We know that the property finance and mortgage market can be overwhelming, especially when you are new to property finance.
We have created this glossary to help explain some of the key terminology that you may see being used when looking into the property market.
Additional fees to loan
Mortgage deals may include additional product fees, normally called arrangement fees, which can either be paid upfront or added onto the total loan amount to be repaid. If a borrower chooses to add this onto their loan, monthly payments will be higher.
Adjustable Rate Mortgages (ARM)
A home loan whereby the interest rate is fixed for an initial period and then changes over time. The initial interest rate is typically lower than that of a fixed-rate mortgage, however once the initial period ends, the interest rate can either go up or down.
Annual Percentage Rate of Charge (APRC)
This shows a breakdown of the total cost of a mortgage, including fees over the entire term. It was introduced by the Financial Conduct Authority (FCA) in 2016 to give borrowers a more realistic idea of the total mortgage cost across the whole of the term.
Arrears
When a borrower misses a payment on their mortgage, they have gone into ‘arrears’, meaning they owe money.
Borrowers should try to avoid going into arrears as much as possible as this may impact their reliability when it comes to securing future finance.
Automated Valuation Model (AVM)
This is a digital tool used by some lenders to calculate the value of properties. It combines mathematics and statistics with databases of existing properties and recent transactions. AVMs can be utilised when a surveyor may not be able to attend.
In some cases, it may be more suitable to use an AVM rather than a full physical survey in order to save time.
Bankruptcy Search
Conveyancers and solicitors may conduct a search on whether the seller or buyer has been declared bankrupt.
Base Rate
The interest rate set by the Bank of England (BoE). This is used as the benchmark for lender’s Standard Variable Rate (SVR, see below), as it’s usually higher than the BoE’s base rate and is often adjusted in reference to it. The base rate can change monthly and directly impacts lending rates offered across the mortgage and property industry.
Bridging Finance
A short-term loan with a term which usually lasts between 12-18 months. It is a flexible loan meaning it can be used for a variety of purposes revolving around the property market (but can also be used for numerous business purposes), including securing an auction purchase, refinancing from a mortgage product, or to renovate properties which are not suitable for sale or traditional mortgage funding.
People often reference the term ‘bridge the gap’ when discussing bridging loans, as they provide a short-term solution and fill in traditional finance options gaps temporarily, allowing the borrower to find a longer-term solution.
Find out more about what a bridging loan can be used for, click here.
Buy-to-Let (BTL)
A rental property which is bought by a landlord/ property investor and is not used as a residentially home by the borrower but is to be ‘let out’ or rented to a tenant. The Landlord is the owner of the property and responsible for the mortgage payments being made.
Capital Repayment
This refers to the mortgage payments made by borrowers back to lenders on a monthly basis. This includes the monthly payment as well as any interest (if applicable).
Completion Fee
This is a cost which occurs once mortgage funds are transferred to either the borrower or their solicitor.
Consent to Let (CTL)
This is something where a residential property owner can get approval from with their lender and refers to when the owner wants to let their property out for a short period of time, for instance, they may be out of the UK for a period of time and let the property to a third party.
Conveyancer
This is a licensed individual (or entity) who represents a person during the purchase of property process. Their duties include handling legal documentation and will advise the appropriate land registry and transferring ownership of property.
Credit Rating
A profile of a person’s borrowing and repayment habits, which helps lenders assess their credit reliability. They will look at how promptly a borrower repays debts and how much credit the borrower has taken out throughout their life.
Having a low credit rating can make it difficult for borrowers to secure mortgages with lower interest rates and can see loan applications declined.
Development Finance
A type of short-term finance with a term usually ranging from 18-24 months, specifically designed for property developers to fund residential and commercial development projects. The finance can be used for build costs, land and raw materials and commodities.
The projects involved can range from new builds to conversions and refurbishments.
Deposit
This is the initial down payment towards securing finance for the property. This down payment is used as security to support a mortgage application and is usually a percentage (often a minimum of 5-10% for first-time buyers) of the total value of the property.
For example, if a property was worth £150,000, a borrower could pay a deposit of 10% worth £15,000. The term ‘Loan-to-Value (LTV)’ (see below) is the total amount of the mortgage as a percentage, in this example the lender would offer 90% LTV, a value of £135,000.
Drawdown
This s when the conditions of a loan are compiled with the mortgage.
Early Repayment Charge (ERC)
This is a charge which a borrower may incur if they decide to pay off their mortgage agreement early or overpay more than what the lender allows them to pay.
This is done so that the lender can make up for any lost interest which they would have made over the course of the term.
Energy Performance Certificate (EPC)
This is a document which determines the energy performance rating of a property.
Currently all buy-to-let tenancies are required to have an EPC rating of ‘E’ or above, however this is set to change.
It is proposed that from 2025 new tenancies will be required to have an energy efficiency rating of C or higher, with existing tenancies following suit in 2028. To find out more on the upcoming EPC legislation changes, visit the HMRC website, here.
Equity
The value of an individual’s ownership of a particular property, which is calculated through the current market value of a property minus any remaining mortgage payments.
The value can change over time due to changes on the property and the more the mortgage debt decreases through monthly repayments from the borrower.
Existing Borrower Transfer (EBT)
A process whereby a customer transfers to another mortgage product with the same provider, often called a 'Product Transfer' (PT). This is not to be confused with a ‘remortgage’ which is when a borrower is taking out a new mortgage with a provider different to the one they are already in a deal with.
Fixed Rate Mortgage
A fixed rate mortgage is a mortgage deal whereby the interest rate remains the same throughout the term of a mortgage deal. This can be a great option for borrowers who want to keep paying the same amount monthly, rather than other interest rate types where the rate can fluctuate.
Before deciding on what type of interest rates to go for, borrowers should seek financial advice from an expert to assess what is most suitable for their situation.
Freehold
Having a freehold means having the ownership of the building and land which it stands on, outright.
Green Mortgage
A type of mortgage which can be sometimes offered by banks or lenders, offering a homebuyer favourable terms, given they can prove that the property which they are securing a mortgage on meets specific environmental standards (this can include the property meeting sustainability ratings, or they are committed to renovating the property to improve its environmentally-friendly impact). EPC rating plays a large part in this assessment (see Energy Performance Certificate above for more details).
Initial Period
This is an initial period during a mortgage term before the rate switches to a reversionary rate, like a Standard Variable Rate (SVR, see below).
Interest Only Mortgages
These are mortgages whereby the borrower is only required to repay the monthly interest, and then can pay off the remaining amount of the mortgage at the end of the term.
In order to secure an interest only mortgage, the borrower may be asked to map out a repayment strategy to the lender (usually pension endowments, sale of property, inheritance, refinancing, and other sources of income).
With an interest only mortgage, the initial agreed mortgage amount will remain the same throughout the term of the mortgage.
Interest Rate
A percentage of total amount which an individual must pay the lender for borrowing money. Interest rate can depend on various factors like a borrower’s credit score, the mortgage type and the current market conditions.
Landlord
A landlord is the term used for a property investor who rents out or leases their property to another person in exchange for rent payments. The person who rents from a landlord is referred to as a ‘tenant’.
Leasehold
Leaseholders have ownership to a property, but not the land in which it is built on. Having a leasehold permits someone to occupy the property, however, once the ownership passes over to the 'freeholder' once the lease expires.
Loan Size
A lender will dictate the minimum and maximum loan amount which they lend to a borrower. This is determined by the type of mortgage a borrower wishes to secure. The loan size will also be determined by various circumstances such as the borrower’s employment status, household income, credit rating and more.
Loan to Cost (LTC)
A ratio used to compare the amount of a loan which will be used to finance a property project against the cost to build the project.
For example, if a project will cost £1,000,000 and the property investor borrowed £650,000 the LTC ratio would be 65%.
Loan to Income (LTGDV)
A ratio which calculates the difference between the amount of debt financing that will be used to fund a property development, versus the total estimated value pf the property development once completed.
Loan to Income (LTI)
This is a ratio whereby the bank takes the borrower’s household income and multiplies it by a certain amount to work out exactly how much they will lend. A common multiple that is used is 4.5 although this may vary across different lenders.
If someone earned £25,000 annually and the lender offered a 4.5 loan to income multiple, they would lend the borrower £112,500.
Loan to Value (LTV)
The size of the total mortgage amount as a percentage of the value of the property which a borrower wishes to secure it on.
For example, if the purchase price of a property was £100,000, and the borrower secured a mortgage of 90% LTV, they would have to pay a deposit of £10,000 and the £90,000 would be provided by the lender.
Mortgage Equity
This is the difference between the value of the property and how much the borrower still owes on their mortgage. For example, if the property was worth £250,000 and the borrower made a down payment of £17,500, the mortgage equity would be £232,500.
Mortgage Term
The total length of time a borrower has left remaining to get the mortgage paid back in full. Usually, this is 20 to 30 years, but this can vary depending on the type of mortgage and the requirements needed from a mortgage.
Outstanding Balance
This is the term used when describing any remaining amount left on a mortgage, including any repayable interest and fees to redeem the loan. The outstanding balance will get smaller as the borrower continues to make monthly repayments.
The borrower should aim to have no more ‘outstanding balance’ remaining before the end of the mortgage term.
Overpayment Allowance
This is an allowance which allows the borrower to pay off their mortgage before incurring any Early Repayment Charges (ERC). In every 12-month period, the borrower will have an overpayment allowance, and this may vary depending on the mortgage deal they have; therefore, it is important that they ask the lender.
Refinancing
Refinancing is the process where a borrower takes their existing mortgage agreement and revises the terms with their lender. The mortgage agreement is repackaged, either to extend the payment deadline or to change the interest rate initially agreed.
Redemption
This is the term used when a borrower has made a full repayment of their mortgage debt.
Remortgaging
The process in which a borrower switches their mortgage from one lender to another within the period in which the existing mortgage is due to expire.
This should not be confused with an existing borrower transfer or refinancing, whereby the borrower would get a new deal under the same lender.
Repayment Vehicle
A term used to describe a mortgage repayment plan (can also be known as a repayment strategy) for interest-only mortgages. Some examples include pensions, sale of property, and more.
Second Charge Mortgage
Can sometimes be referred to as a second mortgage or secured loan. This is a mortgage which is secured by borrowers who already have an existing mortgage, and do not want to get out of their existing deal.
This is a financial product which can be used to get further equity, using the security of their existing property as leverage.
Stamp Duty Tax
A type of tax which is imposed when land or property is purchased in England, Wales, and Northern Ireland, when the value of a property exceeds a certain threshold.
Stamp duty must be paid on residential properties exceeding the value £125,000 (for non-residential properties the threshold is £150,000).
Standard Variable Rate (SVR)
This is the default interest rate that a borrower moves onto once the initial period of their mortgage ends (for example, a borrower will move onto a lenders standard variable rate after their fixed rate or tracker rate finishes).
Surveyor
A surveyor is an individual who provides an examination of a property, both inside and outside to assess the properties structural integrity and can help developers and valuers with the valuation of a property.
They will highlight any defects or potential problems to do with the property.
Tariff of Charges
A document which shows all of a lender’s fees and charges.
Tracker Mortgage
A tracker mortgage is a form of variable rate mortgage which tracks and changes in accordance with the Bank of England’s base rate.
This means when the base rate set by Bank of England changes, a tracker mortgage will also change (the rate could change up to eight times a year).
Underwriting
The process when a lender assesses the risk of a case to see if they are comfortable with lending.
An underwriter will work with many parties who are working on a case and will look at a borrower’s affordability, credit history, the property and eligibility (which is subject to the lender’s criteria).
Underwriters have the authority to decline a mortgage application if certain criteria are not met.
Unencumbered Property
A term used for property which has no mortgage secured on it (mortgage-free), thus being free of any loans, charges, and restrictions. This occurs usually when someone has either paid off their entire mortgage or has purchased a property outright with no loan/mortgage used to acquire it.