The Mortgage Maze

Most buyers need a mortage to enable them to purchase property. In  recent years lenders have expanded the type of products they offer in a bewildering way. To help our clients at least understand the jargon we set out below our own glossary explaining the terminology:

  • Annual percentage rate (APR)
    The actual interest rate your lender charges after taking into account the mortgage headline rate and all association costs during the term of the deal.   All lenders must quote an "overall cost for comparison" APR, so you can judge one lender's deal against another.
     
  • Base Rate
    The base rate of interest is set every month by nine members of the Bank of England's Monetary Policy Committee (MPC).  Every residential mortgage in the UK is linked to this rate, either directly or indirectly.    Borrowers with variable-rate mortgages will typically see their monthly repayment rise (or fall) in line with base rate changes.  Existing fixed-rate mortgages will be unaffected but the cost of the new fixed-rate deals would change.
     
  • Buy-to-let
    A mortgage that helps people become private landlords by lending money to buy properties to let out to tenants.

    The key benefit is that lenders take into account your likely rental income when deciding how much you can borrow.   Some blame the buy-to-let system for inflating property prices and knocking first-time buyers off the ladder.
     
  • Capital-repayment mortgage
    The most popular type of deal.  You repay the capital borrowed and the interest charged for a set term, typically 25 years.  During the early years, most of the monthly payments go towards covering the interest.   Only later in the term do you pay off any significant element of capital.
     
  • Capped-rate mortgage
    These deals appear to offer the best of both worlds (compare with fixed-rate and tracker below).  If interest rates rise your mortgage cannot go above a certain level, called the "cap", but if they fall, your mortgage rate can also go down.  Unfortunately capped rates are poorly priced and therefore rarely used.
     
  • Cashback deal
    Your lender pays you an immediate lump sum of several thousand pounds when you take out your mortgage, these are popular with first-time buyers.  Cashback deals help them meet the cost of setting up home but, inevitably, you pay a higher interest rate.

 

  • Current-account mortgage
    This mortgage combines your home loan with your current account, savings, credit card and  any personal loans. Every time you pay money into your account whether salary, savings or a bonus, you immediately cut your mortgage debt and monthly interest repayment.
     

  • Discounted-rate mortgage
    This gives you a discount on the lender's standard variable rate (SVR) for a set term, typically two or three years, with penalties for switching lender in that time. After the discount is finished, you automatically switch to the lender's SVR.
     

  • Fixed-rate mortgage
    Those worried that base rate rises could make repayments too high can protect themselves with a fixed-rate mortgage. Rates are typically fixed for two, three or five years but could look expensive if the base rate fell.
     
  • Flexible mortgage
    Instead of repaying the same amount each month, flexible mortgages allow you to make overpayments or underpayments, as your financial circumstances change.  You pay slightly more for the privilege.  Many mortgages offer limited "flexible features" say, the freedom to overpay a maximum 10 per cent of your mortgage each year.
     
  • Income multiples
    The amount a lender will let you borrow, expressed as a "multiple" of your income.  Income multiples vary but typically allow single people to borrow 3.25 times their income and couples  2.5 times their joint income.  Lenders are steadily moving towards assessing applicants "affordability" your spending and other loan repayments as well as income.
     
  • Interest-only mortgages
    Unlike a capital repayment mortgage your monthly payments cover only the interest on your loan.  You can clear the capital by investing in an investment vehicle such as an ISA or pay off chunks  using employment bonuses and commission.  To cut initial  repayments, some first-time buyers take out an interest-only loan for the first two years, then  switch to capital repayment.
     
  • Loan-to-value (LTV)
    The amount of mortgage expressed as a percentage of the property's value.  If your home is valued at £200,000.00 and the mortgage is £150,000.00, the LTV is 25 per cent.
     
  • Higher lending charge (HLC)
    If you are borrowing a high proportion of the property's value, typically more than 90 per cent, some lenders will slap on an HLC, previously known as a mortgage indemnity guarantee (MIG).

    This protects the lender from any losses if you default on repayments and it is forced to repossess but, amazingly, you foot the bill, which can be thousand of pounds.

    Thankfully HLC's are now waived by plenty of lenders, including C&G, the Co-operative Bank, Intelligent Finance. Nationwide, Standard Life Bank and Woolwich.
     

  • Portable mortgage
    A portable mortgage can be transferred penalty free to you new property if you move home during the period of your initial discounted or fixed rate - a vital factor if you plan to move house again soon.  Should you want to increase your mortgage, you may be able to do so, borrowing the extra money at your present rate.
     

  • Self-certification mortgage
    These allow the self-employed, freelances and contract workers with variable salaries to take out a mortgage without offering firm proof of income, such as pay-slips.
     

  • Shared-equity mortgage
    This involves buying a majority share in your home, with a  third party such as the Government acting as your mortgage lender and buying the remainder.  If you sell the house later, they get a share of the proceeds.

    Government shared-equity schemes have targeted key workers such as teachers, nurses and police officers. Mortgage lender Advantage offers a private shared-equity mortgage called Flexishare.
     

  • Standard variable rate (SVR)
    Once your fixed or discounted initial rate is over you automatically shift on to the  lender's SVR.

    Millions of borrowers pay their lender's SVR month after month, even though these rates can be much higher than the best deals on the market.
     

  • Sub-prime mortgage
    Also known as "adverse credit" mortgages, they allow borrowers with past money troubles, such as payment arrears or County Court Judgement, to take out a mortgage but at a higher interest rate.
     
  • Tracker mortgage
    This loan guarantees to rise and fall in line with changes in the Bank of England base rate, often for the terms of the mortgage.
     

  • 100 per cent mortgage
    A mortgage for the full value of the property. Useful for buyers who don't have a deposit, 100 per cent mortgages cost slightly more because lenders view you as a higher-risk borrower and you could quickly plunge into negative equity if prices drop.

 

A word of warning - Unwelcome bills and fees that borrowers should not forget.

  • Arrangement fee
    A one-off payment charged when  taking out a new mortgage.  Fees range from £250.00 to £1,500.00 depending on the deal.   Those with larger mortgages might find it worth paying a higher fee in return for a low interest rate.
     
  • Early repayment charge (ERC)
    If you fully repay your mortgage during the term of a discounted, fixed or capped-rate deal, or switch to another lender, you will probably be charged on ERC.   Watch out for "overhanging" penalties, which can last several years after the initial rate has expired.
     
  • Exit fee
    A one-off charge imposed on borrowers when they switch to a new mortgage lender.  Exit fees vary.  Alliance & Leicester is one of the most expensive, charging £295.00.
     
  • Mortgage payment protection Insurance (MPPI)
    Many lenders will try to persuade you to take out MPPI to cover your mortgage repayment if you suffer an accident, fall ill or lose your job.  Sometimes called accident, sickness and unemployment  (ASU) cover.  Expensive and difficult to claim on, but profitable to sell.

 

16th December 2018

Sarginsons Law