Mortgages a glossary of terms
In This Guide:
- Arrangement fees
- Bank of England base rate
- Buy to let mortgage
- Credit rating
- Fixed rate mortgage
- Flexible mortgage
- Interest-only mortgage
- Loan-to-value (LTV)
- London interbank offered rate (libor)
- Mortgage lender
- Mortgage term
- Early repayment charges
- Repayment mortgage
- Residential mortgage
- Standard variable rate
- Tracker mortgage
- Valuation fee
- Variable rate mortgage
General administrative/booking fees charged by the mortgage lender to actually set up and secure your loan.
Bank of England base rate
This is the rate at which the banks themselves borrow money. It is essentially the cost of money at the time as set by the state. All interest rates offered by mortgage providers will reflect the base rate to varying degrees.
Buy to let mortgage
A buy to let mortgage is a loan designed specifically for landlords to purchase a property they wish to rent out. These mortgages are generally interest only, with monthly payments coming out of the rental income received and the rest of the mortgage being paid off when the property is eventually sold.
This is the amount of money you are actually borrowing. This is as opposed to interest.
Your credit rating is essentially a profile of your previous dealings with credit that allows a lender to see how much of a risky investment you may be. Things that affect your credit rating will be how promptly you repay debts, as well as how many loans or credit cards you have taken out or used throughout your life. A bad credit rating will make it harder for you to get a mortgage with good interest rates, and vice versa.
This is the amount you have to pay up front in order to be able to take out a mortgage. Generally, it amounts to around 25% of the total value of the property, with the mortgage itself making up the remaining portion.
Equity is the share or portion of the property that you actually own, as opposed to the share that you borrow as part of your mortgage. This can go up either as your property increases in value or as you pay off more and more of your mortgage.
Fixed rate mortgage
A fixed rate mortgage is one with an interest rate that stays the same for a set term of either two, three, four, five or ten years. With loans like this, you can budget well into the future and you’ll be safe from rising interest rates. However should rates fall, you’ll end up paying over the odds so they are always something of a gamble.
With a flexible mortgage, you’ll be able to underpay, overpay and in some cases not pay at all each month without incurring any extra charges.
This is essentially the cost of the mortgage – it is the amount that is added to what you borrow (i.e. the capital) each month until the entire loan is paid off.
An interest-only mortgage is one where the monthly repayments consist solely of the interest charged and do not contribute to reducing the capital borrowed, which is paid off in full at the end of the term. These are different to repayment mortgages. The lender must agree to the repayment vehicle whilst the mortgage is being arranged.
If you take out a mortgage on a house worth £200,000 and can afford a deposit of £20,000, then you only need to borrow £180,000, giving you an LTV of 90%.
London interbank offered rate (libor)
A mortgage is a loan taken out or secured against a property.
A bank, building society or other financial institution that will offer mortgages.
This is the length the mortgage agreement; the amount of time you have to pay the loan off.
Early repayment charges
A repayment mortgage is one where the monthly repayments consist of a combination of a portion of the capital owed and the interest charged. These are different to interest-only mortgages.
Standard variable rate
The standard variable rate (SVR) is the basic representative rate at which a lender will charge interest on variable rate mortgages. Each lender’s SVR will be different and will fluctuate according to a variety of criteria.
A tracker mortgage is one where the interest rate directly tracks the Bank of England base rate, staying consistently at a set percentage above it – usually between 0.5% and 2%.
This is the fee charged by the lender for the valuation of the property to be used as security for the mortgage.