APR - This stands for Annual Percentage Rate. It enables you to
compare the full cost of the mortgage. Rather than just being an
interest rate, it includes up front and ongoing costs of taking
out a mortgage. The formula for calculating APR is set by
Government Regulations and therefore enables direct comparison
of the cost of mortgages.
Capital and Interest Mortgage - This is when part of your
monthly payment contributes to paying off the outstanding
mortgage in addition to paying the interest on the mortgage. The
payments are structured so that at the end of the term, your
mortgage will have been completely paid off. For this reason
this type of mortgage is also called a Repayment Mortgage.
Capped Rate - This is a mortgage where the lender agrees that
the interest charged will never exceed a specific percentage.
This deal lasts for a set period of years. After the set period,
the rate usually reverts to the lenders standard variable rate.
During the capped period, the interest charges can move up and
down with the lenders interest rate - but cannot exceed the
capped rate.
Cashback - An amount, either fixed or a percentage of a
mortgage, which you can opt to receive when you complete your
mortgage. The lender may well claw back this money through a
higher interest rate.
CAT marks/standards - CAT stands for Fair Charges, Easy Access
and decent Terms. They were created by the Government in an
attempt to provide consumers with simple, clear financial
products with straightforward, easy to understand terms. A CAT
mortgage will have no arrangement fees, no redemption fees and
will have interest calculated daily. It will also have a minimum
loan of just £5000, offer you repayment flexibility and the
mortgage should be portable should you move home. Finally, you
will not have to buy the lender's insurance products and there
will be no penalties should you find yourself in arrears but can
subsequently catch up.
Completion - This is end of the house buying process, when the
funds are transferred and the keys are handed over. Happy moving!
Contract - A contract is a binding agreement between the buyer
and seller. In the context of house buying, after the contract
is signed by both the buyer and the seller it is then
'exchanged' between the respective solicitors for a set
completion date. At that point, the contract is legally binding
on both parties.
Conveyancing - This is the legal process in which property is
bought and sold. You can do it yourself or hire a solicitor or
specialised conveyancer to perform the tasks for you. The buying
of a freehold is much less complicated than the buying of a
leasehold.
Discounted Rate - This is where the lender makes a guaranteed
reduction off the standard variable rate for an agreed period of
time. After the discounted period ends, the mortgage usually
moves to the lenders' standard variable rate. Watch out for
redemption penalties that overhang the initial discount period.
Early Redemption Charges - Redemption is when the borrower pays
off the capital and the interest on the mortgage and thus owns
the property outright. Early redemption fees are the charges
incurred for paying off the mortgage early, either to buy the
house outright, move or re-mortgage. Always ask about early
redemption charges before you agree a mortgage.
Endowment - Endowments are life assurance policies with an
investment element designed to pay off the outstanding capital
on an interest-only mortgage. There are a few types of
endowments, such as 'with profits', 'unitised with profits' and
'unit-linked'. In the 1980s, these were sold by salesman who
seemly suggested that these policies were "guaranteed" to pay
off the mortgage at the end of the term. However, the investment
returns on these policies have fallen to below what was
previously considered to be the norm. Consequently, many
policies are not worth what was originally forecast and may not
fully repay the money borrowed at the end of the mortgages'
term.
Equity - In housing terminology, equity is the difference
between the value of the property and the money owed on the
property. So if the property is valued at £200,000 and you owe
£150,000 on the mortgage, you have equity of £50,000. If you
sold at that moment, you would receive £50,000. Should the value
of the home be less than the mortgage outstanding then you have
negative equity.
Freehold - Owning the freehold means that you own the total
rights to the property and the land on which it is built.
HLC - This is the Higher Lending Charge (it was previously known
as a Mortgage Indemnity Guarantee). It is levied by around three
quarters of all lenders on clients who cannot afford to put down
a deposit of 10% of the price of the property. In practice it is
a type of insurance aimed at protecting the lender should you
default on your mortgage when the value of your home is less
than the capital you borrowed. The insurance only provides cover
for the lender, not you, and typically costs £1,500.
Homebuyers Report - A property survey aimed at providing more
information than a mortgage valuation but less information than
a full structural survey. It will help the borrower to decide
whether to purchase and help the lender to decide how much to
lend.
Interest Only Mortgage - This is a mortgage where your monthly
repayments only pay the interest on the mortgage. Therefore, at
the end of the mortgage you still have to repay the full sum you
borrowed. You are advised to have a separate investment vehicle
into which you make payments aimed at building up a fund capable
of paying off the mortgage capital at the end of the term.
Typical investments include ISA's, a pension or an endowment
policy.
IFAs - Stands for Independent Financial Advisor. These advisors
are regulated by the Financial Services Authority. To be
classified as "independent" they have to be able to offer you
the full range of products from all financial product providers.
They are not entitled to describe themselves as "independent" if
they can only offer products from a restricted panel of
financial companies. A Financial Advisor can be one man band or
work for very large companies. Before they make any
recommendation, an IFA must carry out a detailed fact find so
they fully understand your financial circumstances. They can
then make their recommendations to suit your personal
circumstances.
ISA - An ISA is an Individual Savings Account, which is a
tax-free method of owning shares, building up a cash savings
account or a life assurance policy. You can use an ISA to build
up a capital sum to repay an interest only mortgage.
Leasehold - If your property is leasehold, ownership of the
property reverts to the Freeholder at a set date. Many houses
were originally sold on 999 year leases which means that 999
years after the initial date of the Leasehold, ownership of the
property reverts to the Freeholder. Building in multiple
occupation such as apartments, are always sold on a leasehold
and usually have a much shorter leasehold period - 100 and 125
years is quite common. Often, with a block of apartments, the
apartment owners individually own the leaseholds whilst a
management company, in which they hold shares, owns the
freehold. These days, however, leaseholders who live in the
property have the legal right to buy their freehold under terms
laid down by UK law.
Life Insurance - This can also be called Term Insurance or, when
specifically linked to proprty purchase, as Mortgage Protection
Insurance. It is designed to pay a tax free lump sum in the
event of your death to enable your mortgage to be repaid in
full. There are a number of variants such as Level Term Life
Insurance and Decreasing Term Life Insurance. At the outset you
take out insurance for the full sum you have borrowed from your
mortgage lender and for the same number of years as you have
agreed on your mortgage. These insurance policies do not have
any investment or surrender value. The premiums are based on a
number of factors - the main ones being the amount of cover you
need, your age, health and how many years you want to be insured
for.
Lock-In Period - This is the minimum period you have agreed to
stay with the lender. Depending on the deal, it could be as low
as six months up to the whole of the term. Should you wish to
repay the mortgage or remortgage during the lock-in period, you
will invariably have to pay redemption penalties. Always make
sure you know how long you are locked in for with your mortgage.
LTV - Literally means Loan to Value. This is a measurement of
the mortgage amount against the value of the property or the
price that you are actually paying. A £157,500 mortgage on a
property for which you paid £175,000 would be a LTV of 90%.
Lenders tend to charge a Mortgage Indemnity Premium on mortgages
with a loan to value of anything about 75%. Some don't so ask
about this.
MIG - This has now changed its name to HLC. See above.
Mortgage - A mortgage is a long-term loan taken out in order to
buy a property with repayment secured on that property. So if
you don't keep to the repayment terms, the lender can repossess
the property, sell it and retain the money they are owed. Any
balance is then paid to you. If the property is sold for less
than you owe your lender, you still remain liable to repay the
shortfall.
Mortgage Advisor - On October 31st 2004 the selling of mortgages
in the UK came under the remit of the City watchdog, The
Financial Services Authority (FSA). As from that date any person
providing mortgage advice had to be registered with the FSA and
abide by its rules of conduct, methods of operating and training
programmes etc. The objective has been to improve life for the
consumer by offering better protection, clear information and
access to redress for poor advice.
Negative Equity - Negative equity is when the value of your home
is less than the amount that you owe on your mortgage plus any
other loans secured against it. It can happen very easily if you
take out a 100% mortgage or if property prices fall. (Also see
Higher Lending Charge)
Portable - This is a measure of how easy it is to move a
mortgage from one property to another should a property move be
required. This is vital if you are moving during your
lock-in-period and wish to avoid redemption penalties.
Repayment Mortgage - This is the same as a Capital and Interest
mortgage - see above.
Searches - During the conveyancing process, the buyer has to be
sure that the seller has title to the property and identify any
matters may affect the prospective owners ownership of the
property. For example, whether the property is affected by any
proposed road building, whether there are preservation orders
affecting the property, is it a listed building and has it been
built in accordance with planning conditions and building
regulations. Searches will also show whether there are mines
under or close by the property. This information is obtained by
the person undertaking the conveyancing from HM Land Registry
and the relevant Local Authority. These investigations are
collectively known as "Searches".
Self-Certification - Should you have difficulty in providing
documentation that "proves" your income to a prospective
mortgage lender, you may need a self-certification mortgage. In
essence you personally certify what your full income is. If you
receive high bonuses, or work seasonally or on commission, or
are self-employed this may be your best option. You declare your
income plus some evidence that your declaration is reasonable.
Ideally lenders want to see as much guaranteed income as
possible. To compensate the lender for the increased risk they
are taking on a self-certified mortgage, they will charge you a
higher rate interest, typically 1% over their standard variable
rate.
Stamp Duty Land Tax (commonly known simply as Stamp Duty) - You
pay Stamp Duty Land Tax on property like houses, flats, other
buildings and land. If the purchase price is £120,000 or less,
you don't pay any Stamp Duty Land Tax. If the price is more than
£120,000, you pay between one and four per cent of the whole
purchase price, on a sliding scale.
Upto £120,000 - No duty payable
£120,001 to £250,000 - 1% duty payable* £250,001 to £500,000 -
3% duty payable £500,001 and over - 4% duty payable
*If you're buying a property an area designated by the
government as 'disadvantaged', you don't pay any Stamp Duty Land
Tax if the purchase price is £150,000 or less.
Did you know? Stamp Duty was originally introduced by William of
Orange when he was King of England.
Structural Survey - The most thorough report you can get on the
condition of the property you are considering to buy. The
surveyor will look in detail at the inside and outside of the
property and will tell you if the property is structurally
sound. All major and minor defects in the building will also be
listed and should tell you what maintenance work may be needed
either now or in the future. You should make sure the scope of
the survey is agreed in writing before you commission it. Should
the survey identify problems, use them to negotiate a reduction
in the price before you exchange contracts.
Variable Rate - This is when the interest rate you pay on your
mortgage can go up or down depending on changes to the lender's
standard variable rate. If you have a variable rate mortgage
your monthly mortgage payments will change whenever the lender
changes the interest rate.
Valuation - This is where a valuer appointed by your proposed
lender, visits the property in order to estimate its current
value. This value is then used by the lender as a basis for its
security and to calculate its Loan to Value Ratio. The borrower
never sees the valuation. With some mortgage deals the lender
absorbs the cost of the valuation but in many cases the borrower
has to pay upfront.
About the author:
Michael now works as the editor of Kings Remortgage
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