This guide was last updated 15 March 2022
There are lots of terms out there, so it can be hard to understand what brokers, solicitors, lenders, and estate agents are referring to and if they apply to you. But knowing your stuff can help you feel in control during the mortgage process.
In this second part of our glossary, we will look at a few of the most common terms, which can be a great way to prep before you start your property and mortgage hunt.
From early repayment charges to offset mortgages, here’s part 2 of our guide to ‘the lingo’ series. Missed out on part 1? Not to worry, you can read it here.
This is a type of mortgage available for buyers who have had credit problems in the past, such as missed payments, arrears, defaults, and CCJs.
If you think this might apply to you, then you should look to talk to a broker, as many of the lenders who can consider lending to such applicants do not offer mortgages directly to consumers.
An Agreement in Principle (aka Agreement in Principle) is just a document a lender can produce confirming how much a lender will lend you for a mortgage. Buyers can then use this to prove to estate agents and sellers how much they can afford for their property.
Essentially, it is the first part of a mortgage application where the lender uses all your personal, income, and expenditure details, performs a credit search and initially decides how much they can lend.
It is usually valid for up to 30 days, as that is when your credit file updates. Brokers can get these on your behalf with their access to many lenders.
APR stands for Annual Percentage Rate and is the total cost of a mortgage, including all interest and fees. It can be a bit confusing as it is often calculated over the full term of the mortgage rather than the initial product period (e.g. for a five-year fixed rate). Your broker should explain which costing method is best for you and your situation.
If you have arrears, this means you have missed or even defaulted on your mortgage payments in the past. This is likely to adversely affect your credit score and chances of getting a mortgage in the future. Speak with your lender as soon as you think you might struggle to pay a mortgage payment.
The base rate is set by the Bank of England. This is what tracker and variable rate mortgages will use to work out the interest rate you pay with your mortgage.
When lenders or brokers talk about capital, they are usually referring to the outstanding balance of the mortgage, which for a repayment mortgage will reduce over time to zero at the end of the full term (so long as all the payments have been met).
This is why a repayment mortgage is also known as a capital and interest mortgage since your monthly payments are made up of the interests charged by the lender and a capital element to reduce that outstanding balance every month.
A CCJ (County Court Judgement) is when you have missed payments to a company or individual you owe money to and they have taken you to court where the judge has authorised a note to go on your credit file for prospective lenders to see. Having a CCJ (cleared or still outstanding) will reduce your choice of lenders dramatically, making it difficult to get a mortgage. CCJs and defaults stay on your credit file for six years.
A mortgage collar is the lowest a variable or tracker rate mortgage can go to. This is to protect the lender in case the base rate falls so low that the tracker or variable rate is in danger of being 0%.
A credit score is the total number of points a lender awards a mortgage application based on the answers given to all the questions and the data received when doing a credit search on the applicants.
It should not be confused with the credit score credit reference agency’s offer and advertise. Lenders do not actually look at scores from credit reference agencies. They perform their own credit score and the more points you are awarded in your application, the greater chance of the lender saying ‘yes’.
This is when a borrower doesn’t pay their monthly payments for long enough so the lender puts the contract into a defaulted state.
It is not the same as a CCJ, as the lender has not taken the borrower to court. If there is no attempt to make up those missed payments then the lender may well go to court to place a CCJ on the borrower’s credit file.
If payments continue to be missed and the arrears increase in size, a lender may feel they have no option but to apply to the courts to repossess the property.
Mainstream lenders are extremely unlikely to lend to people with defaults (or any adverse credit). There are some lenders who understand that some applicants may have had difficulties in the past six years but are still prepared to lend.
If you want to change to a different mortgage deal or pay off some/all of your mortgage within the initial product period, you may well have to pay a penalty fee known as the Early Repayment Charge/Penalty.
Your broker will go through this with you when you get your mortgage illustration and it will also be detailed on your mortgage offer. Most lender’s products will allow you to overpay up to 10% of the outstanding mortgage balance each year without penalty.
When you come to the end of your current mortgage product (or deal) you will be switched on to the lender’s standard variable rate. As that is more expensive than other products, you can either move your mortgage to a new lender with a new product (called remortgaging) or stay with your current lender and take one of the products they offer to existing borrowers only. This is called a product transfer or rate switch.
The Help to Buy Scheme is a government-funded scheme to help first-time buyers on the property ladder. The original scheme closed in 2019 but the new Help to Buy Equity Loan is available until 2023. A new scheme is hoped to be announced to replace it to aid first time buyers but no announcement has been made (as of February 2022).
An offset mortgage is a combination of a normal mortgage and a savings account that is linked to the mortgage account. At the end of every day, any balance in the savings account is deducted from the outstanding mortgage balance before the amount of interest you will be charged is calculated.
This allows you to use savings to lower your mortgage costs each month, which means instead of earning interest on your savings, you’ll have less interest charged on your mortgage. Offset mortgages are extremely flexible, very tax-efficient, and can be used for many reasons.
They are more complicated than a normal mortgage, however, so talking to a broker is very much advised.
An overpayment allowance is the amount you can overpay each year to reduce your mortgage without having to pay the Early Repayment Charges/Penalties. This will depend on our mortgage deal, so check the details on your mortgage illustration and mortgage offer to see what is permissible and what is not.
This scheme provides council tenants to right to buy the council houses they live in. The scheme is now allowing housing association tenants to do the same.
The council will give you a discount on the purchase price that is not as much as it used to be but it can still be a significant amount that has enabled many council tenants to own their home rather than rent.
There are quite a few conditions that have to be met and rules to follow, so we advise you to talk to the council early on to check what you are eligible to receive as a discount and what you can and cannot do with the property.
With shared ownership, you can buy between 25% and 75% of a property and pay rent on what’s left. Again, these schemes can really help people get on the housing ladder but not all lenders offer mortgages for them and there are considerable terms and conditions that come with them.
Make sure you talk to the shared ownership scheme provider to fully understand what is involved and what your options are in the future.
Stamp duty is a tax charged on property purchases larger than £125,000. There is an additional tax called Additional Stamp Duty Land Tax (currently an extra 3% above normal Stamp Duty) when buying second homes, holiday let homes, and buy to let investment rental properties.
Please see our guide on stamp duty for further details here.
Stamp Duty is payable only by purchasers, not vendors (sellers) and it is due to be paid in full on completion.
Once your initial mortgage deal ends, you will automatically switch over to your lender’s default interest rate, known as the standard variable rate. This is usually more expensive than other interest rates but it rarely has any early repayment charges (see below). Most borrowers look to remortgage to a new lender or take another product with their current lender, rather than go onto the standard variable rate.
Lenders set their own standard variable rate but if the base rate goes up or down, they usually move their SVR in line with that change.
Your house can get repossessed if you fall too far behind on monthly mortgage payments.
The tie-in period refers to the time you cannot leave your agreed mortgage term unless you pay an early repayment charge. In the past, there were some mortgage products where the introductory rate ended before the penalty period had finished. That type of product is really quite rare nowadays though.
All lenders need someone to look at the actual market value and check that the property is suitable security for lending. The lender will instruct a company to assess the property.
Sometimes they will just use a computer and data on the internet to make that assessment. Sometimes they will order an actual surveyor to visit the property and perform an actual internal inspection.
The report the lender’s valuer submits is for the lender and not for the borrower, so we often recommend buyers get their own survey done to highlight any potential problems with the property.
That report is usually called a homebuyer’s report/survey.
We can offer you a free property valuation report! Find out more here.
Being aware of common mortgage terms will help you feel more prepared for any meetings you have with your broker. But don’t be afraid to ask them what they mean if a term comes up that you’re not aware of. They’re there to help you and will be more than happy to explain.
Get in touch with us any time for a no obligation chat!