A Glossary of UK Mortgage Terms For Homeowners

Mortgage Terminology: A Comprehensive Guide for UK Homebuyers

Navigating the world of mortgages in the UK involves understanding a multitude of terms and concepts. As experts in stopping repossession, we find that some of the most common enquiries do not understand mortgage terms.

So, whether you're a first-time buyer or looking to remortgage, this guide breaks down key mortgage terminology to empower you in making informed decisions.

General Mortgage Terms

Agreement in Principle (AIP)

Also known as a 'Mortgage Promise' or Decision in Principle (DIP), this certificate from a lender indicates a willingness, in principle, to lend a certain amount based on basic information. While not a guarantee, it aids negotiations with sellers and estate agents.

Arrangement Fee

An arrangement fee is the cost incurred by the lender to set up your mortgage. You can opt to pay this upfront or add it to your mortgage amount, though adding it means paying interest on the fee.

Arrears

Mortgage arrears occur when you fall behind on your mortgage payments. If you are over 3 months in arrears your lender may seek repossession.

Buy to Let

Buy to let mortgages are tailored for property investors. These mortgages apply exclusively to properties you don't intend to occupy and typically require a larger deposit compared to standard residential mortgages.

Cash Back

Cash back mortgages provide an extra lump sum at the start of your mortgage. While it offers flexibility for expenses like home improvements, these mortgages often come with higher interest rates.

CHAPS Fee

This fee covers the lender's expenses when transferring mortgage funds to your solicitor, ensuring a smooth transaction process.

Completion

Completion marks the end of legal formalities in a property purchase or mortgage. It's the point when sellers receive the funds, and buyers gain possession.

Early Repayment Charge (ERC)

ERC is a charge payable to the lender if you move your mortgage or overpay beyond the agreed limit during a special deal period.

Equity

Equity represents ownership. In the context of your home, it's the difference between what you owe and your home's market value.

Exchange of Contracts

At this stage, the buyer commits to purchasing, and the seller commits to selling, legally binding both parties.

Exit Fee

Charged for closing your mortgage account when switching lenders or remortgaging with the same lender.

Higher Lending Charge (HLC)

This fee is levied when the borrowed amount exceeds a certain percentage of the property value, often used to mitigate increased lending risks.

Legal Fees

Legal fees cover the solicitor's work in conveyancing, the legal paperwork involved in the property transaction.

Loan-To-Value (LTV)

Expressed as a percentage, LTV compares your mortgage size to your property's value. For instance, a £150,000 mortgage on a £200,000 house results in a 75% LTV.

Mortgage Offer

A written offer from the lender to the borrower detailing the mortgage terms and conditions, usually valid for up to six months.

Mortgage Term

The duration over which you repay the mortgage.

Portability

A feature allowing the transfer of the mortgage between properties when moving house without penalties.

Redemption Statement

Required for paying off the mortgage in full or when remortgaging, indicating the total amount including fees and interest owed.

Remortgage

Switching to a new lender without moving. Common reasons include reducing payments, raising money, or changing the mortgage type.

Read More: What is an Urgent Remortgage?

Right to Buy

An option for council tenants to purchase their residence at a discounted rate.

Shared Ownership

A method involving purchasing a percentage of the property and renting the rest from a Housing Association, making homeownership accessible.

Vendor

The seller of the property.

Repayment Methods

Interest Only Mortgage

Monthly repayments cover only the interest for an agreed period, requiring a separate savings or investment plan to settle the loan.

Repayment Mortgage

Monthly repayments cover both the loan and interest over the agreed term.

Read More: A Guide on the Different Types of Mortgage

Interest Rate Deals

Capped or Cap

A capped mortgage ensures the interest rate doesn't exceed an upper limit for a set period, providing payment security.

Collar Rate

Sets a minimum level for monthly repayments, often applied to tracker mortgages.

Discount

Offers a discounted rate on the lender's standard variable rate for a specific period, typically two or three years.

Fixed Rate

Maintains a constant interest rate for a set period, providing stable monthly repayments.

LIBOR Rate

Tracks the LIBOR rate for a specified time, moving with its fluctuations.

Offset

Links savings to the mortgage, reducing interest payments. Suited for those with stable savings.

Standard Variable Rate

Variable interest rate following the lender's standard rate, often changing with the Bank of England's base rate.

Stepped Rate

Starts with a low rate, increasing annually until the deal ends. Early exit penalties may apply.

Tracker Rate

Tracks another interest rate, often the Bank of England's base rate, for a specified period. Ideal for overpaying during low rates.

Variable Rate

Monthly payments fluctuate with changes in interest rates. Requires savings for potential payment increases.

Understanding these mortgage terms provides a solid foundation for navigating the complexities of property financing in the UK. Whether you're negotiating with sellers, choosing the right mortgage type, or planning for the long term, this glossary equips you with the essential knowledge to make informed decisions on your homeownership journey.