Mortgage Terminology Explained

Sourcing a mortgage can be confusing at the best of times and it can be made worse when you have a barrage of jargon thrown at you. Unfortunately, those in the mortgage industry use financial terms in everyday conversation not realising a lot of what is being said is probably going over your head.

The good news is mortgage terminology is fairly easy to understand once it is broken down. This is exactly what we aim to do, jargon bust and provide all your mortgage terminology in digestible soundbites.

Let’s explore the world of mortgage terminology.

Mortgage

Starting with the basics, a mortgage is a loan that is typically backed by property such as a house. Mortgages are not limited to houses and can be tied to other assets.

You can also obtain mortgages on land and commercial premises.

Deposit

When you apply for a mortgage, most lenders will require a down payment toward the property value. You can consider it a security and the deposit works in the same way as if you were putting a down payment on a car which you want to finance. The minimum deposit required is 5%, assuming that you can afford the remaining 95% mortgage.

Types of Mortgage

There are various types of mortgage available and which one you choose will depend on your property goals and personal circumstances.

Buy to Let

A Buy to Let mortgage allows you to buy a property that you wish to rent out.

Let to Buy

A Let to Buy mortgage allows you to switch your current residential mortgage to a Buy to Let product and buy a new residence simultaneously. It is two mortgage products packaged up into a straightforward package. Let to Buy exists because some lenders will not allow you to own a Buy to Let without also owning a Residential. With the Let-to-Buy transaction, these criteria are met as you will own a residential on completion.

Holiday Let

A Holiday Let mortgage allows you to buy property with the purpose of being rented out to holidaymakers.

Residential Mortgage

A residential mortgage allows you to buy a property to live in.

Second Mortgage

Typically, a second mortgage is a mortgage that allows you to buy an additional property to live in, such as a second home. You can however get multiple mortgages on a single property providing there is enough equity to do so.

Commercial Mortgage

Commercial mortgages are for businesses to buy property. The property can vary widely and commercial mortgages extend to offices, warehouses, factories and even builders’ yards.

Equity Release Mortgage

If you are aged 55 or over, with little or no mortgage remaining on your home, you can use an Equity Release mortgage (known as a Lifetime Mortgage) to free the money tied up in your property. Equity Release mortgages work in a different way to traditional mortgage products, and you will need specific advice before taking one. Boon Brokers are members of the Equity Release Council and can advise and arrange Equity Release products.

Guarantor Mortgage

If you have a bad credit history or have been a registered bankrupt, you can still get either a bad credit mortgage or a guarantor mortgage. Guarantor mortgages will require someone else to back your mortgage known as guaranteeing it – paying the monthly payments or mortgage in full if you do not.

Offset Mortgage

Offset mortgages are typically aimed at high-net-worth individuals who already have substantial savings. Those savings will be moved into a ringfenced account with your lender and reduce the amount of interest you pay by offsetting the interest you would normally get from your savings.

Mortgage Interest Rates

All mortgages have interest rates attached to them. You can consider the interest rate to be the cost of borrowing money. It is how lenders make their money on a mortgage product.

Fixed Rate

A fixed rate mortgage has an interest rate that does not change throughout the term of your mortgage product. This is usually for 2, 3, 5 or 10-year periods.

Tracker Rate

A tracker rate mortgage has an interest rate that follows the Bank of England base rate. The tracker rate can go up or down depending on how the Bank of England changes the base rate.

Standard Variable Rate

When you have a mortgage deal you will typically be on a fixed rate or tracker rate mortgage. When the deal ends, a lender will move your mortgage onto their Standard Variable Rate (SVR). A Standard Variable Rate is normally uncompetitive. If you are able to do so, you can then switch to a new product with your existing lender or remortgage to a different lender to avoid the SVR payments.

Capital Repayment

A capital repayment mortgage allows you to repay both the interest and capital. This means over time your total amount of borrowing falls. It is common for residential mortgages to be capital repayment products so that the mortgage is cleared at some stage in the future.

Interest Only

With interest only mortgages you only pay the interest on the loan. This means the loan does not decrease over time and at the end of the mortgage you will have the total balance outstanding.

Repayment Vehicle

Repayment vehicles are used to clear the outstanding balance at the end of an interest only mortgage. In most cases, this will be by selling the property or taking a new mortgage. In other cases, you may use savings or investments to clear the debt.

Mortgage Term

Every mortgage has a term or a timeframe in which you must pay it off. Traditionally, 25 years was a typical mortgage term. However as people have found affordability more difficult in recent times, it is now more common to take a longer mortgage term. Many lenders offer terms up to 40 years, usually to a maximum of age 70 or 75.

Mortgage Product Term

Product terms are shorter timeframes within your overall mortgage product where you have a competitive interest rate. You may be tied into a fixed rate for 5 years for example.

Early Repayment Charges

If you make overpayments or repay the mortgage in full before your deal term ends, you may incur an Early Repayment Charge (ERC). These charges ensure a lender still makes enough profit to make lending the money worthwhile.

Product Transfer

A product transfer is sometimes available when your deal term ends and allows you to take a new mortgage deal with your current lender.

Remortgage

In all cases, it is best to consult a mortgage broker, like Boon Brokers, when your deal term is ending to see if you can remortgage with a different lender for a better deal.

Equity

Equity accumulates as you repay the capital on your mortgage. It is essentially the amount of your home you own after the mortgage is considered.

Negative Equity

Negative equity can occur if you overpay for your property or if house prices fall. It means your mortgage amount is greater than the value of the property.

Stamp Duty

Stamp Duty is a tax charged by the government when you buy property. It is based on the purchase price of the property and whether the purchase is for an additional property.

Credit Score

When lenders consider whether you can get a mortgage, they will look at your past financial history. This financial history is compiled by Credit Reference Agencies and is provided to lenders as a simple credit score.

Ask a Specialist

Mortgages can be confusing and are also significant financial commitments. You should ensure you understand them fully before agreeing to borrow money. A mortgage broker will be able to explain all complicated mortgage terminology and help you understand the risks associated with mortgages.

Boon Brokers is a Whole-of-Market Mortgage, Insurance and Equity Release Brokerage. Boon Brokers provides free mortgage advice.

Contact Boon Brokers to book your free mortgage consultation today.