JARGON BUSTER

ANNUAL PERCENTAGE RATE (APR)
A way of comparing the rates charged by different mortgage lenders. A percentage figure is calculated by using a standard formula that takes into account interest rates and associated costs over the term of the mortgage. Although mortgage lenders are legally obliged to quote the APR in any mortgage schedules they provide, its usefulness is questionable as more sophisticated repayment methods are introduced by lenders, and as mortgage borrowers become accustomed to remortgaging every few years.

BASE RATE (BBR)
The Bank of England Base Rate, set by its Monetary Policy Committee every month, determines lending rates in the UK.

BUY-TO-LET MORTGAGE
A mortgage for a property that is, or will be, let to tenants. This is semi-commercial lending, reflected in the higher set-up costs and marginally less attractive rates available. Income multiples are of secondary importance with this type of lending; mortgage lenders are more concerned with the relationship between rental income and mortgage payments.

CAPITAL-AND-INTEREST MORTGAGE
Another term for a repayment mortgage.

CASHBACK MORTGAGE
With this type of mortgage, the lender refunds a percentage of the advance – the cashback and you are then usually tied by way of an early repayment charge to the standard variable rate for a set number of years. Early repayment charges are likely to apply during the time you are obligated to pay the standard variable rate.

CRITICAL ILLNESS INSURANCE
A policy that pays a lump sum in the event of the policyholder being diagnosed as having one of a list of life-threatening and/or disabling illnesses.

EARLY REPAYMENT CHARGE
The fee you would have to pay for fully repaying your mortgage or making a lump sum reduction of the balance within a particular period. Borrowers may feel that the charges often in place with mortgages – discounts, fixed rates, capped rates etc, – are acceptable during the rate-control period, but that early repayment charges tying them in for a number of years to a lender’s standard variable rate thereafter are unfair. Flexible mortgages tend to have minimal early repayment charges.

EQUITY
The value of property in excess of charges on it. If your house is worth £200K and you have a mortgage for £100K and no other secured loans, you have £100K equity.

HIGHER LENDING CHARGE
A one-off premium that mortgage borrowers may be charged. It is generally payable when you want to borrow a high percentage of a property’s value —usually above 75% loan to value; but it is common practice for mortgage lenders to carry the cost of this insurance themselves between 75% and 90%. The premium pays for the lender to insure against potential losses should the house be repossessed and sold for less than the outstanding mortgage. It is important to note that the insurance protects the mortgage lender, not the borrower. Irrespective of who pays the premium (lender or borrower), the insurer providing the cover retains the right to pursue the defaulting borrower for any loss made as a result of a lender’s claim on the policy.

INCOME MULTIPLES
The factors by which mortgage lenders will multiply the gross annual income of applicants to determine their maximum borrowing capability. Multiples vary among lenders.

LETTING YOUR PROPERTY
Lenders have different mortgage schemes for residential and let properties. If you intend to let your property you should let your lender know or otherwise you will be in contravention of your mortgage deed.

LIFE ASSURANCE
A policy designed to repay your mortgage in the event of your death. Interest-only mortgages linked to endowments have in-built life cover, but if you have an ISA-linked interest-only mortgage or a repayment mortgage, life cover should be arranged separately. Term assurances taken in conjunction with a repayment mortgage are sometimes called mortgage protection policies – these are not to be confused with payment protection insurance, which protects against accidents, sickness and redundancy.

LOAN TO VALUE
(LTV) A percentage figure indicating the size of the mortgage on a property in relation to its value. Thus, a house worth £120K with a mortgage of £60K would have a loan to value of 50%. Better mortgage deals are available for lower loan to values – 75% and below. At higher loan to values – usually from 90% to 95% you are likely to find yourself paying a higher lending charge.

PORTABLE
A portable mortgage is one that can be transferred without penalty if you move house during a rate-control period. If you increase your mortgage the rate available for additional borrowing depends on what schemes the lender is prepared to offer you. If you reduce your mortgage, a pro-rata early repayment charge may apply. Most mortgages nowadays are portable.

REPAYMENT MORTGAGE
Also referred to as a capital-and-interest mortgage. Part of each monthly payment you make goes towards repaying the capital amount you owe and part goes towards paying interest charged on the loan. At the end of the term (typically 25 years) the entire debt will be repaid. In the early years payments consist largely of interest; as time goes on the capital-repayment proportion increases.

SPLIT LOAN
A mortgage that has some of the loan set up on an interest-only basis and some on a repayment basis.

STAMP DUTY
This is a land tax payable when purchasing a property or land in the UK. The amount payable depends upon the purchase price. If you are paying £125,000 or less, then you are exempt from paying stamp duty. If you are paying more than £125,000, then you pay stamp duty of between 1 to 12 % of the purchase price – on a sliding scale.

Examples:

£125k0%
£125k-£250k – 2%
£250k-£925k – 5%
£925-£1.5M – 10%
£1.5M – 12%

VALUATIONS AND SURVEYS
When you take out a new mortgage on a property (whether house purchasing or a remortgage), the mortgage lender concerned needs to value it in order to ensure that it offers sufficient security. There are three levels of valuation/survey:

1. Basic valuation
is carried out purely on behalf of the mortgage lender even though you may have to pay for it. Most lenders charge valuation fees on a scale depending on the value of properties. The report is basic, and all lenders disclaim any responsibility for the condition of the property. You have no comeback against the surveyor for any defects or problems overlooked in the report.

2. Homebuyers’ report
a more detailed but still limited report to a set format on the readily accessible parts of the property. It may offer you some limited recourse should the surveyor, who is acting on your behalf rather than the lender’s, be negligent.

3. Full structural survey
the most thorough (and most expensive) report. If the property is defective, the surveyor should discover this. If major defects are not discovered then the surveyor acting for you would have some legal liability, and you would be able to claim redress. Applicants should always check with mortgage lenders before instructing their own valuation or survey. Lenders tend to work with panels of surveyors, and if your surveyor is not known to your lender you may find yourself paying again for a valuation by one who is known.

REGULATED MORTGAGE
A mortgage is a loan taken out to buy property or land. Most run for 25 years but the term can be shorter or longer.
The loan is ‘secured’ against the value of your home until it’s paid off. If you can’t keep up your repayments the lender can repossess (take back) your home and sell it so they get their money back.

The money you borrow is called the capital and the lender then charges you interest on it till it is repaid. The type of mortgage you are able to apply for will depend on whether you want to repay interest only or interest and capital.

REPAYMENT METHOD
With repayment mortgages you pay the interest and part of the capital off every month. At the end of the term, typically 25 years, you should manage to have paid it all off and own your home.

INTEREST ONLY
With interest-only mortgages, you pay only the interest on the loan and nothing off the capital.

These mortgages are becoming much harder to come by as lenders and regulators are worried about homeowners being left with a huge debt and no way of repaying it.

You are responsible for ensuring that a credible repayment strategy is in place so that you have sufficient funds available to fully repay the loan at the end of the mortgage term.

Failing to maintain an adequate repayment strategy could result in you having difficulty in fully repaying the mortgage capital when due. You should review the progress of your repayment strategy on a regular basis to ensure enough capital is available when repayment becomes due. The mortgage lender will also check during the term of the mortgage that your repayment strategy remains in place and still has the potential to fully repay the capital borrowed.

CURRENT ACCOUNT MORTGAGE
A current account mortgage reduces the overall amount ‘owed’ when your savings or current account balance are taken into account. The mortgage and current/savings account are normally combined into a single account, effectively acting like one big overdraft.

The lender normally stipulates a minimum amount that needs to be left in the account each month to repay your mortgage over the agreed period. If there is a surplus, then you will pay less interest and pay off your mortgage early. Similarly, if you leave less than the required amount in the account, you will end up paying more for your mortgage.

A current account mortgage also normally has the typical features of a current account such as a chequebook, access via cash machines, direct debits etc.

OFFSET MORTGAGE
An offset mortgage sees your earnings paid in, permits overpayment, underpayment, lump sum deposits, payment holidays and all the other features of a flexible mortgage, as well as giving you a chequebook, debit card and the facility to set up direct debits. However, instead of combining all the accounts (current account, mortgage, and savings) into one and having a single balance, the different components are kept separate but work towards reducing the mortgage debt.

The three different accounts are not usually charged at the same rate of interest, the lender charges a set rate of interest on the current account and the savings account OR will ‘sweep’ the marketplace and apply the best rate of interest that can be found for each particular component. The balance in the two accounts is then added together and the total is then offset against the mortgage.

Importantly, because you’re not receiving interest on your current account or savings there is no tax payable.

Often, monthly payments will remain at an equal amount and ‘overpayments’ are used to reduce the overall mortgage debt. This is how you can pay off your mortgage early and save money with an offset mortgage. Some lenders will amend the monthly mortgage payment instead so that you benefit from lower payments but, of course, you won’t be able to pay off your mortgage early.

HELP TO BUY – EQUITY LOAN
As the name implies, Help to Buy is equity loan assistance available to home buyers meeting certain requirements and will be paid directly to registered house builders. The equity loan will be provided by the Homes and Communities Agency.

This scheme is available in England only.

You will need to contribute at least 5% of the property price as a deposit.

Up to a maximum of 20% of the purchase price is available through an equity loan funded by the Government through the scheme. To reflect the current property prices in London, from February 2016, the Government increased the upper limit for the equity loan for buyers within Greater London to 40%.

You will need a mortgage of up to 75% will be needed to cover the rest.

An equity loan from the scheme of £480,000 (80% of the Purchase Price) based on a maximum purchase price of £600,000 is available and is interest-free for the first 5 years.

In the sixth year, you will be charged a fee of 1.75% of the outstanding amount of the loan, rising annually by the increase (if any) in the Retail Price Index plus 1%. These fees don’t count towards paying back the equity loan.

The Help to Buy scheme will not allow you to transfer/port your loan to another property. The equity loan must be repaid after 25 years or earlier if you sell your home. You must repay the same percentage of the proceeds of the sale, as the initial equity loan (i.e. as you will receive an equity loan for example, for 20% of the purchase price of your home, you must repay 20% of the proceeds of the sale.) The entitlement by the Help to Buy Agency to a share of the future sale proceeds is secured through a second charge on your home.

Details relating to early repayment of the equity loan and the implications of the property value falling are provided on the Help to Buy website.

TYPES OF INTEREST RATE
Fixed interest rate/stepped fix
The mortgage has a ‘fixed’ mortgage interest rate, so you pay a set amount each month for the duration of the fixed period. This allows you the security of knowing your exact monthly commitments in the early years of the mortgage, unaffected by changes in the underlying interest rates. If interest rates fall below the fixed rate you will, however, continue to pay the higher, fixed amount.

Variable interest rate
The mortgage has a variable interest rate which can rise and fall in line with market conditions. This does involve a degree of uncertainty as your monthly repayments can vary and increase but will allow you to benefit from a fall in interest rates.

Discounted variable interest rate
The mortgage has a discounted variable interest rate. This does involve a degree of uncertainty as your monthly repayments can vary and increase but it allows you to have a discount on your mortgage payments for a specific period and to minimise your monthly payments, it also allows you to benefit from a fall in interest rates.

Tracker mortgage
The mortgage has a tracker interest rate. This means that the interest rate is linked to the [Bank of England Base Rate/LIBOR] and is equivalent to that rate plus a certain percentage. This does mean that your monthly premium may vary and can increase and therefore involves a degree of uncertainty, but this does allow you to benefit from a fall in interest rates.

Capped rate
The mortgage has a capped interest rate which means that the lender has put a “cap” on the maximum interest rate that can be charged. It provides the security of knowing that your monthly repayments will not rise above a certain amount, whilst allowing you to benefit from any drop in the rate below the cap.

ELIGIBILITY
Most lenders regard affordability as the most important factor in determining whether an applicant is eligible for a mortgage, and consequently how much can be borrowed.

You will need to prove your income, and provide the lender evidence of any outgoings, including debts, household bills and other living costs such as clothing, childcare and travel costs.

• You with potential ‘negative equity’.
• Failure to disclose any requested or relevant information may adversely affect any mortgage offer
• Once a mortgage has completed, it cannot be cancelled
• The payments shown on the relevant KFI/ESIS could be considerably different and higher if interest rates change
• If the value of the property drops below the amount borrowed, the amount borrowed will still need to be paid

BUSINESS BUY TO LET MORTGAGE
Business buy-to-let (BTL) mortgages are for landlords who buy property specifically to rent out. They are usually more expensive than residential mortgages, but they could help you become a property investor.

Buy-to-let mortgages are only suitable for people who want to invest in houses and flats.

Investing in property is risky, so you shouldn’t take out a BTL mortgage if you can’t afford to take that risk.

They are in many ways just like residential mortgages, but with some key differences:

• Interest rates on buy-to-let mortgages tend to be higher
• The minimum deposit for a buy-to-let mortgage is usually a quarter (25%) of the property’s value (some lenders offer deals with a 20% deposit, others want a 40% deposit)
• The fees tend to be much higher
• The level of borrowing is typically based on the level of rental income
• A 3% stamp duty surcharge applies, which applies to the entire purchase price of the property

Most BTL mortgages are interest-only, which means you don’t pay anything off the lump sum borrowed each month but, of course, at the end of the mortgage term you need to repay the capital owing in full.

Unlike obtaining a mortgage on a property you wish to live in, BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA).

There are a number of risk considerations that need to be taken into account. It is important that you are aware of these.

• Buy-to-let carries with it various risks such as finding tenants, checking tenants’ references, ensuring rental payments are received on time, understanding legal responsibilities, maintaining the property and if necessary, using an appropriately qualified managing agent.
• The payments shown within the relevant product disclosure document(s) provided, could be considerably different, and higher, if interest rates change.
• In the event that your income falls, you will still have to make your mortgage payments.
• If you can’t find tenants – or if you can’t charge the level of rent you expected – you may not be able to cover your mortgage repayments.
• Regular rental income is not guaranteed – you may have periods where the property is vacant.
• Your property may be repossessed if you do not keep up repayments on your mortgage.
• You will still have to pay your mortgage if you lose your job or illness prevents you from working. Think about whether you could do this.
• Your mortgage may have early repayment charges which may result in a penalty if you do not want the mortgage anymore.
• The amount of rent you can charge varies according to a number of factors outside your control i.e. typical rental levels/demands within the property’s locality.
• If you elect to have an interest-only mortgage, the lender may seek details of a repayment strategy you intend to use to repay the mortgage at the end of the term (as opposed to selling the property in the future to repay the outstanding loan). If relevant, you will need to consider the costs of any such repayment strategy.

• In addition to the actual mortgage repayments, you will also need to consider a range of other likely outgoings, including:
• Letting agent fees (if you decide to use one)
• Maintenance / repair costs
• Annual safety checks
• Landlords insurance
• Rent insurance
• Income tax

• The affordability assessment we have undertaken at this time is based on current interest rates, which may rise in the future, and on your current circumstances, which might change in future;
• The relevant product disclosure document(s) should be read and understood fully.
• If all relevant information has not been disclosed accurately and honestly, this may result in any mortgage contract offered, becoming invalid.
• The value of the property may go down, leaving you with potential ‘negative equity’.
• The lender will typically require you to sign a declaration confirming:
• You are entering into the agreement which is wholly or predominately for the purpose of a business being carried out or intended to be carried out by you
• You understand that the protections applying to Consumer Buy-to-Let clients will not apply
• You understand that if you are in any doubt as to the consequences of the agreement not being regulated that you should seek independent legal advice

CONSUMER BUY TO LET MORTGAGE
Consumer buy-to-let (CBTL) mortgages are any buy-to-let contracts that are not entered into by an individual ‘wholly or predominantly’ for the purpose of a business.

They are usually more expensive than residential mortgages.

Consumer buy-to-let mortgages are only suitable for people who have become a landlord by default as opposed to making an active business decision, for example, where a property has been inherited or has been previously lived in and the individual is unable to sell it, so resorting to a buy-to-let arrangement (BTL).

Investing in property is risky, so you shouldn’t take out a BTL mortgage if you can’t afford to take that risk.

They are in many ways just like residential mortgages, but with some key differences:

• Interest rates on buy-to-let mortgages tend to be higher
• The minimum deposit for a buy-to-let mortgage is usually a quarter (25%) of the property’s value (some lenders offer deals with a 20% deposit, others want a 40% deposit)
• The fees tend to be much higher
• The level of borrowing is typically based on the level of rental income
• A 3% stamp duty surcharge applies, which applies to the entire purchase price of the property

Most BTL mortgages are interest-only, which means you don’t pay anything off the lump sum borrowed each month but, of course, at the end of the mortgage term you need to repay the capital owing in full.

Unlike obtaining a mortgage on a property you wish to live in, BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA).

ELIGIBILITY
Most lenders will expect you to own your home, whether outright or with an outstanding mortgage and you must have a good credit record and not be stretched too much on your other borrowings such as any existing mortgage(s) and credit cards. Your earnings will also be taken into consideration and if they are less than £25,000 a year you are likely to find it harder to get a buy-to-let mortgage.

You will need to prove your income, and show the lender evidence of any outgoings, including debts, household bills and other living costs such as clothing, childcare and travel costs.

Lenders will have their own upper age limits – typically between 70 or 75. This is the oldest you can be when the mortgage ends not when it starts. For example, if you are 45 when you take out a 25-year mortgage it will finish when you’re 70.

The maximum you can borrow is linked to the amount of rental income you expect to receive. Lenders typically need the rental income to be a quarter to a third higher than your mortgage payment (25–30%).

TAXATION
If you are considering using a limited company to purchase a buy-to-let, you should seek professional advice from an accountant.

If you sell your buy-to-let property for profit, you will need to pay Capital Gains Tax if your gain exceeds the annual Capital Gains Tax threshold. Also, rental income that exceeds your mortgage interest payments and certain allowable expenses are liable to Income Tax.

RISK CONSIDERATIONS
There are a number of risk considerations that need to be taken into account. It is important that you are aware of these.

• Buy-to-let carries with it various risks such as finding tenants, checking tenants’ references, ensuring rental payments are received on time, understanding legal responsibilities, maintaining the property and if necessary, using an appropriately qualified managing agent.
• The payments shown within the relevant product disclosure document(s) provided, could be considerably different, and higher, if interest rates change.
• In the event that your income falls, you will still have to make your mortgage payments.
• If you can’t find tenants – or if you can’t charge the level of rent you expected – you may not be able to cover your mortgage repayments.
• Regular rental income is not guaranteed – you may have periods where the property is vacant.
Your property may be repossessed if you do not keep up repayments on your mortgage.
You will still have to pay your mortgage if you lose your job or illness prevents you from working. Think about whether you could do this.
• Your mortgage may have early repayment charges which may result in a penalty if you do not want the mortgage anymore.
• The amount of rent you can charge varies according to a number of factors outside your control i.e. typical rental levels/demands within the property’s locality.
• If you elect to have an interest-only mortgage, the lender may seek details of a repayment strategy you intend to use to repay the mortgage at the end of the term (as opposed to selling the property in the future to repay the outstanding loan). If relevant, you will need to consider the costs of any such repayment strategy.
• In addition to the actual mortgage repayments, you will also need to consider a range of other likely outgoings, including:
• Letting agent fees (if you decide to use one)
• Maintenance / repair costs
• Annual safety checks
• Landlords insurance
• Rent insurance
• Income tax
• The affordability assessment we have undertaken at this time is based on current interest rates, which may rise in the future, and on your current circumstances, which might change in future.
• The relevant product disclosure document(s) should be read and understood fully.
• If all relevant information has not been disclosed accurately and honestly, this may result in any mortgage contract offered, becoming invalid.
• The value of the property may go down, leaving you with potential ‘negative equity’.

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