Jargon Buster
We understand that the language of Financial Services can sometimes be confusing. Please see below for an explanation of the most common terms, including Repayment Types and Mortgage Types:
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A document from a mortgage lender indicating how much they may be willing to lend you.
Also known as a Decision in Principle (DIP) or a Mortgage in Principle, you apply for it before your formal mortgage application. It gives you an indication of what properties you may be able to afford, as well as showing estate agents and sellers that you are a serious prospective buyer.
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The amount you pay each year to borrow money. It includes the interest charged on your loan plus any other associated fees.
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Money that is owed and should already have been paid.
Repayment types:
A mortgage has two parts: capital is the amount you borrow and interest is the charge made by the lender on the amount you owe. There are lots of different mortgage types available - Fixed, Variable, Tracker etc. Whilst these primarily deal with how the interest is calculated, it can help to look at how you plan to pay back your mortgage first, for which there are 3 options:
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A repayment mortgage - also known as a capital & interest mortgage - is the most common type of mortgage. With a repayment mortgage you can make monthly payments for an agreed term (typically 25-35 years), until you have paid back both the original capital and the interest accumulated on it. With repayment mortgages, the amount you owe decreases each month until you eventually own 100% of your home.
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With an interest only mortgage your monthly payments only cover the interest charges on your loan, not any of the original capital borrowed. As a result, monthly payments will be cheaper, however at the end of the mortgage term you will still need to pay back the original amount borrowed from the lender in full. This model is primarily used for buy-to-let mortgages.
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Part & part mortgages are a combination of repayment and interest only mortgages. For example, a part & part mortgage for £350,000 might consist of £250,000 on repayment and £100,000 on interest only. You would pay the £250,000 off over the term of your mortgage (including any interest accrued on it) but at the end of the agreed term you would still need to pay off the remaining £100,000 capital upon which you have been making interest only payments.
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This refers to the interest rate set by the Bank of England. Tracker mortgages directly follow it, whilst Standard Variable Rate (SVR) mortgages tend to be influenced by it, meaning that your mortgage interest rate and repayments could be affected by changes to the base rate. Fixed rate mortgages protect you from base rate rises for the duration of their term (typically 2, 5 or 10 years).
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The amount you still have to repay on your mortgage.
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A loan made by your bank or another lender to cover the gap between two transactions, such as buying a property before your current home has been sold.
Mortgage types:
Once you have determined your repayment type, there are a number of different mortgage options available:
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With a fixed rate mortgage you pay a fixed rate of interest for a set period of time - typically 2, 5 or 10 years. Benefits include predictable monthly payments, even if interest rates rise. At the end of the fixed period it is advisable to review the market and consider switching to another product and/or lender.
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A variable rate mortgage is one where the interest rate fluctuates broadly in line with the base rate set by the Bank of England. Variable rate mortgages are often exempt from Early Repayment Charges (ERCs), giving you the freedom to leave at any time, but rates tend to be higher and payments will vary.
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A tracker mortgage moves directly in line with the Bank of England’s official base rate. Therefore, if the official base rate falls, so will your monthly payments, but if the base rate rises, your mortgage payments will go up too. Trackers usually run for 2 or 5 years, but there are some lifetime options available.
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When you come to the end of a fixed term deal you will usually roll on to the lender’s standard variable rate (SVR), unless you choose to remortgage to another deal / lender. Each lender sets their own SVR, so they vary, but are usually higher than other rates on the market and are also subject to change at any time. An SVR mortgage doesn’t lock you in however, so you can leave at any time without penalty.
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With a discounted SVR mortgage you pay the lender’s SVR with a fixed amount deducted for a set period of time, usually 2 or 3 years. The rate therefore starts out lower, but the lender’s SVR is subject to change at any time, so your monthly payments could fluctuate up or down.
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An offset mortgage is a type of mortgage that is linked to your current or savings account. The money in your account isn’t used to pay off the mortgage, but is instead used to lower your monthly interest payments. It works by ‘offsetting’ the amount of money you need to repay on your mortgage against what you have in a linked account. So for instance, if you have a mortgage balance of £100,000 and offset £20,000 in savings, you will only be charged interest on £80,000.
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A specialist who can give you professional advice on mortgages.
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Building Survey
A buyer may commission a surveyor to inspect the condition of the building in order to identify any structural problems, faults or any other potential issues prior to exchanging contracts. This is different from the survey carried out for a mortgage valuation (see ‘Mortgage Valuation Survey’).
The Royal Institution of Chartered Surveyors (RICS) offers three levels of survey:
RICS Home Survey – Level 3
Also known as a full structural survey and previously as a RICS Building Survey, this is the most comprehensive option and is recommended for older or run down properties, listed properties, unusual properties, or those that the buyer plans to do significant work to.
RICS Home Survey – Level 2
Previously known as Home Buyer Survey, this mid-level survey is a popular choice for those buying a conventional property in reasonable condition.
RICS Home Survey – Level 1
Previously known as a Condition Report, this is the most basic survey, so is only really suitable for modern homes that use conventional building materials and appear in good condition.
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An insurance policy that covers the cost of repairing or rebuilding your home if it is damaged or destroyed - for example as a result of a flood or fire. It will cover the cost to rebuild, repair or replace structural elements like your roof, walls, windows, doors or fitted bathrooms and kitchens.
Buildings insurance does not usually cover items such as furniture, carpets, clothes, electronics, and personal items, as these fall under contents insurance (see ‘contents insurance’ below), however joint buildings & contents policies are available.
Note that most mortgage lenders will insist you have buildings insurance in place prior to exchange of contracts.
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An asset that can be used as a guarantee against a loan.
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The date when the legal process of buying a house has been completed, the documents and funds have been distributed to the right people and you receive the keys to the property. (Completion only happens after 'Exchange of Contracts' - please see below)
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An insurance policy covering items that aren’t attached to the property, such as furniture, appliances and personal possessions, in case they’re accidentally damaged or stolen.
It differs from Buildings Insurance (see above) which covers you in the event of the damage or loss of structural elements of your home, though joint buildings and contents policies are available.
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An agreement between the buyer and seller outlining the terms and conditions of the sale. This will be drawn up by your Conveyancer or Solicitor.
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The legal transfer of property from one owner to another.
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A document from a mortgage lender indicating how much they may be willing to lend you.
Also known as an Agreement in Principle (AIP) or a Mortgage in Principle, you apply for it before your formal mortgage application. It gives you an indication of what properties you may be able to afford, as well as showing estate agents and sellers that you are a serious prospective buyer.
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The amount of money a buyer contributes towards the purchase price. A mortgage usually covers the rest.
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The amount a property’s value declines by.
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Disbursements are the fees and taxes that need to be paid by your solicitor, on your behalf, to third parties during the conveyancing process. Examples include Land Registry fees, search fees and Stamp Duty Land Tax (SDLT).
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You may have to pay your lender an Early Repayment Charge (ERC) if you wish to repay all or part of your mortgage within the ERC period, as outlined in your Mortgage Illustration. This includes remortgaging before your original deal term ends - either with a new lender, or onto a lower rate from the same lender - or overpaying each month by more than the permitted amount. This is because the lender will receive less interest than they were expecting when you entered into the Mortgage Agreement, so an ERC is essentially a penalty charge that helps secure them against this loss.
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The value of your property minus the amount that’s outstanding on your mortgage.
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The point at which contracts are exchanged between the buyer and seller and the buyer is legally committed to completing the purchase. The buyer must also make the agreed deposit payment at this time.
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An Exit Fee - also known as a Redemption Fee - is an administration fee that may be payable when you repay your mortgage or move from your existing lender.
Note that this fee differs from an Early Repayment Charge (ERC), which is a penalty that applies when you choose to pay off your mortgage or remortgage before the end of a set deal period.
Exit fees are usually considerably less than ERCs, but both will be outlined in your Mortgage Illustration.
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A freeholder has outright ownership of a property including the land it is built on.
Most houses are freehold, though there are some exceptions. Apartments are almost always leasehold (see ‘Leasehold’ below), though some apartments benefit from share of freehold. This means that multiple owners of the apartment block collectively own the freehold, including the land on which it is built, though each apartment remains subject to a lease.
With a share of freehold, the group of people who own the land collectively have more control over the property, including ground rent, maintenance, and lease extensions.
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Fixtures are items that are permanently attached to a property, such as the boiler, bathroom suite and fitted kitchens. Fixtures are generally included in a property sale.
Fittings are items that are not attached to the property, such as curtains and freestanding appliances. Fittings are not usually included in a property sale unless agreed between the buyer and seller.
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Gazumping is when a property is sold to a second buyer for a higher price than has already been agreed with the first buyer.
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Somebody who guarantees to pay someone else’s loan or mortgage repayments should they be unable to. Guarantor mortgages are common with first time buyers.
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A fee charged by some mortgage providers if you take out a mortgage with a high loan to value, due to the increased risk this may carry for the lender.
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Interest is a charge you pay for borrowing money, or what banks pay to you for saving money with them. Interests rates are shown as a percentage of the amount you borrow or save over a year.
In mortgage terms, interest is what the lender charges you for allowing you to borrow money. This means that over the course of your mortgage you will pay back more than you initially borrowed.
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A joint mortgage is when you borrow money to buy a home with someone else. This could be your partner, a relative or a friend. You are both jointly responsible for the loan.
see also Mortgage
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A Key Facts Illustration (KFI), also known as a Mortgage Illustration, is a document that summarises the key details of a mortgage, including the interest rate, monthly repayments, fixed rate period, early repayment charges and any other fees and conditions.
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The Land Registry is a government department that deals with property and land registration in England and Wales.
The Land Registry provides property owners with a land title guaranteed by the government, as well as with a title plan indicating the property boundaries. It also records ownership changes and any mortgages or leases affecting the property.
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If your property is leasehold, you own a lease on the property but not the building or land, so will likely have to pay ground rent to the freeholder every year. Most apartments are sold as leasehold properties, with the freehold owned by the original developer, or a firm they sold the freehold interest to.
The lease permits you to occupy the property for a set term, which could be years, decades or even centuries, depending upon its length. If your lease expires, ownership of the property reverts to the freeholder. For this reason mortgage lenders usually require there to be a certain number of years remaining on the lease before they will consider giving you a mortgage. Leaseholders can usually extend their lease subject to a fee being paid to the freeholder.
Leasehold enfranchisement - also known as ‘freehold purchase’ or ‘collective enfranchisement’ - is when a group of leaseholders who own apartments in the same building join together to purchase the freehold interest from the freeholder. Although they technically remain leaseholders, they now each own a ‘share of freehold’, so have more control over the property, including ground rent, maintenance, and lease extensions.
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Loan to value (LTV) refers to the amount you borrow as a mortgage (the loan) as a percentage of the total value of the property.
For example, if you put down a deposit of £30,000 on a property worth £300,000 then your LTV is 90%, as the amount you are borrowing - £270,000 - is 90% of the home’s value.
The percentage that isn’t covered by the mortgage is referred to as your equity. Every time you make a mortgage repayment you are gradually increasing your equity in your home until you eventually own it outright.
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A document issued by the estate agent once an offer has been formally accepted. It contains key information relating to the sale including the address of the property and the agreed price, the names of the buyer/s and seller/s, and contact information for their respective solicitors. It may also include additional information such as whether the sale is subject to a chain, the expected exchange/completion dates and if the property is freehold or leasehold.
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A mortgage is a long-term loan taken out to buy a property, or in some cases land. During the term of your mortgage you are required to make monthly repayments, which also include interest.
The loan is secured against the value of your home, meaning that the lender can repossess your home if you fail to keep up with your repayments.
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Also known as a Key Facts Illustration (KFI), a mortgage illustration is a document that summarises the key details of a mortgage, including the interest rate, monthly repayments, fixed rate period, early repayment charges and any other fees and conditions.
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The formal offer given by a mortgage provider detailing how much they will lend you.
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An assessment carried out by the mortgage lender to confirm that the property is worth what you are planning to pay for it, and therefore suitable security for the loan.
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If the value of your property falls to less than the amount you owe on your mortgage.
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A property that hasn’t yet been built, and only detailed plans for it currently exist.
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Where you trade the value of your current property against a new-build house.
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Repossession is a legal process where a mortgage lender takes ownership of a property as a result of the borrower failing to keep up with repayments on their mortgage. It tends to be a last resort however, if the borrower and mortgage lender are unable to find an alternative solution.
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The process of paying off all or part of your mortgage, along with other related fees.
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The amount you have to pay back each month to your mortgage provider.
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A solicitor or conveyancer will conduct searches of the local area on behalf of a buyer to check for any future planning developments or historical problems that might affect the purchase.
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You must pay Stamp Duty Land Tax (SDLT) if you buy a property or land over a certain price in England and Northern Ireland. The thresholds for SDLT payments are set by the government, so please visit https://www.gov.uk/stamp-duty-land-tax for the most up to date information.
Your solicitor or conveyancer will usually file your return and pay the tax on your behalf on the day of completion and add the charge to their fees.
Note that you may be charged penalties and interest if you do not file your return and make payment within the time frame specified by the HMRC.
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The property owner has accepted an offer made by the buyer, however it is not yet legally binding as the paperwork (contract) still needs to be drawn up and signed.
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Title Deeds are legal documents that record the ownership of a property and any accompanying land.
This list is by no means exhaustive, so if there are any other terms you are unfamiliar with or would like further clarification on, then please don’t hesitate to contact our helpful team on 01635 46100 or email us at info@shfs.uk.com