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Jargon Buster

Glossary of mortgage terms

A plain English guide to mortgage jargon

Glossary of terms

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

These definitions are those commonly used within the lending industry. Some terms may have different meanings to other institutions.

As there are many expressions prefixed with the word mortgage, mortgage term for instance they are normally listed in this glossary without the prefix.

A

accident, sickness and unemployment insurance (ASU)

- Insurance cover arranged by the borrower to protect against inability to meet mortgage payments.

This cover should be more accurately described as accident, sickness and redundancy insurance as unemployment cover is generally seriously restricted to cover only events that are entirely beyond the control of the insured person. Typical exclusions include dismissal following professional misconduct and any act of voluntary redundancy. The accident and sickness cover will also be subject to major restrictions such as any act of self-injury or any injury related to the use of alcohol or drugs.

accountant

- a chartered or certified accountant.

accountant's letter

- a letter of income confirmation provided by an accountant (normally chartered or certified).

Some lenders may accept an accountant's letter in lieu of audited accounts. Such confirmation is more likely to be accepted if the loan-to-value ratio is below a certain level and it is normally used only for the self employed or controlling directors.

added to loan

- a reference to the additional costs associated with arranging a mortgage such as High Lending Charge or arrangement fees, which can be incorporated into the amount you borrow.

Fees that may be added vary by lender. Care should be exercised when the sum of the loan and any costs added to the loan may cause the total advance to exceed a given loan-to-value. In certain cases additional conditions may apply.

additional security

- When lending exceeds a certain loan-to-value lenders may require additional security.

The simplest form of additional security is a Higher Lending Charge. Alternatively lenders may accept other security such as cash or shares being deposited with them or a charge over another property.

administration charge

- see also valuation fee. Some lenders will reserve a proportion of the fee charged for the valuation to cover their own costs. This element of the valuation fee may not be refunded should an application not proceed even if the valuation has not taken place.

agricultural tie

- restriction placed on certain rural properties which requires that the land adjoining a residence be actively used for farming.

annual percentage rate (APR)

- a definition intended to identify the true cost of borrowing and to provide the consumer with a method of comparing the true costs of different types of loan.

Mortgage loans were originally excluded from a requirement to quote an APR and was designed more to reflect the cost of different types of hire-purchase contracts which, at the time the legislation was drafted, were frequently quoted on flat and fixed basis giving headline rates which were often half the APR. It is a legal requirement that a true APR figure be provided with any loan illustration.

annuity mortgage

- alternative term for a capital & interest repayment mortgage

applicant

- anyone applying for a mortgage

applicant type

- will indicate whether the applicant is a first time buyer or self-employed, for example.

arrangement fee

- fee charged by a lender for setting up the loan. Normally payable upon completion but may sometimes be added to the loan

arrears

- mortgage payments that have not been made by the due date in accordance with the mortgage deed

B

bank

- an institution authorised by the Bank of England under the Banking Act 1987

base rate

- introduced by banks following the abolition of Minimum Lending Rate by Geoffrey Howe, the then Chancellor of the Exchequer, in 1981.

Commonly used to refer to the mortgage lender's standard variable rate. The lenders SVR, although based on the base rate, is usually higher.

basic annual income

- the amount of money earned that is guaranteed regardless of the individual or the company performance.

See other income.

bankrupt

- an individual who has been declared bankrupt in accordance with the Insolvency Act.

A supervisor is appointed to receive a bankrupt person's earnings. The bankrupt is permitted to receive an allowance on which to live with the balance being reserved for the benefit of his or her creditors.

A bankrupt person is not permitted to hold a bank account or apply for credit in excess of 250 without the court's permission.

bankruptcy:discharge from

- After a period, normally three years, the debtor is discharged from bankruptcy, his debt being treated as paid. A discharged bankrupt is likely, however, to experience severe difficulties in borrowing money. Credit reference agencies will normally identify former bankrupts for 15 years after their discharge.

booking fee

- fee charged by a lender to secure mortgage funds, payable at the time the application is submitted. Normally applies to special offer loans, such as fixed or capped rates.

broker fee

- fee charged by an intermediary to the applicant for negotiating a loan.

Mortgages are now regulated by the FSA and fees no longer fall within the remit of the Consumer Credit Act.

building society

- an institution regulated by the Building Societies Act.

Building Societies are mutual organisations owned by their members and are restricted as to the amount of their funds which they are allowed to raise from the money markets.

In addition, the Building Societies Commission lays down restrictions on their lending criteria. Thus building societies are less able to help with certain categories of loans than are banks.

buildings insurance

- insurance covering the structure of the building which you must have.

Where the property is leasehold the buildings insurance will normally be arranged by the freeholder and the cost charged on to the leaseholder within the service charges payable.

As a general rule of thumb any item which cannot be taken away by the owner is covered by the buildings insurance, anything which can be removed should be covered by the contents insurance. This is only a guideline and any doubts should be raised with insurers as this definition can prove problematic in some instances, such as fitted carpets.

C

cap and collar

- see capped rate

capital

- the principal part of a loan, i.e. the original amount borrowed.

capital and interest

- otherwise known as a repayment loan. The borrower pays an amount each month to cover the amount borrowed or principal and the interest charged on that.

capital raising

- When you remortgage, (change your mortgage but stay in the same property) your new loan pays off the existing/outstanding mortgage but MAY leave a surplus at the disposal of the borrower.

If the surplus is to be used for home improvements (i.e. increase the value of the property) then some lenders do not regard this as capital raising. See also remortgage.

capped rates

- the mortgage interest rate will not exceed a specified value during a certain period of time, but it will fluctuate up and down below that level.

Some capped products will have a ceiling and a floor between which the rate payable may move, such loans may be known as cap and collar mortgages.

cash back

- an incentive payment made by the lender to the borrower upon completion of a mortgage.

CCA

Consumer Credit Act (CCA) - the principal legislation covering the provision of loans to individuals. First charge mortgages are now regulated by the FSA and no longer fall within the remit of the Consumer Credit Act.

A regulated loan is a loan not exceeding 15,000 and would hence not include a mortgage loan over 15,000. For this reason many lenders set a minimum loan of 15,001 to ensure it is not treated as a regulated loan.

CCJ

County Court Judgment - (CCJ) - judgment for debt in the county court. If a judgment is settled in full within 30 days of the date of the judgment it will not appear in the credit register. In the event of a payment after that date the judgment will appear in the register but will be shown as being satisfied.

If a judgment has not been settled and is outstanding this is likely to lead to a lender's refusing a mortgage application. In fact applications are still likely to be declined if satisfied judgments are shown. A small number of lenders will offer loans when a judgment has been satisfied if the amount involved is small.

centralised lender

- generic term applied to mortgage lenders, other than building societies and high street banks, who generally do not have retail outlets and operate wholly from a head office location.

clearing bank

- see bank.

CML

- The Council of Mortgage Lenders publishes various booklets on buying property to protect the borrowers.

co-ownership

- shared ownership - method of property purchase in partnership with a Housing Association. The borrower purchases part of the property and rents the remainder from the Housing Association.

Also known as co-ownership, this arrangement is designed for people who could not otherwise become homeowners.

Under most arrangements, the minimum purchase amount is 25% of the property value with the remainder available to be purchased in blocks of 25%.

commercial mortgage

- a loan granted for a commercial purpose, normally secured against commercial property, although residential property may be used. Usually carries a higher rate of interest than a residential mortgage because the lender perceives a higher degree of risk.

completion

- the point at which the legal formalities of a property purchase or mortgage are finalised and the funds are drawn down from the lender, normally into the solicitor's account.

In the case of a purchase, the purchasers should not be allowed to take occupation until after completion has taken place.

conditional insurance

- an insurance policy that has to be taken out as a condition of obtaining a loan. Normally conditional insurances must be taken out via the lender's agency so that they benefit from any resultant commission.

contents insurance

- the insurance of property within your home i.e. furniture, clothing, personal possessions etc. as distinct from the buildings insurance.

Whilst lenders will be keen to offer contents insurance to borrowers, it is not essential that you should have it. Cover is normally provided for insurance of fire, a full range of perils (e.g. water damage) and theft. Some policies offer a wider, all-risks wording.

Contents policies normally cover goods within the home, although most will extend to include small amounts of cover outside the home, possibly upon payment of an additional premium.

contract work

- In order to limit their liabilities in respect of redundancy payments and to have greater control over staffing costs many employers now offer employment under fixed-term contracts without the right to continued employment at the end of the term.

converted flat

- a self contained flat that has been converted out of part of a larger property.

conveyancing fee

- fee charge by a solicitor or licensed conveyancer for arranging the necessary legal work in transferring the ownership of a property. The total cost of the legal work also includes profit cost, stamp duty, land registry fees and disbursements.

credit check

- enquiry made on the credit history of an applicant, normally by reference to one of the major credit agencies such as Equifax, CCN or Westcott Data.

credit scoring

- method of loan assessment carried out by scoring the various answers given on a loan application.

Almost all loan applications are credit scored and as a result it becomes essential for all questions on any application to be fully completed Missing answers on an application will normally result in the maximum negative score being allocated to that question.

criteria

- the lender's standard terms and conditions for acceptable loan applications. These vary from mortgage to mortgage.

current service (employment)

- length of time that you have spent with your current employer.

D

debt consolidation

- replacing a number of existing loans with a single loan from a new lender.

This can result in a reduction in your monthly payments by spreading the larger loan over a longer period and possibly, by reducing the overall interest rate. The borrower should realise that they could end up paying more overall at the end of the term.

deducted from loan

- expression used by lenders to refer to certain fees, such as the arrangement fee, that will be deducted from the amount borrowed on completion. It effectively means that you have paid the fee, as opposed to adding it to the loan.

deeds release fee

- fee charged by a lender for releasing the deeds of the mortgaged property and returning them to the owner or his solicitor, usually when the mortgage has been repaid.

deferred interest

- an old type of loan whereby some or all of the interest owed by the borrower is not collected immediately but is added to the amount outstanding. As a result the borrower may end up owing considerably more than originally borrowed.

deposit

- money paid upon exchange of contracts.

Also, the borrowers equity in a property may be referred to as the deposit.

despatch fee

- see deeds release fee.

E

early repayment charge

- amount charged by a lender for withdrawing from a mortgage before a given date specified in the mortgage conditions.

Lenders will normally impose such a charge on a fixed or discounted loan.

earned income

- income that is earned from an employment or self employment, as distinct from investment income from property or securities.

employed

- normally refers to a person (the employee) who has an open-ended contract of employment and has income tax and national insurance contributions deducted from their salary.

employer's reference

- a written statement from an employer confirming the borrower's employment, giving details of his or her salary and length of service; an essential requirement for assessing an employee's ability to repayment the mortgage.

employment status

- the basis of an individual's employment: i.e. employed, self-employed, controlling director or not in employment.

endowment

- a life assurance policy into which you pay monthly premiums.

The proceeds of an endowment policy will be free from all taxes provided the policy has conformed to the qualifying rules. The insurance fund does, however, pay tax on the profits it achieves whilst the fund is growing.

See also: with profit, unit linked, unitised with profits.

equity

- the stake that you own in your home, i.e. the property value less the mortgage loan outstanding.

equity appreciation

- increase in the equity you have in your home.

exclusive products

- whilst such mortgage products are funded and administered by a particular mortgage lender, they are available only from certain mortgage brokers or other particular distribution channels.

existing liabilities

- your debts, other than an existing mortgage such as hire purchase, personal loans, school fees etc.

F

fee

- amount charged by a lender, broker or other intermediary for arranging a mortgage or property purchase. See sub menu.

feudal

- equivalent of a freehold under Scottish law.

first charge

- normal legal charge used to secure the main mortgage. A lender with a first legal charge over a property has a first call on any funds available from the sale of the property. See also: second charge.

first time buyer

- person wishing to purchase a property for the first time. Some lenders offer preferential lending terms to first time buyers. A borrower who has owned a property before but has sold this prior to buying again may be offered first time buyer terms by some lenders. However, this will vary on a lender to lender basis.

fixed rates

- a loan where the initial payments are based on a certain interest rate for a stated period and the rate payable will not change during that period regardless of changes in the lender's standard variable rate.

flat over shop

- residential dwelling situated above retail premises. Lenders are likely to take a similar approach to flats above any form of commercial premises. Some lenders will not lend on this type of security as it is seen as having limited appeal to prospective purchasers and may therefore have a lower value compared to an otherwise similar property in a wholly residential block. Any property that is located above commercial property is found generally to take longer to resell than properties which do not have any commercial element. A flat above a take-away restaurant is going to be more difficult to arrange a loan on than a flat above a book shop.

flats

- see sub menu

flexi

- an abbreviation for flexible. Flexible mortgages are offered by some lenders. A flexible mortgage allows you to make overpayments in order to repay the mortgage early or save for a special event.

freehold

- land or property which is owned outright, as opposed to leasehold where the owner has the right to occupy the land or property for a given period of years only. See also: feuhold.

freehold flat

- a flat which has the freehold of the land on which it is built. Such properties are notoriously difficult to get a mortgage on because, if they do not benefit from some sort of legal contract from the owner of any supporting or adjacent property, major difficulties can be experienced in the event of anything affecting them structurally (e.g. subsidence.) This should not be confused with a situation when one or more leaseholders in a block of flats acquires the freehold interest in the property and it is sold with the benefit of a share in the freehold. In this situation the individual leases on the flats should still be left in place in order to provide the necessary legal agreements, however the leaseholders may grant themselves extensions on the lease as they wish.

FTB

- FTB see First Time Buyer

full status

- a loan where complete checks are made on the borrower's credit history and income.

G

general conditions

- the set of standard conditions that apply to a mortgage, normally provided to the borrower in booklet form at the time the mortgage offer is given.

general insurance

- insurance of goods (other than marine insurance).

Insurance companies identify different types of insurance policy as falling into different branches. For instance the Life branch covers the insurance of people and is generally known as life assurance. The insurance of property, rather than businesses, is known as personal lines.

guaranteed earned income

- any income received on top of your basic salary that is not part of your normal basic pay under the terms and conditions of your employment but which you are guaranteed to receive.

guarantor

- person who agrees to guarantee that a loan will be paid.

The guarantor is therefore fully liable for the repayment of the borrowed amount should the borrower default.

H

higher lending charge

-An insurance premium which insures the lender against any loss of money if you default on your loan or get repossessed. This usually applies only if you borrow more than 75 per cent of the price asked for the property you are buying. Even though you have to pay for the insurance premium, you must remember that you are not covered by the insurance, the lender is. formerly known as indemnity guarantee premium.

holiday home

- a property which will not be your main address or place of residence.

home improvements

- works carried out to improve your home. Mortgage interest relief used to be given on loans for home improvements in the same way as for house purchase. Loans taken out before its abolition still receive this relief but this is lost if you move lender.

homebuyer's valuation fee

- the fee paid for a fuller inspection of the property you are thinking of buying which is more thorough than the normal lender's valuation. This is frequently referred to as an Option 2 valuation fee.

house or flat buyer's report

- a more thorough survey than the simple valuation carried out on the property by the lender (although you still have to pay for it). If your lender does not offer this as an alternative to the basic valuation, you can negotiate with the surveyor carrying out the valuation for the fuller inspection and this may cost you less than a separate inspection.

Housing Association

- a society, body of trustees or company which is established for the purposes of providing, building, improving or managing, or facilitating, or encouraging the construction or improvement of, housing accommodation. It does not trade for profit. Anyone wanting help with housing puts his or her name down on the housing association list which acts in the same manner as council house lists. See shared ownership.

I

illustration

- example of the monthly cost of a mortgage and other expenses associated with the loan such as set-up costs.

incentive

- inducements such as cashbacks offered to borrowers to persuade them to take out a loan with a lender.

income

- see sub menu

Individual Saving Accounts (ISA)

- A way of holding cash deposits, life assurance policies and investments in stock and shares in a tax privileged way. ISA's are intended to build upon the experience of PEP's and TESSA's. The Government have stated that ISA's will be available for a minimum of ten years. ISA's have been available since April 1999.

individual voluntary arrangement (IVA)

- introduced under the Insolvency Act 1986 with the intention of allowing an individual to avoid bankruptcy and make maximum possible restitution to creditors. An IVA is seen as preferable to bankruptcy as the debtor can retain his tools of trade and, in the case of a professional person, continue to practice, or hold company directorships. IVAs can be set up for either a person or a company. An Insolvency Practitioner petitions the High Court for protection for a borrower debtor under an IVA. A proposal is put to the creditors of whom 75% must accept. If this is achieved, the arrangement becomes binding upon debtor and all creditors named in the agreement. If the debtor fails to meet payments under an IVA the Insolvency Practitioner is likely to petition for the individual to be made bankrupt. Whilst bankruptcy normally lasts for only three years some creditors insist that IVAs last a longer period.

initial disclosure document

- The FSA have designed the Initial Disclosure Document to provide information about firms that is easy to compare. The document should provide a clear understanding about any service being offered and enable consumers to make informed decisions as to which company and whether or not to accept their service. The Initial Disclosure Document should be provided to you from the outset of your dealings with a Mortgage Intermediary Broker or mortgage lender.

initial interest

- the payment of interest to cover the period between the date of completion and the normal date from which an interest payment is due. For example if mortgage payments are normally due on the 30th of a month and the loan completes on 14th March, the first monthly payment may be due one month from 30th March, on 30th April. Any interest due for the period from completion until 29th March will be due with the initial mortgage payment. Thus, the borrower's first mortgage payment will normally comprise one full month's payment plus the initial interest.

initial rate

- interest rate that is payable from the commencement of the loan. Many mortgage products, e.g. fixed and discount, have an initial rate of interest which will change at the end of the initial period.

insurance

- see sub menu

interest only

- interest only mortgage - loan for which only payments of interest are paid to the lender during the term of the loan. All mortgages other than capital and interest repayment loans are a form of interest only loan. Some lenders will allow loans to be set up without any specific provision to repay the capital at the end of the period this is known as a pure interest only loan.

introducer

- person who introduces a loan to a lender.

investment income

- income received from investments. This could be from rental income on investment property, dividends on equities or interest on deposits with financial institutions.

irregular earned income

- additional income over basic salary that is of an erratic nature; additional payments to which the employee may be entitled but which are not received on a regular basis.

IVA

- individual voluntary arrangement (IVA) - introduced under the Insolvency Act 1986 with the intention of allowing an individual to avoid bankruptcy and make maximum possible restitution to creditors. An IVA is seen as preferable to bankruptcy as the debtor can retain his tools of trade and, in the case of a professional person, continue to practice, or hold company directorships. IVAs can be set up for either a person or a company. An Insolvency Practitioner petitions the High Court for protection for a borrower debtor under an IVA. A proposal is put to the creditors of whom 75% must accept. If this is achieved, the arrangement becomes binding upon debtor and all creditors named in the agreement. If the debtor fails to meet payments under an IVA the Insolvency Practitioner is likely to petition for the individual to be made bankrupt. Whilst bankruptcy normally lasts for only three years some creditors insist that IVAs last a longer period.

J

joint application

- mortgage application involving more than one person as the borrower.

K

key facts illustration (KFI)

- The FSA have designed a Key Facts Illustration to ensure that consumers receive consistent illustrations, with content shown the same way, from all mortgage providers, allowing them to compare like with like. Consumers must have personalised product information, in the form of a KFI, at an early stage in the buying process, to ensure an easy comparison of different products. It also ensures consumers receive the information they need to decide whether to apply for a particular mortgage.

L

land registry

- A record of property, ownership and the mortgage is registered in a central register at HM Land Registry.

land registry fees

- fee payable to the land registry to change an entry in their records following a transaction involving registered land. This can be following a change of ownership or just a change of mortgage.

landlord's reference

- reference from the previous landlord regarding the general conduct of the tenant and whether rent has been paid promptly.

large town allowance

- additional portion of salary payable to an employee to compensate for the additional expenses incurred as a result of working in a major conurbation. In theory the payment is made to cover either increased housing or commuting costs and is normally considered as part of basic income when applying income multipliers.

leasehold

- the land on which the property is built is not owned directly by the property purchaser and is held under a lease for a fixed period.

legal charge

- the means by which lenders enforce their rights to a property - it is recorded at the land registry. There are various different types of legal charge and the type used will vary from lender to lender. Building Societies tend to use a charge for the specific amount that they have lent. Banks tend to use an all monies charge, allowing them to free equity in a property if it is owned by them. This may allow them to recover overdrafts and other loans if they have granted more than just a mortgage. A primary mortgage will normally be secured by a first charge. Building societies are allowed to lend only if they have a first charge on a property. Second or subsequent charges may be granted on a property if additional money has been borrowed against it.

legal mortgage fee

- fee charged by the solicitors acting for the lender in creating their legal charge over the property.

lender

- An organisation which offers mortgage products.

LIBOR

- London Interbank Offered Rate is the rate at which banks notionally buy and sell money to each other. It varies from day to day and is closely linked to Base Rate. The relationship of LIBOR to base rate can give an indication of the possible future direction of base rates. If LIBOR is significantly above base rate it indicates that the money market believes interest rates are about to increase. If it is significantly below, the reverse is true. The key LIBOR rate is 3 month LIBOR, however rates are also quoted for one, six and twelve month periods.

libor-linked

- A mortgage linked to libor will be charged at a given margin over the Interbank rate (typically 1 to 1.5%) and is likely to be reset quarterly. LIBOR rates tend to be more volatile than variable mortgage rates as the rate payable will change almost every quarter. They offer the customer the opportunity to pay a rate closer to the true cost of money. In a low interest rate environment they are likely to result in lower overall payments but will be more expensive in periods of higher interest rates.

life company

- a life assurance company.

life insurance

- policy payable upon the death of the insured, usually referred to as assurance.

loan

- the amount to be borrowed. First charge mortgages are now regulated by the FSA and no longer fall within the remit of the Consumer Credit Act.

loan illustration

- example of the monthly cost of a mortgage and other expenses associated with the loan such as set-up costs.

loan to value ratio

- is the ratio of the loan amount to the property valuation expressed as a percentage. E.g. if a borrower is seeking a loan of 20,000 on a property worth 40,000 it has a 50% loan to value rate. If the loan were 30,000, the LTV would be 75%. The higher the loan to value the greater the lender's perceived risk. Lenders will be more cautious in underwriting high loan to value loans. Loans above normal lending LTV ratios may require additional security.

local authority search

- a search of local authority records to confirm the status of the property. Local authority searches should reveal any proposed changes in the area, the details of the planning permission for the subject property and whether any enforcement notices have been served by the local authority.

loan authority search fee

- fee payable for the local authority search.

low cost endowment

- the most common form of endowment policy used to repay a home loan. It is a mix of full endowment and term assurance designed to provide full life cover in the event of death during the loan period. If investment returns are high enough it should also provide sufficient funds to repay the loan at the end of the term and ideally provide the borrower with a tax free cash surplus. It is not guaranteed to pay off the loan and that any shortfall will have to be made up by the borrower.

low start

- (premiums) - a premium structure for a low cost endowment or other investment policy which allows the level of premiums payable to commence at a low level and build up over a period of time (normally the first five years). The total premiums payable under a low-start arrangement will exceed those payable under a normal contribution structure to compensate for the loss of investment growth on the reduced payments in the early years.

loyalty bonus

- a concessionary bonus (usually by way of a temporary reduction in interest) payable for maintaining a satisfactory account with a lender for a period of years. Alternatively, loyalty bonuses may be offered to existing customers who return to the lender for a new mortgage. In which case the bonus may be dealt with by way of a reduction in the set-up costs of the new loan or a lump sum payable upon completion.

LTV

- loan to value ratio (LTV) - is the ratio of the loan amount to the property valuation expressed as a percentage. E.g. if a borrower is seeking a loan of 20,000 on a property worth 40,000 it has a 50% loan to value rate. If the loan were 30,000, the LTV would be 75%. The higher the loan to value the greater the lender's perceived risk. Lenders will be more cautious in underwriting high loan to value loans. Loans above normal lending LTV ratios may require additional security.

M

main residence

- the normal place of residence, see also: holiday home and second home.

maintenance payments

- money either paid or received under a court order in respect of a previous partner or child.

maisonette

- property comprising more than one separate dwelling; used to describe a flat which extends over more than one floor or a flat which, despite there being other units in the building, has its own entrance at street level.

mortgage

- loan secured by land.

mortgage deed

- legal document establishing a loan on property.

mortgage subsidy

- a payment made by an employer to subsidise the cost of interest payments on a home loan. The amount and extent of the subsidy will vary from employer to employer and these can be calculated in a variety of different ways. It is advisable to seek a specific statement from your employer on the operation of the arrangement.

mortgage term

- length of time before the mortgage loan must be repaid.

MPI

- Mortgage Payment Insurance - Insurance cover to protect your mortgage payments.

mtgs

- an abbreviation for mortgage(s)

multipliers (income)

- factor applied to a prospective borrower's income to calculate how much can be borrowed. See submenu

negative equity

- situation which occurs when the amount loaned against a property is in excess of the market value of the property.

N

net profit

- the income of a company or self employed business after making full allowance for the expenses of running the business (and, in the case of a limited company, corporation tax.) This should be the amount available to the owners of the business for their own benefit and consequently is the figure that can be used to calculate their ability to service a mortgage.

net profit, declining

- where net profit from a business decreases from one year to the next. Many lenders will not lend in this situation, as in the future the business may not provide sufficient income to cover the cost of loan repayments. Capital raising remortgages are especially avoided in this situation as the borrower may be seeking funds to shore up a failing business.

new build

- refers to new properties developed on green field sites. Can refer to a single property or whole estates.

no capital raising

- the application is for a loan to replace the existing loan without increasing the amount owing.

non contributory pension income

- pension scheme provided by an employer into which the employee makes no payments.

non status

- loan granted without making enquiries as to the borrower's income or credit history.

not in employment

- unemployed - not in employment or receiving any regular salary; not self-employed. (Could be receiving state benefits.)

O

obligatory insurance

- same as conditional insurance.

occupational pension

- pension provided by an employer. In some cases the pension payments are related to the person's salary in the final year of employment.

Office of Fair Trading (OFT)

- a non-ministerial government department, headed by the Director General of Fair Trading which aims to protect consumers by ensuring that trading practices are as fair as possible and by encouraging competition among businesses. One of the OFT's major responsibilities is the administration and enforcement of the Consumer Credit Act 1974. Any business planning to provide consumers with credit facilities, or refer them to a source of credit, or hire out goods, must first obtain a consumer credit licence from the OFT. The OFT also has consumer protection duties under the Fair Trading Act 1973, the Estate Agents Act 1979, the Control of Misleading Advertisements Regulations 1994. Monopolies and mergers are dealt with under the Fair Trading Act, and other competition issues are covered by the Restrictive Trade Practices Act 1976, the Resale Prices Act 1976, the Competition Act 1980 and the Financial Services Act 1986.

open market value

- value of a property on the basis of a willing buyer and willing seller in the open market allowing for a reasonable period for sale.

other income

- income in addition to basic annual salary or, in the case of self-employed, annual net profits. See sub menu for examples

outgoings

- existing liabilities - your debts, other than an existing mortgage such as hire purchase, personal loans, school fees etc.

outstanding discount

- for property purchased under the Right to Buy scheme at a discounted price, the value of the discount, or a portion of it, that has to be repaid to the local authority if the property is sold within a certain period of time, normally 3 years from date of purchase.

P

part & part

- a generic phrase referring to a loan, part of which is interest only (i.e. the capital never declines) with the remaining part being repaid as under capital & interest arrangement. The capital remaining at the end of the mortgage term would normally be expected to be repaid from a proceeds of a life policy or investment. See also: part endowment.

part endowment

- a mortgage that is arranged partly on an endowment basis, the balance of the loan most commonly being arranged on a capital and interest basis.

pay rate

- See: initial rate.

payment method

- means by which the mortgage capital is eventually repaid. e.g. endowment plan, tax free cash sum from pension.

payment protection insurance

- see ASU accident, sickness and unemployment insurance. and unemployment insurance.

payment schedule

- schedule of monthly payments under a loan

pension

- annuity payable on a regular basis (normally to a retired person).

pension mortgage

- an interest-only mortgage where the capital will be repaid from the tax free cash sum that can be received from the pension fund at maturity.

pension plans

- see sub menu.

period

- the length of time for which, or end date until, the initial interest rate applies.

personal equity plan

- An investment in shares, unit trusts or investment trusts where all the proceeds are currently free of income and capital gains tax. Depending on the lender, you can use PEP's to repay an interest only mortgage. The Government announced in 1997 their intention to launch Individual Saving Accounts (ISA's) from April 1999 to build upon the experience of PEP's and TESSA's. Existing PEP's were allowed to continue after April 1999 but you were not allowed to put any more money into them.

personal lines

- see general insurance.

personal pension

- Established under the Social Security Act 1986, personal pensions allow individuals to make their own provision for an income in retirement. Tax relief is allowable on the contributions at the investor's highest marginal tax rate. Investments grow free of all taxes to create a fund to be used at retirement to purchase an annuity. Up to 25% of the fund may be taken as tax free cash and the balance must be used to purchase an annuity. Alternatively, from July 1995 the balance may be used in an income withdrawal annuity arrangement.

portable

- describes a mortgage that can be transferred from one property to another. This most commonly applies to loans in the category of Treasury product.

postcode

- an alphanumeric code defined by the post office which can identify properties to a location of within a handful of dwellings. Since their introduction postcodes have been used for a number of other purposes including assessing premiums for household insurance.

postcode area

- the first one or two letters of the first part of the postcode. e.g. B for Birmingham, TW for Twickenham.

premium

- amount payable. See: term assurance.

previous lender's reference

- reference from a lender who has previously lent money to a prospective borrower regarding the conduct of the loan account.

principal

- the original amount of the loan, the capital.

product

- is a mortgage product offered by a lender.

professional

- person who is a member of a recognised profession, such as a doctor or solicitor. The definition of a professional can vary substantially from lender to lender with occupations such as banker being accepted as a profession by some but rejected by others. Many professions are disqualified from practising if they become bankrupt.

profit cost

- that part of a solicitor's bill which covers his or her own time and profit.

profit

- gross profit - profit of a company before allowing for the expenses of running the business. This is not a reliable measure of a company's ability to provide income as not all of the gross profit will be available to the owners for distribution.

net profit -net profit - the income of a company or self employed business after making full allowance for the expenses of running the business (and, in the case of a limited company, corporation tax.) This should be the amount available to the owners of the business for their own benefit and consequently is the figure that can be used to calculate their ability to service a mortgage.

profit related pay

- PRP -Introduced under the Finance Act No 2 1987, PRP schemes are sponsored by employers and allow employees to receive some of their pay (the lower of 20% of their pay or 4,000) tax free provided that payments are linked to the profitability of the employer. Rules governing PRP schemes are defined when the scheme was set up and individual scheme rules should be available to employees.

property construction

- method of construction, see sub menu

property type

- see sub menu.

property status

- see sub menu.

property occupancy

- see sub menu

purchase

- acquisition of a property.

purpose built flat

- flat designed and built as such; a self contained residential unit contained within a larger structure containing several self contained units or flats all sharing a common entrance.

Q

qualifying rules

- Inland Revenue rules which define the conditions that must be met for the proceeds of a life assurance policy to be tax free when paid.

quotation

- a detailed document itemising costs, fees etc. which will be incurred in taking out the specified loan.

R

redemption

- paying off the mortgage, either to move to another property or at the end of the mortgage term.

repayment charges

- see early repayment charge.

redundancy insurance

- known as accident, sickness and unemployment insurance - (ASU) Insurance cover arranged by the borrower to protect against inability to meet mortgage payments. This cover should more accurately be described as accident sickness and redundancy insurance as unemployment cover is generally seriously restricted to cover only events that are entirely beyond the control of the insured person. Typical exclusions include dismissal following professional misconduct and any act of voluntary redundancy. The accident and sickness cover will also be subject to major restrictions such as any act of self-injury or any injury related to the use of alcohol or drugs.

references

- see sub menu.

refinancing

- rearranging borrowings with a different lender, usually to obtain more attractive terms or to raise fresh capital.

regular earned income

- payment which is not guaranteed but is still a regular part of an employees remuneration. Lenders will normally wish to see evidence of such payments being made on a regular basis, e.g. payslips or P60s covering a period of months or years. See also: guaranteed income.

regulated loan

- loan of under 25,000 regulated under the terms of the Consumer Credit Act.

remortgage

- arranging a loan on a property in which the borrower already resides. Normally this involves redeeming an existing loan on the property. See also unencumbered.

remortgage with outstanding discount

- refers to a property that was purchased under a Right to Buy legislation, where the owner now wishes to remortgage whilst there is still an outstanding discount remaining.

rent allowance

- payment received from an employer to be used towards the cost of accommodation.

repayment

- payment made to cover interest or reduction in principal of a loan; monthly amount due to the lender

retired

- no longer working, either as an employee or on one's own account.

retirement annuity contract

- investment of a lump sum which produces a regular income for a retired person.

right to buy

- option for council tenants to purchase the property in which they reside, often at a discount proportional to the length of occupancy. See separate sub menu for more information

RTB

- option for council tenants to purchase the property in which they reside, often at a discount proportional to the length of occupancy.

S

schedule of payments

- schedule of monthly payments under a loan

sealing fee

see discharge fee.

second charge

- a legal charge that ranks behind a first charge, possibly to secure a second mortgage, or a guarantee given to secure other borrowings.

second home

- an alternative to your main residence - subject to Capital Gains Tax! See also: holiday home.

second mortgage

- a further loan on a property which ranks after the first charge mortgage.

second jobs

- sources of income other than an individual's main employment.

self-build

- a property, the construction of which is controlled by the borrower; not a finished unit. Loans on self build properties will normally be advanced in stage payments and are subject to strict limits on loan to value. A qualified architect will need to be involved and lenders will frequently look for the builder to have NHBC or Foundation 15 guarantees.

self certification

- a mortgage loan where the borrower makes a statement of his or her income and the lender makes fewer checks than normal on the accuracy of this statement.

self employed

- working on one's own account. For mortgage purposes this will include partners in unlimited liability businesses and professional practices.

semi-commercial

- a property that has at least part commercial use. A semi-commercial mortgage is a loan on security that is not entirely used for residential purposes, e.g. a shop and upper part.

shared equity

- method of property purchase in partnership with a builder (vendor) who offers an incentive for the prospective buyer by accepting, say, 95% of the purchase price to be paid on completion and the other 5% to be paid at some stated time in the future. The builder will normally register a second charge on the property until the remaining 5% has been paid. The 5% owing may be on an interest free basis or interest may accrue and be added to the debt. Unlike shared ownership, there is not normally a monthly payment commitment.

shared ownership

- method of property purchase in partnership with a Housing Association. The borrower purchases part of the property and rents the remainder from the Housing Association. Also known as co-ownership, this arrangement is designed for people who could not otherwise become homeowners. Under most arrangements, the minimum purchase amount is 25% of the property value with the remainder available to be purchased in blocks of 25%.

sitting tenant

- a person having a legal right of occupation, even if the property changes ownership, and who is able to apply to the local authority to set a fair rent. Properties with sitting tenants are generally worth at least 30% - 40% less than their open market value with vacant possession.

sole occupancy

- a property that is occupied by the borrower and his or her immediate family only. No paying tenants are in residence.

special conditions

- specific terms, usually outlined on the mortgage offer document, that apply to a particular loan offer.

special status or non-status

- unwilling or unable to provide the necessary documentary evidence of income and status.

stabilised rate

- mortgage where a notional rate is set designed to be a true reflection of the likely average rate over a period. The borrower makes payments each month based on this rate, but the rate charged to the account may vary in line with market conditions. These products are designed to protect borrowers from wildly fluctuating interest rates. Whilst highly popular in the late 1980s they became discredited when some lenders set unrealistically low notional rates resulting in borrowers' being faced with a considerable increase in the loan amount outstanding.

stamp duty

- government land tax charged as a percentage of the purchase price of a property. Charged on all property purchases over 120,000, percentage varies by price.

standard construction

- constructed of brick with a tile or slate roof. Lenders may be less inclined to provide funds on properties of non-standard construction. However, the definition is generally accepted to extend to the main mass-building techniques that have not subsequently been found to have greater potential for defects.

standard property

- a detached, semi-detached or terraced house or bungalow.

start-up business

- a new business venture without a trading record.

state benefits

- Any regular long-term payment from a Government department. e.g. State Pension, benefits for low income, children, carers, incapacity or sickness. Lenders vary greatly in their treatment of additional income and may therefore not accept the full value of this income. Provide the figure before tax is deducted.

structural survey

- the widest form of inspection that can be undertaken by a Chartered surveyor. In the case of properties with movement, lenders may require a structural engineer's report. This is a different type of survey carried out by a Chartered Building Engineer and should not be confused with a structural survey.

studio flat

- flat comprising a single habitable room, plus bathroom and possibly separate kitchen. Many lenders will not lend on these properties as they are considered more difficult to resell.

subsidy (mortgage)

- a payment made by an employer to subsidise the cost of interest payments on a home loan. The amount and extent of the subsidy will vary from employer to employer and these can be calculated in a variety of different ways. It is advisable to seek a specific statement from your employer on the operation of the arrangement.

sum assured

- the maximum amount payable under a policy of insurance. In the case of a life assurance policy this is the amount payable upon death. Under a general insurance policy it is the maximum amount that can be paid out in the event of a claim. The sum assured under a general policy must be adequate to represent the full value of goods at risk. If an insurer feels that a policyholder has not declared the full value of goods at risk and a claim occurs, the insurer may reduce the claim by applying average.

survey fee

- see valuation fee, home-buyer's survey fee.

T

TAP

- total amount payable - total due to the lender over the lifetime of the credit agreement, including all fees and other associated charges from the lender.

tax free cash sum

- optional withdrawal of a lump sum from a pension fund on retirement.

TCC

- total cost of credit (TCC) - total amount payable under a credit agreement less the principal.

term (mortgage)

- length of time before the mortgage loan must be repaid.

term assurance

- simplest form of life assurance. The insured person or persons are covered against death within a fixed period subject to the payment of the premiums as they fall due (normally monthly or yearly).

If an insured person dies within the policy term the sum assured is paid out. If all insured persons survive the term the premium has been spent and the insurance ends with nothing being paid to the policyholders.

thatched roof

- Insurers will normally impose special terms for fire insurance on thatched properties. It is advisable to check that full fire cover is available with an insurer acceptable to the lender before proceeding.

threshold

- IG premium - loan to value ratio above which mortgage higher lending charge is payable.

timber framed

- method of house construction.

Timber framed properties have traditionally suffered from poor damp-proofing and this restricts the number of lenders willing to accept them as security. Modern building techniques have largely removed these difficulties and properties constructed since about 1980 should be acceptable security to most lenders.

tracking

- process of following the progress of a loan application. This information should be fed back from the lender or packager to the introducer.

top-up loan

- form of second mortgage normally used to provide an overall loan in excess of the loan to value ratio allowed by the primary lender.

Top up loans will invariably be charged at a higher rate than the first mortgage and will frequently carry onerous repayment charges.

treasury product

- a mortgage that has conditions that control the future of the interest rate, so that the rate is not totally subject to market interest rate movements. Typical examples are fixed rates and capped rates.

typical APR

- - example of the annual percentage rate for a given mortgage product, normally used in an advertisement in order to comply with the requirements of the Financial Services Authority rules as well as the Consumer Credit Act (Advertising Regulations).

U

unemployed

- not in employment or receiving any regular salary; not self-employed. (Could be receiving state benefits.)

unemployment insurance

- see - accident, sickness and unemployment insurance - (ASU). Insurance cover arranged by the borrower to protect against inability to meet mortgage payments.

This cover should more accurately be described as accident sickness and redundancy insurance as unemployment cover is generally seriously restricted to cover only events that are entirely beyond the control of the insured person. Typical exclusions include dismissal following professional misconduct and any act of voluntary redundancy. The accident and sickness cover will also be subject to major restrictions such as any act of self-injury or any injury related to the use of alcohol or drugs.

unencumbered

- property that is owned without borrowing or other legal charge over it.

unitised with profits

- a form of with-profits endowment which gives the insurer the ability to adjust, in certain circumstances, the value of bonuses already allocated in certain circumstances.

unit linked

- - investments purchased within a collective investment fund, the price of which is denominated by the underlying value of the investments within the fund.

V

val

- an abbreviation for valuation

valuation

- inspection carried out for the benefit of the mortgage lender to ascertain if a property forms good security for a loan.

Whilst the borrower may be given a copy of the valuation this is only a limited form of inspection and should not be relied upon on when deciding whether to purchase a property. Purchasers should be advised to obtain either a House or Flat Buyer's report or a full structural survey before proceeding with a purchase.

valuation fee

- fee paid by the prospective borrower for the lender's inspection of the property. Normally paid on application.

variable rate

- interest rate that will vary over the term of the loan, normally in line with the general cost of borrowing.

W

with profit policy

- form of life assurance policy which, on maturity, entitles the beneficiary to participate in the profits of the life assurance or pension fund involved.

Under a conventional policy the insurance company declares bonuses during the life of the contract (known as reversionary bonuses) which once allocated to the policy cannot be taken away. In addition a final (terminal) bonus may be paid at the end of the policy term. Under a unitised policy the investment purchases units within a unitised with-profits fund. Some companies reserve the right to adjust the value of such units in extreme circumstances, this is known as a market value adjuster.

X

Y

Z

 

 

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. There may be a fee for mortgage advice. The precise amount will depend upon your circumstances, in most cases this can be waived but we estimate that it will be 250.

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