Key Mortgage and Financial Terms You Need to Know
As you study CeMAP, you will come across many new words and short forms.
At first, some of them may sound complicated. However, most describe fairly simple ideas once they are explained clearly.
Therefore, do not try to memorise every term on this page immediately.
Instead, use this page to become familiar with the language of mortgages and financial services.
As you move through the course, we will return to these terms and explain them in much more detail.
Why Does Mortgage Language Matter?
Mortgage advisers use certain words because they have specific meanings.
For example, you will often see words such as:
- capital
- interest
- deposit
- equity
- LTV
- affordability
- arrears
- remortgage
If you understand these terms, later topics become much easier to follow.
Therefore, think of this page as your introduction to the language of CeMAP.
Mortgage
Let’s start with the most important word.
A mortgage is a loan that is normally secured against a property.
For example, someone may want to buy a home for £200,000 but only have £40,000 of their own money.
They may therefore need to borrow:
£200,000 − £40,000 = £160,000
The £160,000 could be provided through a mortgage.
However, because the mortgage is secured against the property, failing to keep up with the required payments can have serious results. Ultimately, the lender may take action that could lead to the property being repossessed.
We will look at this in detail later.
Remember
A mortgage is borrowing secured against property.
Borrower
The borrower is the person taking out the mortgage.
For example, if Sarah takes out a mortgage to buy a home, Sarah is the borrower.
Sometimes, there is more than one borrower.
For instance, a couple may take out a mortgage together. In that case, both people are borrowers.
Lender
The lender provides the mortgage.
Banks and building societies are common examples of mortgage lenders. However, other firms may also provide mortgage lending.
The borrower receives the money, while the lender provides it.
Therefore:
Borrower → borrows the money
Lender → lends the money
This simple difference is worth remembering.
Deposit
A deposit is money the buyer puts towards the purchase of a property.
For example:
Property price: £200,000
Deposit: £20,000
Mortgage needed: £180,000
In this case, the buyer provides £20,000 and borrows the remaining £180,000.
Generally, the size of the deposit affects the amount that needs to be borrowed.
As a result, it also affects the loan-to-value.
Loan-to-Value (LTV)
Loan-to-value, usually shortened to LTV, compares the mortgage with the value of the property.
For example:
Property value: £200,000
Mortgage: £150,000
To calculate the LTV:
£150,000 ÷ £200,000 × 100 = 75%
Therefore:
LTV = 75%
This means the mortgage is equal to 75% of the property’s value.
Meanwhile, the remaining 25% represents the buyer’s deposit or existing equity, depending on the situation.
Remember
LTV tells us how large the mortgage is compared with the property’s value.
Capital
In mortgage lending, capital generally means the amount of money borrowed.
For example, imagine you borrow:
£180,000
That £180,000 is the mortgage capital.
As you repay the capital, the amount you owe reduces.
However, borrowing money normally has a cost.
That brings us to interest.
Interest
Interest is the charge for borrowing money.
For example, a lender may provide a £180,000 mortgage and charge interest on the amount owed.
The interest rate is normally shown as a percentage.
Therefore, the mortgage payment may include both:
Capital → paying back the money borrowed
and
Interest → the cost of borrowing
The exact way this works depends on the mortgage repayment method.
Interest Rate
The interest rate helps determine how much interest is charged on the mortgage.
For example, you may see mortgage rates such as:
3.5%
4.2%
5.0%
However, simply comparing these percentages does not always tell you which mortgage is best.
Fees, mortgage features, the length of any deal and the customer’s needs can also matter.
Therefore, mortgage advice involves looking at the wider picture.
Repayment Mortgage
With a repayment mortgage, the regular payment normally covers both interest and part of the capital.
As a result, the mortgage balance should gradually reduce, provided the required payments are made.
For example:
Monthly payment
↓
Interest + Capital repayment
↓
Mortgage balance gradually reduces
By the end of the mortgage term, the loan should be repaid if all required payments have been made.
Interest-Only Mortgage
An interest-only mortgage works differently.
Generally, the regular mortgage payment covers the interest rather than repaying the original capital.
Therefore, the borrower needs a suitable way to repay the capital at the end of the mortgage term.
For example:
Mortgage borrowed: £150,000
If the mortgage remains fully interest-only, the borrower may still owe the £150,000 capital at the end.
As a result, understanding how the capital will eventually be repaid is very important.
Mortgage Term
The mortgage term is the length of time over which the mortgage is arranged.
For example, a mortgage could have a term of:
- 20 years
- 25 years
- 30 years
- 35 years
Generally, changing the term can affect monthly payments and the total amount of interest paid.
Therefore, the mortgage term is an important part of mortgage planning.
We will explore this properly later.
Fixed Rate
A fixed interest rate stays at an agreed rate for a set period.
For example, a mortgage may have a rate fixed for:
2 years
or
5 years
During the fixed period, changes in wider interest rates do not change the agreed mortgage interest rate.
As a result, fixed rates can provide greater certainty over mortgage payments during that period.
However, the mortgage terms may also include charges or limits that need to be considered.
Variable Rate
A variable interest rate can change.
Therefore, the mortgage payment may also change.
If the rate rises, payments may increase.
On the other hand, if the rate falls, payments may decrease, depending on the mortgage terms.
There are different types of variable mortgage rate, which we will cover later.
Tracker Rate
A tracker mortgage has a variable interest rate linked to another rate.
For example, it may track the Bank of England base rate.
Imagine the mortgage is:
Base rate + 1%
If the base rate were 4%, the mortgage rate would be:
4% + 1% = 5%
If the base rate later changed, the mortgage rate would normally change in line with the tracker terms.
Therefore, tracker mortgage payments can rise or fall.
Standard Variable Rate (SVR)
A lender’s Standard Variable Rate, usually called its SVR, is a variable interest rate set by the lender.
A borrower may move onto the lender’s SVR after an initial mortgage deal ends, depending on the mortgage terms.
Because the rate is variable, it can change.
However, an SVR is not the same as a tracker rate.
A tracker follows a stated external rate according to its terms. In contrast, an SVR is set by the lender.
Mortgage Product
A mortgage product is a particular mortgage deal offered by a lender.
For example, a lender might offer:
A 2-year fixed-rate mortgage at a particular rate with a product fee
Another product might offer:
A 5-year fixed rate with different fees and conditions
Therefore, one lender may offer many mortgage products.
Each product can have different:
- interest rates
- fees
- incentives
- conditions
- early repayment charges
- LTV limits
As a result, comparing mortgages involves much more than looking at one interest rate.
Product Fee
A product fee is a charge that may apply to a particular mortgage deal.
For example, a mortgage could have:
Interest rate: 4.5%
Product fee: £999
Another mortgage may have a higher rate but no product fee.
Therefore, the mortgage with the lowest rate is not automatically the cheapest overall.
Costs need to be considered together.
Early Repayment Charge (ERC)
An early repayment charge, or ERC, is a charge that may apply if the borrower repays some or all of a mortgage earlier than allowed under the mortgage terms.
For example, an ERC may apply during a fixed-rate period.
Therefore, someone planning to move home or repay a large amount early may need to consider these charges carefully.
However, the exact rules depend on the mortgage product.
Overpayment
An overpayment is an extra payment made towards the mortgage above the normal required amount.
For example:
Normal monthly payment: £900
Amount actually paid: £1,000
The extra £100 is an overpayment.
Depending on the mortgage terms, overpayments can help reduce the mortgage balance more quickly.
However, limits or charges may apply.
Therefore, borrowers should check the terms of their mortgage.
Equity
Equity is the part of a property’s value that is not covered by borrowing secured against it.
For a simple example:
Property value: £250,000
Mortgage: £150,000
Therefore:
£250,000 − £150,000 = £100,000
In this simplified example, the owner has £100,000 of equity.
However, if other borrowing is secured against the property, that may also need to be considered.
Negative Equity
Negative equity happens when the amount owed on a property is greater than the property’s value.
For example:
Property value: £180,000
Mortgage balance: £200,000
The mortgage is £20,000 greater than the property value.
Therefore, the borrower is in negative equity.
This can create problems, particularly if the borrower wants or needs to sell the property.
Affordability
Affordability is about whether a customer can reasonably afford the mortgage.
A lender may consider areas such as:
- income
- household spending
- debts
- loans
- credit commitments
- dependants
- possible future changes
Therefore, affordability is not simply based on salary.
For example, two people could both earn £40,000 but have very different monthly commitments.
As a result, their borrowing position may also be different.
Credit History
A person’s credit history shows information about how they have used and managed credit.
For example, it may contain information relating to:
- loans
- credit cards
- payment history
- missed payments
- defaults
- other credit commitments
Lenders may use credit information when deciding whether to lend.
Therefore, a customer’s past use of credit can affect a mortgage application.
Credit Reference Agency
A credit reference agency gathers and holds information relating to people’s credit histories.
Lenders can use information from credit reference agencies as part of their lending decisions.
However, a credit reference agency does not make the mortgage decision itself.
Instead, the lender uses the available information alongside its own lending rules.
Agreement in Principle
An Agreement in Principle, often shortened to AIP, gives an early indication of how much a lender may be willing to lend.
You may also hear terms such as Decision in Principle.
However, an AIP is not the same as a final mortgage offer.
Further checks will usually be required.
Therefore:
Agreement in Principle ≠ Guaranteed mortgage
This is an important difference.
Mortgage Application
A mortgage application is the formal request for a mortgage.
At this stage, the lender may need information and evidence relating to areas such as:
- identity
- income
- employment
- spending
- debts
- credit history
- deposit
- property
The lender then considers the application according to its lending rules.
Underwriting
Underwriting is the process of assessing the mortgage application and its risks.
For example, an underwriter may consider whether:
- the applicant meets the lender’s rules
- the income is acceptable
- the mortgage is affordable
- the credit history is acceptable
- the property meets lending requirements
Therefore, underwriting helps the lender decide whether it is willing to provide the mortgage.
Mortgage Valuation
A mortgage valuation is carried out for the lender to help assess whether the property provides suitable security for the mortgage.
However, it should not automatically be treated as a full survey of the property’s condition.
This difference is important.
Therefore:
Mortgage valuation → Mainly for the lender
while a more detailed survey can provide the buyer with more information about the property’s condition.
We will explore the different types of property inspection later.
Mortgage Offer
A mortgage offer is the lender’s formal offer to provide the mortgage, subject to its terms and conditions.
This normally comes after the lender has completed the required checks.
Therefore, a mortgage offer is much further along the process than an Agreement in Principle.
A simple way to remember the order is:
Agreement in Principle
↓
Mortgage application
↓
Checks and underwriting
↓
Mortgage offer
Remortgage
A remortgage usually means replacing the mortgage on a property with a new mortgage, without moving home.
For example, a homeowner may remortgage to:
- obtain a new mortgage deal
- change lender
- change mortgage features
- borrow more money, where appropriate
However, costs, charges and suitability need to be considered.
Therefore, remortgaging is not automatically beneficial in every situation.
Buy-to-Let
A buy-to-let mortgage is generally used when a property is being bought or held for rental to tenants rather than as the borrower’s own home.
The way lenders assess buy-to-let mortgages can differ from residential mortgages.
For example, expected rental income may play an important part.
In addition, different regulatory and tax rules can apply.
Therefore, buy-to-let needs to be understood separately from ordinary residential mortgage lending.
Arrears
A mortgage is in arrears when required payments have not been made when due.
For example, if a borrower misses mortgage payments, arrears may build up.
This can become serious if the problem continues.
However, there are rules around how lenders deal with customers experiencing payment difficulties.
We will cover mortgage arrears and payment problems properly later.
Repossession
Repossession can occur when a lender takes possession of a property after serious problems with a mortgage, following the required process.
However, repossession is a serious step rather than simply what happens after one missed payment.
There are processes and rules that must be followed.
Therefore, it is important not to think of repossession as an immediate result of a payment problem.
Financial Conduct Authority (FCA)
The Financial Conduct Authority, or FCA, regulates financial services firms and financial markets in the UK within its areas of responsibility.
Mortgage advisers will come across the FCA frequently throughout CeMAP.
In particular, you will learn about rules covering mortgage lending and advice.
Therefore, remember:
FCA = Financial Conduct Authority
MCOB
MCOB stands for:
Mortgages and Home Finance Conduct of Business
These are FCA rules covering important areas of regulated mortgage and home-finance business.
At first, MCOB may sound complicated.
However, we will break the rules into smaller and much easier sections later.
For now, simply remember:
MCOB contains important FCA rules relating to mortgages and home finance.
Financial Ombudsman Service (FOS)
The Financial Ombudsman Service, or FOS, helps resolve eligible complaints between consumers and financial businesses.
For example, a customer may first complain to a financial firm.
If the complaint is not resolved, the customer may be able to take it to the FOS, subject to the relevant rules.
Therefore, the FOS plays an important role in consumer protection.
Financial Services Compensation Scheme (FSCS)
The Financial Services Compensation Scheme, or FSCS, can provide compensation to eligible customers when an authorised financial services firm cannot meet certain claims against it.
However, protection depends on factors such as the type of financial product and the circumstances.
Therefore, it is important to learn the relevant FSCS rules rather than assume that every financial loss is covered.
We will study this in more detail during CeMAP 1.
APRC
APRC stands for Annual Percentage Rate of Charge.
It is designed to help show the overall cost of mortgage borrowing as an annual percentage, based on certain assumptions.
Therefore, it considers more than simply the initial mortgage interest rate.
However, APRC can involve several factors and assumptions.
For now, you only need to recognise the term.
We will explain how it works later.
Don’t Try to Memorise Everything Yet
You have now seen many of the terms that will appear throughout CeMAP.
However, there is no need to memorise every definition immediately.
Instead, concentrate on becoming familiar with the language.
As you progress, you will see these words repeatedly.
For example:
Deposit
↓
Mortgage amount
↓
LTV
↓
Interest rate
↓
Monthly payment
↓
Affordability
As the terms begin to connect, they become much easier to remember.
The Most Important Starter Terms
If you only remember a few terms from this page, start with these:
Mortgage
Borrowing secured against property.
Borrower
The person borrowing the money.
Lender
The firm lending the money.
Deposit
Money the buyer puts towards the purchase.
Capital
The amount borrowed.
Interest
The cost of borrowing money.
LTV
The mortgage compared with the property’s value.
Equity
The value in the property above the borrowing secured against it.
Affordability
Whether the customer can reasonably afford the mortgage.
FCA
Financial Conduct Authority.
These terms provide a useful foundation for what comes next.
Quick Knowledge Check
Before moving on, let’s check the main points.
1. What is a mortgage?
A loan normally secured against property.
2. What is the difference between a borrower and a lender?
The borrower receives the loan, while the lender provides it.
3. What does LTV stand for?
Loan-to-value.
4. A property is worth £200,000 and the mortgage is £150,000. What is the LTV?
75%.
5. What is interest?
The cost of borrowing money.
6. What is equity?
Broadly, the value of the property above the borrowing secured against it.
7. What is a remortgage?
Replacing the mortgage on a property with a new mortgage without moving home.
8. What is an Agreement in Principle?
An early indication of how much a lender may be willing to lend. It is not a guaranteed mortgage offer.
9. What does FCA stand for?
Financial Conduct Authority.
10. What does MCOB stand for?
Mortgages and Home Finance Conduct of Business.
Quick Summary
To sum up, CeMAP introduces a large amount of mortgage and financial language.
At first, some terms may seem technical.
However, most describe simple ideas.
For example:
LTV → Mortgage compared with property value
Capital → Money borrowed
Interest → Cost of borrowing
Equity → Value above secured borrowing
Affordability → Ability to afford the mortgage
ERC → Possible charge for repaying early
Therefore, do not try to memorise the whole page at once.
Instead, become familiar with the terms and then build your understanding as they appear throughout the course.
Most importantly, always try to understand what a term means in practice.
Once the language becomes familiar, the rest of CeMAP becomes much easier to follow.
Next Page
How the UK Financial System Works