Mortgage Terminology (A to Z): Full Mortgage Glossary
When you’re applying for a mortgage, sometimes it can be a little confusing. There are different products to choose from and plenty of terminology to get your head around. Our mortgage terminology glossary should help.
Mortgage Glossary: Definitions of Common Terms
Capital
Your capital is the money you’ve borrowed on a mortgage.
Completion
This is when the sale and purchase of a property is completed and the buyer’s solicitor pays the agreed amount to the seller’s solicitor. Once this has taken place, the buyer can collect the keys to the property.
Credit Rating
Your credit rating is the score that indicates your financial viability for a mortgage lender to lend to you.
Decision in Principle (DIP)
Also known as an agreement in principle or a mortgage in principle. It is an indication of how much you could borrow from a mortgage lender based on the financial information you have to provided to them and a soft check. It shows an estate agent and a seller that you’re in a good financial position to buy a property.
Deposit
The sum of money you put towards the purchase of the property. The rest of the purchase price is provide by your mortgage.
Discounted Standard Variable Rate (SVR) Mortgage
Discount rate mortgages have an interest rate set at certain amount below the lender’s standard variable rate (SVR). As the lender’s SVR changes, so does the discount rate. This means that there is a level of uncertainty over your monthly mortgage payments as they can go up or down. You will however secure a better rate than opting for a SVR mortgage.
Early Repayment Charge (ERC)
If you repay part or all of your mortgage early, the lender will likely charge you an early repayment charge.
Equity
The amount of the property you own. If you put down a deposit of 20% when you first purchase a property, you will own 20%. You gain more equity as you pay off your mortgage and if your home increases in value.
Estimated monthly repayment
When you’re applying for a mortgage, this is an estimate of how much you will have to pay each month.
Exchange of contracts
When the contracts are exchanged between the seller’s and buyer’s solicitors. Once contracts have been exchanged, the sale and purchase of the property become legally binding.
Fixed Rate Mortgage
A fixed rate mortgage is a mortgage that has a fixed interest rate for a specified period. Often this will be fixed for up to five years. It is a good option to choose when you first buy a home as it gives you clarity on exactly how much you’ll be paying each month. It also protects you against interest rate rises for a set period of time.
Flexible Mortgage
A flexible mortgage is a loan secured against your home like any other mortgage. Where it differs is that you have the option to change how much you pay back each month. You can make underpayments, have a mortgage payment holiday and daily interest calculations.
Higher Lending Charge (HIC)
This is an additional lending charge applied by mortgage lenders when the loan-to-value (LTV) ratio is above the amount they are prepared to accept at standard rates. This could be for a 90% or 95% LTV mortgage for example.
Interest Rate
The rate of interest you pay on your mortgage. When you pay back your mortgage, you pay back the amount borrowed plus interest. The amount of interest you pay is calculated in accordance with the interest rate.
Interest-only Mortgage
With an interest-only mortgage, you will only pay the interest on your loan. This means that your monthly repayments will be less than with a repayment mortgage. However, at the end of the term you will need to pay the lender the original amount borrowed. This will likely be as a lump sum.
You will need to have the money set aside to pay this or have a sufficient repayment vehicle lined up. Interest only mortgages carry more risk for lenders, so there is strict eligibility criteria.
ISA Mortgage
This is a mortgage in which you repay only the interest on the loan to the lender, but at the same time put regular sums into an Individual Savings Account (ISA). When the ISA matures it is used to repay the capital.
Loan-To-Value (LTV)
The percentage of the value of the property that you want to borrow against. For example, if you have a deposit of 20%, the LTV ratio will be 80%. You therefore borrow 80% of the purchase price from the lender.
Mortgage Lender
The bank or financial institution that is lending you the money as a mortgage.
Mortgage Offer
After you apply for a mortgage with a lender and they have approved your application, they will send you a mortgage offer. This details the amount they are lending, the mortgage type and the repayment terms.
Mortgage Product or Deal Type
This is the potential mortgages that certain lenders offer. They will include the types of mortgages and the potential rates on offer.
Offset Mortgages
An offset mortgage is linked to one of your savings accounts. The money is used to lower the total interest you’ll be charged on your mortgage repayments. For example, if you have £20,000 in savings and want to take out a mortgage for £200,000 you would only be charged interest on £180,000. This therefore lowers the interest you will pay on the mortgage by 10%.
With an offset mortgage, you could save more on your interest than you would earn in a savings account. You also won’t pay any tax on the interest you save. However, you won’t earn any interest on your savings if you use them for an offset mortgage. Interest rates can also be higher on an offset mortgage.
If you have savings it may make more sense to use it for a deposit and pay lower interest rates with a fixed-rate mortgage for example.
Remortgage
This is when you switch your existing mortgage to a new deal with the same lender or a different lender.
Repayment Type
The way you pay back your mortgage. For example, interest-only, capital and interest, etc.
Residential Mortgage
A mortgage on a residential property, rather than one for a business.
Tracker Rate
With a tracker mortgage, the interest the mortgage lender charges is the Bank of England base rate plus or minus a certain percentage.
Most tracker mortgage products usually last for two or five years. There is the possibility of getting a three year, 10 year or lifetime tracker mortgages.
Many lenders will include a minimum interest rate or ‘collar’ which the rate on your mortgage will never fall below. Some also cap the maximum rate. Often there will be no early repayment charges with tracker mortgages, so you can make larger overpayments or repay the mortgage in full without paying a fee.
Valuation Fee
The valuation fee is the charge provided by the lender. It refers to the process of valuing a property to discover how much it’s worth.
Variable Rate Mortgage
With this kind of mortgage, every lender will set their own standard variable rate. Lenders can also raise or lower the SVR whenever they want and by how much they choose to. SVRs don’t track the Bank of England base rate, but will often be influenced by it alongside factors like the lender’s cost of borrowing.
Mortgage Terminology: Frequently Asked Questions
