This page gives descriptions of UK mortgage terminology which can often confuse borrowers.

Introduction

The UK mortgage market is one of the most innovative and competitive in the world. Most borrowing is funded by either mutual organizations ( building societies and credit unions ) or proprietary lenders (typically banks ). Nationalization of Northern Rock (one of the country’s largest mortgage banks).

Since 1982, when the market was substantially deregulated, there was substantial innovation and diversification of strategies employed by lenders to attract borrowers. This has led to a wide range of mortgage types:

Mortgage types

Different ways to repay the capital

  • Repayment mortgage – in principle, and other things being equal, to the lender each month, which covers the interest due for that month on the outstanding loan, plus a repayment of part of the capital. The flat rate is calculated so that the whole of the loan has been repaid by the end of the mortgage term.
  • Interest-only mortgage – where the payments to the lender cover interest only. No capital is repaid, so that the full amount of the loan is still outstanding at the end of the mortgage term. For example, if the amount of the loan is £ 90,000, and the interest rate (charged monthly) is 5.6% per year, the monthly interest payment will be {(90000 * 5.6%) / 12} = £ 420.
  • Endowment mortgage – an interest-only mortgage where the capital is expected to be repaid from the maturity of one or more endowment policies at the end of the mortgage term.
  • An investment backed mortgage – an interest only mortgage where the capital is planned to be repaid from the proceeds of an ISA or other investment plan at the end of the mortgage term. Some ISA mortgages.
  • Pension mortgage Where the tax-free cash lump sum from a personal pension scheme (or in principle share of the rest of the value, Following The exchange to pension law planned for April 2015) is used to repay an interest-only mortgage at retirement.

Types of interest rate

  • Variable rate – the rate varies at the discretion of the lender.
  • Standard variable rate mortgage borrowers with a standard residential mortgage.
  • Tracker rate – a variable rate that is equal to a published interest rate (typically LIBOR , plus a fixed interest rate margin. Borrower would be 5.5% per year.
  • Fixed rate – the interest rate remains fixed for a set period: typically for 2, 3, 4, 5 or 10 years; After which the arrangement reverts to a variable rate. Longer term fixed rates (over 5 years), if available, tend to be more expensive and / or have more onerous early repayment charges, and are therefore less expensive than shorter term fixed rates. (The high early repayment charges are necessary to protect the lender against a fall in market interest rates.)
  • Discount rate for this item is not available in your country. Sometimes the rate is stepped (eg 3% in year 1, 2% in year 2, 1% in year 3).
  • Capped rate – a variable interest rate, but there is a maximum rate of return. In order to provide this, the lender would probably need to purchase a rising above the cap, and would need to pass the cost of this to the borrower. Sometimes it is also a collar . Capped rates are often offered over periods similar to fixed rates, eg 2, 3, 4 or 5 years.

Other ways to categorize mortgages

  • Buy to let mortgage – a form of commercial mortgage used to purchase residential real estate with the intention of letting it to paying tenants.
  • Right to buy mortgage – a mortgage arranged in connection with the “right to buy your home” legislation for council or housing association.
  • Let’s buy a homeowners’ home or business home, either by their current mortgage or a homeowner’s mortgage. [1]
  • Flexible mortgage – a mortgage that allows additional capital payments without penalty and often payment holidays or underpayments.
  • Adverse credit mortgage – mortgages to borrowers with credit problems, eg county court judgments.
  • Self-certified mortgage – a mortgage where the lender does not seek proof of income to demonstrate affordability, but instead relies on a statement of earnings as “certified” by the borrower (s). Self-certified mortgages were banned by the Financial Conduct Authority (FCA) in April 2014. [2]
  • Non-status mortgage – a mortgage where the borrowing is not dependent on the income of the applicant and the applicant states that they can afford the repayments.
  • Deferred interest mortgage – a mortgage that allows the borrower to make repayments that are lower than the amount of interest owed. The property is located in the heart of the city. [3] the remaining interest payments. These mortgages were marketed during periods of high interest rates to young professionals whose salaries were expected to increase quickly. [4]
  • Offset mortgage – a mortgage where the borrower can reduce the interest charged by offsetting a credit balance against the mortgage debt.
  • Foreign currency mortgage – where the debt is expressed in a foreign currency (typically in a capital market). If this is not the case, please do not hesitate to contact us.

Fees

  • Product fee – a fee payable by the borrower to obtain a (usually incentivized clarification needed ] ) product.
  • Early repayment charge, redemption penalty or tie-in – The lender may incur many forms of up-front costs (for example property valuation costs, if not charged explicitly; Or – not least – remuneration of intermediaries or sales teams. It would seek to recoup these costs by charging higher interest rates over the remainder of the mortgage term. Therefore, they typically impose a penalty if the borrower repays the loan earlier than planned in order to ensure that at least some of these costs are recouped. These penalties used to be called a redemption penalty or tie-in ,
  • Valuation fee, which pays for a chartered surveyor to visit the property.
  • Higher lending charge (HLC) – a fee levied by lenders in respect of mortgages exceeding a pre-defined loan-to-value (LTV) percentage threshold. Until the 1990s these were typically levied on all mortgages with an LTV percentage over 75%, threshold at that time. Subsequently, some lenders have moved away from charging an explicit HLC, in favor of charging an increased interest rate on higher LTV mortgages.

Other

  • 100% mortgage
  • First time buyer
  • Negative equity

Statistical and industry jargon

  • Arrangement fee – Either of a mortgage or mortgage broker to provide and arrange a mortgage.
  • Loan to Value (LTV) – The total loan size in relation to the value of the property.
  • Mortgage gross lending – all new lending done in a given period including remortgaging and new loans for house purchase.
  • Mortgage balances outstanding – the total mortgage balances outstanding at a given point of time.
  • Net mortgage lending – the total change in balances between two points in time, this can also be calculated by adding together the total gross lending in a period of time, repayments, redemptions and loan losses in the same time period.
  • Redemption – paying back a mortgage ‘early’ as opposed to paying back a mortgage following a repayment plan, typically when remortgaging to another mortgage provider or by way of some other lump sum payment.
  • Remortgaging – refinancing of a mortgage.

See also

  • Mortgage loan
  • remortgage

References

  1. Jump up^ What exactly is it to buy? Commercial Trust. 21 Jun 2013.
  2. Jump up^ New mortgage rules come into force. FCA. 26 Apr 2014.
  3. Jump up^ http://www.investopedia.com/terms/d/deferred-interest-mortgage.asp
  4. Jump up^ http://www.home.co.uk/guides/mortgage_glossary.htm?defimo