights and obligations related to its ownership.

• Conveyancing - Conveyancing is the legal process of changing the ownership of a property. To do this, you need to hire a solicitor or conveyancer who is authorised to do so and will be able to ensure that the transaction goes smoothly, including from a legal perspective.

• Transfer of Equity - This term refers to the transfer of part of the shares in a property to another person. This can mean either transferring part of the shares to someone else or completely removing a person from the title deeds.

We hope you found our article useful. When you buy a house or apartment you are taking on a large and long-term commitment, so it is worth preparing yourself solidly. By having a sound knowledge and a good broker, you will avoid many mistakes that could be very costly for you.

Are you planning to take out a mortgage or wondering if it is possible to reduce the instalment of your current commitment? Write to us and arrange an initial consultation! Our advisors can do a lot and, as a whole-of-market broker, Extend Finance offers its clients access to virtually all bank offers. To arrange an interview, simply use the contact form :)