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The A-Z Of Mortgage Terms
Agreement In Principle (AIP)
An AIP is an ‘Agreement In Principle’ from a mortgage lender (there are several different names for it, including ‘decision in principle’), describing the funds they will lend you, based on the information you have given your mortgage adviser, and a soft credit search. It is a really good indication before you start making offers on properties of what your affordability is, as well as your credit status. They are typically valid from 30 - 90 days.
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An AIP is also known as as a Mortgage In Principle
(MIP) or a Mortgage Promise.
APR
APR is ‘annual percentage rate’ is the total cost of the mortgage to you, including the loan amount,
interest and fees. It is usually based on the assumption that you will have the mortgage for the whole term, so is a helpful guide but should be seen as just that - a guide.
Arrears
‘Arrears’ is the term used to describe your status if you have missed at least a month of mortgage
payments - or an credit agreement for that matter. Running into arrears on any credit agreement can adversely affect your credit status and, therefore, your ability to arrange credit in the future. If you know you are about to head into arrears, get in touch with your mortgage lender as soon as you can.
Bank of England base rate
The ‘base rate’ is the rate of interest set by the Bank of England. It’s important because there is often a correlation between the base rate and the interest rate lenders charge. If you are on a variable rate or tracker rate, your payments might be affected by the base rate. If you are on a fixed rate, your payments won’t change until after your initial rate period ends.
Buildings insurance
‘Buildings insurance’ is insurance that covers you for damage to the structure of your home; from
your roof to the floor and walls. If you have a mortgage, it is a legal requirement to take buildings insurance out. If you don’t arrange this yourself or with your mortgage adviser before completion, your lender can arrange this for you.
Capital
‘Capital’ is simply the amount of money you borrow to buy a property - your mortgage is made up of the capital, or amount you’ve borrowed, plus the interest charged on the loan.
Deposit
You’ll likely be familiar with this term, having probably saved for it for a number of years! It is,
of course, the amount you are required to put down towards the cost of the property. The minimum deposit you will usually need is 5%, but you can now get 100% mortgages if you meet certain criteria. It is often the case that a bigger deposit will allow you to get a better rate from a lender. However you may want to hold back any extra money that could be used on a deposit to do work to the property once you’re all moved in.
Conveyancing
‘Conveyancing’ is the legal process that happens when you buy a property. Your solicitor will conduct local authority and environmental searches as well as searches with other parties to find out more information about the property you are looking to buy. Finding a good solicitor is paramount for getting into your property sooner rather than later, and avoiding your sale falling through.
Discounted-rate mortgage
A ‘discounted-rate mortgage’ is where the interest rate you are charged is less than your mortgage lender’s standard variable rate (SVR). For example, if the lender has an SVR of 5% and the discount is 1%, you will pay 4%.
Early Repayment Charges (ERCs)
These are the penalty fees you have to pay if you want to leave your mortgage during a specified
period. An example of this is if you want to remortgage before your fixed term period (usually of 2, 3
or 5 years) is up. This is usually charged as a percentage of the loan amount. E.g. a mortgage of £150,000 with an ERC of 1% would be a fee of £1,500.
Equity
We like this one! ‘Equity’ is the amount of the property that you own outright. It is made up of the deposit you initially paid plus the capital you’ve paid off on your mortgage, as well as the price the property has hopefully risen by.
Equity Release scheme
An Equity Release scheme allows homeowners
(usually of over 55 years old) to release some of
the money tied up in their property. Often, you
can choose to take the money you release as a
cash lump sum, in multiple smaller amounts or,
as a combination of these.
Family offset mortgage
‘Family offset mortgages’ allow families to help one another get on the property ladder. Your savings are balanced against your family member’s mortgage debt, reducing the amount they owe and pay in interest.
Fixed-rate mortgage
A ‘fixed-rate mortgage’ is exactly what it says on the tin. Commonly, for the first 2-5 years (depending on your deal) the interest rate for your mortgage loan remains fixed. For that period, you can be confident that the amount you are paying on your mortgage each month will stay the same, even if the Bank of England’s base rate doesn’t. A fixed-rate mortgage is a good bet if your budget is tight and you need to know exactly what your monthly repayments will be.
Flexible mortgage
A ‘flexible mortgage’ allows flexibility in how you pay back your mortgage. It means that you can overpay, underpay or even take a holiday from your monthly mortgage payment. The benefits of this is that you can pay off your mortgage early and save money on interest but, for the privilege of flexibility, you’ll likely pay more than a ‘normal’ mortgage.
Freehold
Buying a ‘freehold’ property means that you will outright own both the building and the land it sits on.
Guarantor
A ‘guarantor’ is that fabulous third party who agrees to pay your monthly mortgage repayments in the event you are unable to. A guarantor is most common with first-time buyers and is usually the
parent or guardian of the buyer.
Higher lending charge (HLC)
A ‘higher lending charge’ can be set by your mortgage lender if you are borrowing more than 75% of the property’s value. It protects the lender against you being unable to make the mortgage repayments and going into arrears. Higher lending charges are almost unknown nowadays.
Interest-only mortgage
With an ‘interest-only mortgage’ you only pay the interest on your mortgage each month - not the
capital. It makes your monthly payments a lot lower but you will, of course, still need to pay off the loan at the end of the mortgage term.
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Often this route is taken if you are building up money to pay off your mortgage at the end of your term through investments, pension endowments or another property sale.
Joint mortgage
A ‘joint mortgage’ is one that is taken out by two or more people. It’s often used by couples, when you are buying a house with a friend or by parents helping their children buy a property.
Land Registry
The ‘land registry’ is her Majesty’s official government body responsible for maintaining details of who owns what property and land.
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