Mortgages can include many words and phrases that may be unfamiliar.
Understanding these terms can make it easier to compare mortgages. It can also help you understand what you are agreeing to.
This guide explains some of the most common mortgage terms in simple language.
Mortgage
A mortgage is a loan secured against a property or land.
You borrow money from a lender and repay it over an agreed period.
Because the loan is secured against the property, your home may be at risk if you do not keep up with the required payments.
Mortgage Lender
The lender is the organisation providing the mortgage.
For example, this could be a:
- bank
- building society
- specialist mortgage lender
Different lenders have different rates and lending rules.
Therefore, being accepted by one lender does not mean another lender will make the same decision.
Borrower
The borrower is the person taking out the mortgage.
There can also be more than one borrower.
For example, a couple buying a home together may apply for a joint mortgage.
Capital
The capital is the money you borrow.
For example:
Property price: £250,000
Deposit: £50,000
Mortgage: £200,000
In this example, the starting mortgage capital is £200,000.
Interest
Interest is the cost of borrowing money.
It is normally shown as a percentage.
For example, your mortgage could have an interest rate of 4.5%.
The rate affects the amount of interest you pay. Therefore, it can have a large effect on your mortgage costs.
Mortgage Balance
Your mortgage balance is the amount you still owe.
With a repayment mortgage, the balance should fall as you make your required payments.
However, an interest-only mortgage works differently. The capital may remain outstanding unless you make payments towards it.
Deposit
A deposit is the money you provide towards the purchase of a property.
For example:
Property price: £200,000
Deposit: £20,000
Mortgage: £180,000
Therefore, you are providing 10% of the purchase price yourself.
Generally, a larger deposit means you need to borrow less.
Loan-to-Value
Loan-to-Value (LTV) compares the mortgage with the property’s value.
For example:
Property value: £200,000
Mortgage: £150,000
The calculation is:
£150,000 ÷ £200,000 × 100 = 75%
Therefore, the mortgage has an LTV of 75%.
LTV is important because lenders often offer different mortgage deals at different LTV levels.
Equity
Equity is the difference between your property’s value and the amount secured against it.
For example:
Property value: £250,000
Mortgage balance: £150,000
The difference is:
£100,000
Therefore, you have £100,000 of equity before considering selling costs and any other secured borrowing.
However, property values can rise or fall. As a result, your equity can also change.
Mortgage Term
The mortgage term is the length of time agreed for repaying the mortgage.
For example, you may take a mortgage over:
- 20 years
- 25 years
- 30 years
- 35 years
A longer term can reduce the monthly repayment on a repayment mortgage.
However, you are borrowing for longer. Therefore, you may pay more interest overall.
Repayment Mortgage
With a repayment mortgage, your regular payments normally cover both:
Interest
and
Capital
Therefore, your mortgage balance should gradually fall.
If you make all the required payments, the mortgage should be repaid by the end of the term.
Interest-Only Mortgage
With an interest-only mortgage, your regular payments normally cover the interest.
However, the capital is not normally repaid through these payments.
Therefore, you need a suitable plan to repay the amount borrowed.
For example, if you borrow £200,000, you could still owe £200,000 at the end of the mortgage term.
Fixed Rate
A fixed rate stays the same for an agreed period.
For example, you may have a mortgage fixed at 4.5% for five years.
During those five years, the rate will not normally change.
Therefore, fixed mortgages can make monthly payments more predictable.
Variable Rate
A variable rate can change.
As a result, your mortgage payment may also rise or fall.
There are different types of variable mortgage. These include tracker mortgages and Standard Variable Rates.
Tracker Mortgage
A tracker mortgage follows a set financial rate. This is often the Bank of England base rate.
For example:
Bank Rate + 0.75%
If Bank Rate is 4%, your mortgage rate would be:
4.75%
If Bank Rate changes, the mortgage rate will normally change too, subject to the terms of the deal.
Standard Variable Rate
The Standard Variable Rate (SVR) is a rate set by the lender.
Many borrowers move onto an SVR when an initial mortgage deal ends.
The lender can change this rate.
Therefore, your monthly payments can change too.
Initial Rate
The initial rate is the mortgage rate that applies during the first deal period.
For example:
4.2% fixed for five years
The 4.2% is the initial rate.
Once the five years end, another rate will apply unless you arrange a new deal.
Follow-On Rate
The follow-on rate is the rate that applies after your initial mortgage deal ends.
Often, this will be the lender’s SVR.
Therefore, it is useful to know both the initial rate and the rate that follows it.
Bank Rate
Bank Rate, sometimes called the base rate, is set by the Bank of England.
It can affect borrowing and saving rates across the economy.
However, mortgage rates do not always move by the same amount as Bank Rate.
APRC
APRC stands for Annual Percentage Rate of Charge.
It is designed to show the overall annual cost of a mortgage as a percentage.
It considers the interest rate and certain other costs.
However, it normally assumes you keep the mortgage under the stated terms for the full term.
Therefore, it should not be the only figure you use when comparing mortgages.
Mortgage in Principle
A Mortgage in Principle gives you an idea of how much a lender may be willing to lend.
It may also be called an:
Agreement in Principle
or
Decision in Principle
However, it is not a final mortgage offer.
You will still need to complete the full application.
Mortgage Offer
A mortgage offer is the formal offer made by the lender after it has considered your application.
It will include important details about the mortgage.
For example:
- amount borrowed
- interest rate
- mortgage term
- monthly payments
- fees
- conditions
Therefore, read the offer carefully before proceeding.
Affordability Assessment
An affordability assessment helps the lender decide whether you can afford the mortgage.
The lender may consider your:
- income
- spending
- debts
- dependants
- financial commitments
Different lenders use different rules.
Therefore, the amount you can borrow can vary between lenders.
Credit Check
A credit check allows the lender to look at information about your credit history.
This can help it understand how you have managed borrowing and payments.
A credit check may be recorded as either a soft search or hard search, depending on the stage and lender.
Soft Credit Search
A soft search can be used to check information without leaving the same type of visible search record as a full credit application.
Some lenders use soft searches when providing a Mortgage in Principle.
However, practices vary.
Therefore, check what type of search will be carried out.
Hard Credit Search
A hard search is normally linked to an application for credit.
It can appear on your credit report for other lenders to see.
Mortgage lenders may use a hard search during the application process.
Therefore, avoid making unnecessary mortgage applications.
Mortgage Valuation
A mortgage valuation helps the lender check the value of the property.
It is mainly carried out for the lender.
Therefore, it should not automatically be treated as a full survey of the property’s condition.
You may want a separate survey for more information about the property.
Survey
A survey can provide information about the condition of a property.
Different levels of survey are available.
The buying process also differs across the UK.
For example, sellers in Scotland normally provide a Home Report before marketing a property, subject to some exceptions.
Product Fee
A product fee is a charge linked to a particular mortgage deal.
It may also be called an:
Arrangement fee
or
Booking fee
depending on the lender.
Some mortgages have no product fee. Others can charge a large amount.
Therefore, compare fees as well as interest rates.
Valuation Fee
A valuation fee may be charged for the lender’s mortgage valuation.
However, some mortgage deals include a free valuation.
Check what is included before comparing deals.
Early Repayment Charge
An Early Repayment Charge (ERC) is a fee that may apply if you repay or change your mortgage during a certain period.
For example, you might owe:
£150,000
with an ERC of:
2%
The charge could be:
£150,000 × 2% = £3,000
Therefore, check ERCs before changing or repaying a mortgage.
Overpayment
An overpayment is an extra payment towards your mortgage.
For example, you may pay an extra £100 each month.
This can reduce your mortgage balance more quickly.
As a result, you may pay less interest and repay the mortgage sooner.
However, some mortgages limit overpayments. Therefore, check the terms first.
Underpayment
An underpayment means paying less than your normal mortgage payment.
Some flexible mortgages may allow this in certain circumstances.
However, you cannot normally decide to reduce your payments without agreement from the lender.
Therefore, contact your lender before making a lower payment.
Payment Holiday
A payment holiday is an agreed period when mortgage payments are reduced or paused.
Not every mortgage allows this.
Also, interest may continue to be charged.
Therefore, a payment holiday can increase the amount you owe or affect future payments.
Remortgage
Remortgaging means replacing your existing mortgage with another mortgage, usually from a different lender.
People may remortgage to get a different rate or change their mortgage terms.
They may also want to borrow more.
However, fees and Early Repayment Charges can apply.
Product Transfer
A product transfer means moving to another mortgage deal with your existing lender.
This can sometimes be simpler than remortgaging to another lender.
However, staying with your existing lender does not automatically give you the best deal.
Therefore, compare your options.
Porting
Porting means taking an existing mortgage deal with you when moving home.
However, the mortgage itself is not simply moved from one property to another.
You will normally need to apply and meet the lender’s rules.
Therefore, porting is not guaranteed.
Additional Borrowing
Additional borrowing means borrowing more money through your mortgage lender.
For example, you may want money for home improvements.
However, this increases the amount secured against your property.
Therefore, consider the monthly and long-term cost.
Mortgage Broker
A mortgage broker helps people find and arrange mortgages.
Depending on the service, a broker may compare mortgages and recommend suitable options.
Some brokers charge customers a fee. Others may receive commission from lenders.
Therefore, check the service and costs before proceeding.
Conveyancing
Conveyancing is the legal work involved in transferring property ownership.
A solicitor or conveyancer will normally deal with this work.
However, the legal process differs across the UK.
Scotland has a different property buying system from England and Wales.
Completion
Completion is the final stage of a property purchase in England and Wales.
The purchase money is transferred and the buyer can normally take possession of the property.
In Scotland, different legal terms and processes apply. For example, you may hear about conclusion of missives and settlement.
Negative Equity
Negative equity happens when your property is worth less than the amount secured against it.
For example:
Property value: £180,000
Mortgage balance: £200,000
The difference is:
£20,000
Therefore, you are in negative equity by £20,000 before considering other costs.
This can make selling or remortgaging more difficult.
Arrears
Your mortgage is in arrears when required payments have been missed or not fully paid.
Mortgage arrears can become serious.
Therefore, contact your lender as soon as possible if you are struggling to make payments.
Getting help early can provide more options.
Redemption
Mortgage redemption means paying off the mortgage.
This may happen when you:
- reach the end of the mortgage
- sell the property
- remortgage
- repay the mortgage early
Fees or Early Repayment Charges may sometimes apply.
Redemption Statement
A redemption statement shows how much is needed to repay your mortgage on a certain date.
It can include:
- outstanding balance
- interest
- fees
- Early Repayment Charges
Your solicitor may request one when you sell or remortgage.
Freehold
Freehold is a common form of property ownership in England and Wales.
In simple terms, you own the property and the land it stands on.
However, Scotland has its own property law and does not use the English freehold and leasehold system in the same way.
Leasehold
Leasehold is another form of property ownership, mainly found in England and Wales.
You own the right to occupy the property for the remaining length of the lease.
There may also be service charges and other costs.
The remaining lease length can affect mortgage availability.
Buildings Insurance
Buildings insurance covers the structure of the property against certain risks.
Mortgage lenders normally require suitable buildings insurance.
However, the cover needed can depend on the property.
Therefore, check both the lender’s requirements and the insurance policy.
The Key Mortgage Terms to Remember
You do not need to learn every mortgage term at once.
However, a few are especially important:
Interest rate – the rate charged for borrowing.
Mortgage term – how long the mortgage lasts.
LTV – the mortgage compared with the property’s value.
Equity – the value you own after secured borrowing is considered.
Repayment mortgage – payments reduce both interest and capital.
Interest-only mortgage – regular payments mainly cover interest.
ERC – a possible charge for leaving or repaying a mortgage early.
Mortgage offer – the lender’s formal offer of borrowing.
Understanding these terms makes it much easier to compare mortgage deals.
Most importantly, if you see a mortgage term you do not understand, find out what it means before agreeing to the mortgage.