Mortgage FAQ

Additional Security Fee: See Higher Lending Charge.

Adverse Credit: This is an umbrella term used to describe applicants with a poor credit history. This may include mortgage or rent arrears, defaults, county court judgements (CCJs), bankruptcy, individual voluntary agreements (IVAs) and house repossessions. Borrowers with elements of adverse credit are offered higher rates than standard full status applicants.

Annual Percentage Rate (APR): The APR is a rate calculated using a generic formula applicable to all Lenders and includes all the costs associated with a mortgage. This allows for easy comparisons to be made between the different mortgage products offered by each Lender.

Base Rate: Every month the Monetary Policy Committee sets the Bank of England Base Rate, which all mortgage rates are linked either directly, as tracker mortgages, or indirectly, in all other cases.

Booking Fee: This fee may be charged on specific products and is either payable in advance, added to the loan or deducted from the advance on completion. It is normally payable in order to reserve funds when a product is likely to sell out quickly.

Buildings and Contents Insurance: This insurance covers damage to the mortgaged property and or its contents in a variety of specified scenarios. Buildings insurance compulsory with all Lenders, and if the Lender's own insurance is not taken they will often charge an administration fee. Some Lenders attach mandatory insurance cover to their most attractive rates, although this is increasingly uncommon.

Capital and Interest Mortgage: With this method the monthly mortgage repayments pay off both the initial loan amount and the interest that is charged upon it. At the end of the loan term the entire debt will be repaid - also known as a repayment mortgage.

Capital Rest Period: This is the regularity with which a Lender calculates the outstanding balance on mortgages, and hence the size of monthly repayments. It is usually annually, monthly or daily. With capital and interest mortgages this can be important; an annual interest calculation means that the borrower will pay interest on capital repayments that have been made in the course of that year. In contrast a daily or monthly interest calculation means that the balance, and consequently the interest charged, will reduce with every capital repayment made.

Capped Rate Mortgage: This is a mortgage that is guaranteed not to rise above a specific rate (the cap), for a set period. There are often early repayment charges applicable if the loan is repaid within the capped period.

Cash-back Mortgage: This is a mortgage in which the Lender refunds a sum of money, either as a percentage of the loan or a flat figure to the borrower upon completion. With this type of loan the borrower will typically be tied to the Lender's SVR. Early repayment charges necessitating the repayment of the cash-back are normal within a set period of time.

Completion: This is the moment when a transfer of property has legally taken place.

Contents Insurance: See Buildings and Contents Insurance.

Current Account Mortgage: This is a fully flexible mortgage combined with a current account. Money in the current account is automatically set against the mortgage balance and interest is only charged on the difference.

Discounted Rate Mortgage: This is a variable mortgage that is discounted from a Lender's SVR by a set percentage within a set period. There are often early repayment charges applicable if the loan is repaid within the discounted period.

Discounted Tracker Rate Mortgage: This is a variable mortgage that is discounted from the Bank of England's Base Rate by a set percentage within a set period. There are often early repayment charges applicable if the loan is repaid within the discounted period.

Early Repayment Charge (ERC): This is a penalty charged on mortgages when the loan is repaid within a set period. Many early repayment charge periods are linked to those of offers, such as capped, discounted or fixed periods. However some mortgage rates have extended early repayment charges which tie-in borrowers even while they are paying the Lender's SVR, although this is increasingly uncommon. An ERC is also known as an Early Redemption Penalty (ERP).

Early Redemption Penalty (ERP): See Early Repayment Charge (ERC).

Endowment: A repayment vehicle associated with interest only mortgages.

Exclusive Mortgage: This is a mortgage only available to intermediaries through a specific packager, in conjunction with a Lender who provides the funding.

Fixed Rate Mortgage: This is a mortgage that is charged at a fixed rate within a set period. There are often early repayment charges applicable if the loan is repaid within the fixed period.

Flexible Mortgage: As its name suggests, this is a type of mortgage that offers considerably more flexibility than traditional mortgages. Although specific details vary between Lenders, the core features of flexible mortgages are: daily or monthly capital rest with the ability to make overpayments at any point of the loan term without an early repayment charge. In addition, many flexible mortgages allow borrowers to defer payment by taking payment holidays, drawback overpayments, drawdown further advances, underpay without penalty (often only to the amount of any previous overpayments).

Freehold: The buyer of a freehold property owns both the property and the land it stands on indefinitely. See also Leasehold.

Full Status: This term describes borrowers with a good credit history who are not self-certifying their income.

Higher Lending Charge: This is a premium charged by Lenders in order to indemnify themselves, and NOT the borrower, against any financial shortfall they may incur in the event of repossessing a property which must then be sold at a loss. It is applicable if the amount required is higher than a certain percentage of the property value, usually 75% LTV; often the Lender will pay the cost of this insurance themselves between 75% and 90% LTV. The charge may either be added to the loan or deducted from the advance on completion. Also known as an, Additional Security Fee, Indemnity, Mortgage Indemnity Guarantee (MIG).

Income Multiples: These are the multiples that Lenders apply to borrowers' income in order to determine the maximum loan they will offer them.

Indemnity: See Higher Lending Charge.

Individual Savings Account (ISA): A repayment vehicle associated with interest only mortgages.

Interest Only Mortgages: With this method the initial loan amount remains the same throughout the term of the loan, while the monthly mortgage repayments only pay off the interest being charged on this amount. For this reason, interest only mortgages are often tied to investment in one of a number of different repayment vehicles, which, ideally, should cover the initial loan amount at the end of the loan term. These repayment vehicles include endowment policies, personal pensions, ISAs etc.

Introducer Fee: See Procuration Fees.

Leasehold: The buyer of a leasehold property owns the property for a set number of years, but doesn't own the land on which it stands. See also freehold.

Lenders Arrangement Fee: This fee may be charged on specific products and is either payable in advance, added to the loan or deducted from the advance on completion. It covers the administrative expenses incurred whilst processing an application.

Libor-Linked Mortgage: This is a variable mortgage that is linked to the London Inter-Bank Offered Rate. The Libor rate is set independently every 3 months. It is often associated with Lenders that offer loans to borrowers with elements of adverse credit.

Life Policy: See Term Assurance.

Loan to Value (LTV): This is a percentage figure of the loan amount in relation to the property value. For instance a £100,000 property bought with a mortgage of £70,000 has an LTV of 70%.

Non-Conforming: See Adverse Credit.

Offset Mortgage: This is a fully flexible mortgage which allows a borrower to keep balances (such as mortgage debt, savings account and current account) in separate accounts, but, for the purposes of interest calculation, all balances are aggregated. Money in savings or current accounts is set against the mortgage balance and interest is only charged on the outstanding amount.

Overpayment: This is when an unscheduled capital repayment is made or when monthly payments are increased, in order that the mortgage is repaid before the end of the set mortgage term, saving considerable sums in interest. Many traditional (i.e. non- flexible) mortgages have an early repayment charge if overpayments are made within a set period. In contrast, flexible mortgages allow unlimited overpayments without penalty and, increasingly, mortgages are semi- flexible, allowing borrowers to overpay a certain percentage of their loan each year without incurring early repayment charges.

Pension: A repayment vehicle which can be associated with interest only mortgages.

Personal Equity Plan (PEP): A repayment vehicle which can be associated with interest only mortgages.

Portability: A portable mortgage is one that can be transferred to another property. Early repayment charges may apply if a smaller loan is required for the new property.

Procuration Fee: This is commission paid by Lenders to intermediaries for introducing business to them.

Redemption Penalty: See Early Repayment Charge (ERC).

Repayment Mortgage: See Capital and Interest Mortgages.

Self Certification Mortgage: This is a mortgage where a borrower states their income and signs confirmation of their ability to repay a loan, without having to provide evidence such as accounts, pay slips or bank statements. Consequently, rates can be higher than standard full status mortgages.

Shared Ownership: This is a scheme operated by a Housing Association where the borrower owns part of a property, and pays the mortgage on this, while a Housing Association owns the rest of the property, and the borrower pays rent on this.

Split Loan: This is a mortgage that is taken partly on a capital and interest basis and partly on an interest only basis.

Standard Variable Rate (SVR): This is a variable rate determined entirely at each Lender's discretion. Unless linked to Libor or the Bank of England Base Rate, the SVR is the reverting rate at the end of any special offer period, such as a capped, discounted or fixed rate.

Term Assurance: This insurance can repay the mortgage in the event of the insured person's death.

Tracker Mortgage: This is a variable mortgage that is either above or below the Bank of England's Base Rate by a set percentage within a set period.

Valuation Fee: Whether purchasing or remortgaging the Lender usually undertakes a valuation of the property to ensure it provides adequate security. The charge is borne by the borrower and increases exponentially with the valuation / purchase price.