The world of personal finance has its own language. Understanding some common mortgage terminology can go a long way in helping you to secure the right deal.
Do you know your LTVs from your SRVs? The financial terms for borrowing money to buy a home can sound as complex as they are varied, but understanding a few important words and phrases could make all the difference in your search for the right mortgage.
The trusted brokers at Knight Frank Finance are here to help make borrowing crystal clear, starting with this A to Z glossary of mortgage terms.
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Arrangement fees
The fees the mortgage lender will charge for administrative costs to set up and secure a mortgage loan.
Bank of England Base Rate
The rate the Bank of England charges other banks to borrow money. Most mortgage interest rates will reflect the base rate to some degree.
Buy-to-Let Mortgage
A mortgage for landlords who want to purchase a property to rent out. They are generally interest only, with monthly payments drawn from the rental income received. The overall cost of the mortgage is paid off when the property is sold.
Capital
The amount of money borrowed, excluding any interest payments.
Conveyancer
If you are buying a new home and you've had an offer accepted, you'll need to instruct a conveyancer to help you with the process. Usually this will be a solicitor. They will conduct searches to make sure you don't get any nasty surprises, like uncovering enforcement notices for the property, and they'll stay in touch with the solicitors of any other buyers in the chain. They'll also make sure all the paperwork checks out legally, so you can move with peace of mind.
Credit Rating
A profile of your borrowing that helps lenders establish your credit worthiness. It assesses how promptly you repay debts and how much credit you’ve taken out throughout your life. It becomes harder to get a mortgage with low interest rates if you have a bad credit rating.
Deposit
The amount of money you have to put down for a property purchase, before you can secure a mortgage. The higher the deposit you can put down the less you have to borrow as a mortgage, and generally the more favourable the interest rate that you can borrow at.
Early Repayment Charges
Charges you must pay if you pay off, or over pay, your mortgage before the end of an agreed interest rate period. These can apply to fixed, tracker or discounted rate mortgages.
Equity
Equity is the share of the property you own, as opposed to the share that you’ve borrowed. As a property’s value increases, or as you pay off more of your loan, your equity increases too.
Fixed Rate Mortgage
The interest rate on a fixed rate mortgage stays the same for a set term of either two, three, four, five or ten years. Fixed rate mortgages can safeguard you from higher payments if interest rates rise, but if interest rates fall you won’t benefit from lower payments either.
Flexible Mortgage
A flexible mortgage enables you to overpay, underpay or potentially not pay at all each month, without incurring extra charges.
Interest
The amount that is added to the total you’ve borrowed (i.e. the capital) each month, until the entire loan is paid off. The interest is essentially the cost of the mortgage.
Interest-Only Mortgage
An interest-only mortgage consists solely of monthly interest payments. They do not contribute to paying off the capital, which has to be paid in full at the end of the mortgage term.
Lifetime Mortgage
A loan with an indefinite term used by older borrowers to free up housing wealth they have built up over many years. Interest can “roll up” on top of the loan, so a borrower doesn’t have to make interest payments. The interest and loan are paid off when the youngest borrower passes away or moves into permanent care.
Loan-to-Value (LTV)
The loan-to-value ratio of a loan is the difference between the amount borrowed and the total value of the property.
Mortgage
A mortgage is a sum of money that is borrowed from a bank or other lender and secured against a dwelling.
Mortgage Lender/Provider
A financial institution such as a bank or building society that offers mortgages.
Mortgage Term
The length of the mortgage agreement; the amount of time you have to pay the loan off.
Repayment Mortgage
Unlike interest-only mortgages, a borrower with a repayment mortgage makes monthly repayments that both pay the interest, and reduce the capital owed.
Retirement Interest Only Mortgage
A loan for those aged 55 or over that consists solely of interest payments. The capital is paid off when the youngest borrower passes away or moves into permanent care.
Standard Variable Rate
The standard variable rate (SVR) is the basic representative rate at which interest is charged on variable rate mortgages. Each lender’s SVR differs and will fluctuate according to their own criteria.
Tracker Mortgage
A loan with an interest rate that tracks the Bank of England base rate, staying consistently at a set percentage above it – usually between 0.5% and 2%.
Valuation Fee
A fee charged by lenders for the valuation of s property to be used as security for the mortgage.
Variable Rate Mortgage
A loan with an interest rate that changes according to a lender’s standard variable rate (SVR).