UK mortgage terminology

This page gives descriptions of UK mortgage terminology which can often confuse borrowers.

Introduction

The UK mortgage market is one of the most innovative and competitive in the world. Most borrowing is funded by either mutual organisations (building societies and credit unions) or proprietary lenders (typically banks). For a number of years the market operated with minimal state intervention, although this changed at least temporarily following the 2008 nationalisation of Northern Rock (one of the country's largest mortgage banks).

Since 1982, when the market was substantially deregulated, there has been substantial innovation and diversification of strategies employed by lenders to attract borrowers. This has led to a wide range of mortgage types:

Mortgage types

Repaying the capital

* Repayment mortgage - a mortgage repayment method where the capital and interest is repaid.
* Interest-only mortgage where the capital is not repaid until the end of the mortgage. For example, if the mortgage value is 90000, interest rate is 5.6% and the mortgage is for 30 years, monthly interest payment will be {(90000*5.6%)/12}=420.
* Endowment mortgage - an interest only mortgage where the capital is repaid by one or more endowment policies at the end of the mortgage term.
* An investment backed mortgage - an interest only mortgage where the capital is repaid with the proceeds of a PEP or ISA or other investment plan at the end of the mortgage term. (Note: PEPs are no longer available to new investors). Sometimes these are referred to as PEP mortgages or ISA mortgages
* Pension mortgage where the tax-free cash lump sum of a personal pension scheme is used to repay an interest-only mortgage at retirement.

Types of interest rate

* Variable rate - the rate varies at the discretion of the lender.
* Standard variable rate - the default variable rate the lender offers to mortgage borrowers with a standard residential mortgage.
* Tracker rate - a variable rate that is linked to an underlying public interest rate (typically Bank of England repo rate) by a predetermined margin. For borrowers the rate is often linked to the LIBOR.
* Fixed rate - the interest rate remains constant for a set period; typically for 2, 3, 4, 5 or 10 years. Longer term fixed rates (over 5 years) whilst available, tend to be more expensive and/or have more onerous early repayment charges and are therefore less popular than shorter term fixed rates.
* Discount rate - where there is reduction in the standard variable rate (e.g. a 2% discount) for a set period; typically 1 to 5 years. Sometimes the rate is stepped (e.g. 3% in year 1, 2% in year 2, 1% in year three).
* Capped rate - where similar to a fixed rate, the interest the rate cannot rise above the "cap" but can vary beneath the cap. Sometimes there is a collar associated with this type of rate which imposes a minimum rate. Capped rate are often offered over periods similar to fixed rates, e.g. 2, 3, 4 or 5 years.

Other types

* Buy to let mortgage - a semi-commercial mortgage on residential property let to tenants.
* Right to buy mortgage - a mortgage arranged under the right to buy your home legislation for council or housing association tenants.
* Let and buy mortgage - you let your existing property and buy a new property with a mortgage.
* Flexible mortgage - allows additional capital payments without penalty and often allows payment holidays or underpayments.
* Adverse credit mortgage - mortgage to borrowers with credit problems, e.g. county court judgements.
* Self-cert mortgage - a mortgage where the lender does not seek proof of income to demonstrate affordability; but instead relies on a statement of earnings as "certified" by the borrower(s).
* Non-status mortgage - a mortgage where the borrowing is not dependent on the income of the applicant and the applicant states they can afford the repayments.
* Deferred interest mortgage
* Offset mortgage - a mortgage where the borrower can reduce the interest charged by offsetting a credit balance against the mortgage debt.
* Foreign currency mortgage - where the debt is transferred to one or more foreign currencies to reduce capital and interest payments through fluctuation in exchange rates.

Fees

*Product fee - a fee payable by the borrower to obtain a (usually incentivised) product.

*Early repayment charge, redemption penalty or tie-in - With each incentive the lender may be offering a rate at less than the market cost of the borrowing. Therefore, they typically impose a penalty if the borrower repays the loan within the incentive period or a longer period (referred to as an extended tie-in). These penalties used to be called a "redemption penalty" or "tie-in", however since the onset of Financial Services Authority regulation they are referred to as an early repayment charge.

*Valuation fee, which pays for a chartered surveyor to visit the property and ensure it is worth enough to cover the mortgage amount.

*Higher lending charge (HLC) - a fee levied by lenders in respect of mortgages exceeding a pre-defined loan-to-value (LTV) percentage threshold. Until the 1990s these were typically levied on all mortgages with an LTV percentage over 75%, but the market generally moved to a 90% threshold at this time. Subsequently certain lenders have moved away from charging an explicit HLC, in favour of charging an increased interest rate on higher LTV mortgages. It can justifiably be claimed that this is the same thing by another name.

Other

*100% mortgage
*First time buyer
*Negative equity
*Mortgage Interest Relief At Source - MIRAS

Statistical and industry jargon

*Loan to Value (LTV) - The total loan size in relation to the value of the property.
*Mortgage gross lending - all new lending done in a given period including remortgaging and new loans for house purchase.
*Mortgage balances outstanding - the total mortgage balances outstanding at a given point of time.
*Net mortgage lending - the total change in balances outstanding between two point in time, this can also be calculated by adding together the total gross lending in a period less repayments, redemptions and loan losses in the same time period.
*Redemption - paying back a mortgage 'early' as opposed to paying back a mortgage following a set repayment plan, typically when remortgaging to another mortgage provider or by way of some other lump sum payment (e.g. when selling of the property).
*Remortgaging - refinancing of a mortgage, usually understood to mean moving from one provider to another.

See also

*Mortgage
*Remortgage


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