Mortgage Jargon Buster

If you read articles about the property market, it can seem like the people involved with it are speaking a completely different language.  The good news is that the average person can get to grips with this jargon if they just put in a bit of effort.  Here is a guide to help.

Arrangement fees

These can also be called admin fees or set-up fees.  They are fees for setting up mortgages.  The fee may be charged by a mortgage broker or by a lender (or, in principle both).  It may be possible for this fee to be rolled into the amount lent, but then you will pay interest on it.

Arrears

When you are “in arrears”, you are behind with your payments on something.  The term is used outside the mortgage market, it is also used when people fall behind with their rent or if someone misses gets behind with payments on a loan, credit card or other debt.

Capped rate

A capped rate mortgage is basically a hybrid of a standard-variable-rate mortgage and a fixed-rate mortgage.  The amount of interest charged varies in line with the base rate, but there is a limit or “cap” at which it is guaranteed to stop, regardless of what the base rate does.

Cashback mortgage

The lender undertakes to give the borrower a sum of cash upon completion of the purchase.  On the one hand, this can be very useful as moving home is notoriously expensive.  On the other hand, there is no such thing as a free lunch and the cashback will have to be paid for somehow, so be careful to look carefully at the overall cost before deciding whether or not it’s a good deal.

County Court Judgement (CCJ)

If you fail to make payments on a debt, the lender may apply to a court for an order to force you to pay what they believe you owe.  If the court agrees with the lender, they will issue a CCJ.  Understandably, other lenders do not look kindly on them, so you want to avoid them if you possibly can.

Collar

A collar is essentially the opposite of a cap.  With a collar, a mortgage will track the base rate but will never go below and agreed rate.

Current-account mortgage

These can also be called savings-account mortgages or offset mortgages.  The basic idea is that you pay all your excess funds into your mortgage account each month so as to keep the amount owed as low as possible and hence reduce the amount of interest you pay.  The reason this is a win is that you would have earned less interest on your credit balances than you would have paid on the equivalent debit balance, so it makes sense just to pay down the debit balance instead.

It is not unusual for mortgage lenders to allow overpayments, but what makes current-account mortgages very different from regular mortgages is that current-account mortgages make it easy for you to take money out again.  This means you can make overpayments with confidence knowing that if you discover later that you do need the money, you can just make a withdrawal in the same way as you would with a standard current or savings account.

Discounted-rate mortgage

A discounted-rate mortgage has a rate which is lower than the lender’s usual standard variable rate.  Like fixed-rates, these offers tend to be time-limited and, again, you need to look at the overall deal to see if they are worth it.

Equity-release scheme

The term equity-release scheme tends to be used to refer to schemes which allow older home-owners to release equity from their property with the capital and interest being repaid upon their death (although there are variations upon this last point).  In principle, however, any home-owner can release equity from their property by remortgaging.

Fixed-rate mortgage

Fixed-rate mortgages charge the same rate of interest regardless of the level of the base rate.  The standard practice is to agree a rate for a certain period of time, after which the borrower will be switched to a standard-variable-rate mortgage.  Fixed-rate mortgages are not necessarily cheaper than standard-variable-rate mortgages.  They do, however, give the borrower the security of knowing what they will be paying from one month to the next.

Flexible mortgage

A flexible mortgage has some degree of flexibility to it.  For example, it may allow overpayments, underpayments or payment holiday (or all of the above).  This may be a great option for people on irregular incomes, but be aware that, as always, everything comes at a price so always look at the overall deal.

Freehold

Freehold means that the person owns the building and the land on which it stands.  Share of freehold means that the person owns the building and has part-ownership of the land on which it stands.  For example, in a block of four flats, a shared-freehold arrangement would mean that each home-owner owned their own flat plus a quarter of the ground underneath it. 

Guarantor mortgage

If you’re not able to get a mortgage on your own, you may be able to get one if someone you know acts as a guarantor, which basically means that they guarantee to make the payments if you are unable to do so.  The guarantor will need to be able to show that they could afford to do so (while still paying their own essential expenses).  Guarantor mortgages can have their uses, but being a guarantor is a serious undertaking and having someone be a guarantor for you can create challenging dynamics between families and friends.

That being so, if you are thinking about getting a guarantor mortgage (or being a guarantor), it may be advisable to take some time out to look at why the purchaser cannot get a mortgage in their own name and address those issues and/or provide help by other means.  For example, if a person cannot meet the affordability criteria then the guarantor could perhaps loan them some money to reduce the amount they need to borrow.  This would limit the guarantor’s liability.

If you are contemplating a guarantor mortgage, either as a borrower or a guarantor, make sure that you think through all the issues, talk them through with the other party and then put everything in writing so that everyone is clear on where they stand.

Help to Buy ISA

The Help to Buy ISA is a scheme to assist people with the purchase of their first home.  It can be used when buying property worth up to £250,000 (or up to £450,000 in London).  In basic terms, people can open an account with a one-time deposit of up to £1200 and then pay in up to £200 per month and for every £200 they save, the government will add a £50 bonus up to a maximum of £3000.  Help to Buy ISA scheme will end on 30th November 2019 and will not be available to new applicants.

Interest-only mortgage

With an interest-only mortgage, your monthly repayments only cover the interest on the loan rather than repaying any of the capital.  The basic idea behind them is that, at the end of the term, you repay the principal by other means.  Interest-only mortgages are now practically unknown in the residential-mortgage market, but they are still widely used in the buy-to-let mortgage market.  They have their uses, but there are a couple of important points about them which need to be understood.

First of all, you are responsible for paying back the full amount owed at the end of the term.  Investment buyers (landlords) may plan to do this by selling the property and this can be a perfectly reasonable approach, but it’s important to remember that if for whatever reason, your property sells for less than you owe, you still need to make good on the difference.

Secondly, while interest-only mortgages have lower monthly repayments, the fact that the principle remains the same throughout the loan term means that you end up paying more interest than you would have done with a repayment mortgage.

Joint mortgage

A mortgage taken out by two or more people.

Land Registry

The official body responsible for maintaining details of property ownership.

Leasehold

A leasehold property is essentially rented from the freeholder.  The difference between standard rentals is that the leaseholder can largely treat the property as they see fit (there may be some restrictions on what they can do) and can sell on the lease to someone else if they wish.  People who own leasehold properties may have to pay “ground rent” to the freeholder.  Basically this is a payment for the use of the land below the building.

Lifetime ISA

The replacement for the Help to Buy ISA.  Lifetime ISAs can be used to save for a person’s first home or for their retirement.  You have to be aged between 18 and 39 (inclusive) to open one.  Lifetime ISAs are more complex products than the old Help to Buy ISAs so it may be a good idea to get professional advice before using one, certainly if you’re planning to use it to save towards retirement.  As a minimum, do your research and your sums very thoroughly.

Mortgage term

The length of time in which a mortgage has to be repaid.

Negative equity

Also known as being “upside-down” or “being underwater”, this is when the value of a property is lower than the amount remaining on the mortgage.

Peppercorn rent

When a renter or leaseholder pays a nominal (ground) rent as a sign that they accept the related tenancy/lease contract as being legally binding.

Rebuild cost

The amount it would cost to rebuild your home from scratch.  This is the amount for which you need buildings insurance (as you already own the land and the land has already been designated as a suitable place to build a home).

Repayment vehicle

The means by which you intend to pay back an interest-only mortgage.

Right to Buy scheme

This scheme allows eligible social-housing tenants (both local authority and housing association) to buy their home at a discount to its fair-market-value.

Service charge

Communal areas in blocks of flats can be managed by a third-party company.  The fees paid to them are called service charges.

Shared ownership

Where a buyer (initially) buys a percentage of a property and rents the rest.  The buyer may or may not go on to buy the property outright.

Stamp duty

Stamp duty land tax is basically the tax payable on the purchase of a property.  It goes by different names in different parts of the UK.

Standard variable rate (SVR)

A lender’s default interest rate, defined as a percentage increase on whatever the Bank of England has set as the base rate.

Tie-in period

The period during which a borrower is ‘tied in’ to a mortgage deal and can only leave by paying an early repayment charge.

Tracker mortgage

Also known as a variable-rate mortgage, this is a mortgage in which the interest rate tracks whatever the Bank of England has set as the base rate.

Valuation survey

A survey to determine whether a property can be sold for the amount the borrower has requested to borrow.

A MORTGAGE IS A LOAN SECURED AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE