21 June 2016

Mortgage glossary and jargon buster

For many people, mortgages and mortgage terminology can be confusing. Find out the meanings of some of the most common mortgage–related words, terms and phrases.

The basics

Stamp Duty Land Tax (SDLT)

A tax you must pay when you purchase a property in the UK, calculated as a percentage of the purchase price.

This falls into different bands so the amount you pay varies depending on the price of the property. It depends on who is buying the property, the purchase price, and on where the property is located. Some first time buyers don’t have to pay this tax.

Tax information by region:

 (This link will open in a new window) Stamp Duty Land Tax (SDLT) no longer applies in Scotland. Instead, you’ll need to pay  (This link will open in a new window) Land and Buildings Transaction Tax (LBTT).

In Wales, from 1st April 2018, 2018  (This link will open in a new window) Land Transaction Tax (LTT) replaces SDLT.

A guarantor is a person who agrees to make the repayments on your behalf if for some reason you can't keep up with them.

This is how much of a property you actually own. If, say, you have a £90,000 mortgage on a property worth £100,000, your equity is £10,000 or 10%.

Remortgaging is when you switch your current mortgage to a new lender without moving home.

Mortgage rate types explained

Fixed rate
With a fixed rate mortgage, your repayments usually remain the same throughout a specified period, for example five years. Fixed rates give you the security of knowing exactly how much you’ll have to pay each month, without having to worry about the interest rate going up. At the end of the deal the interest rate usually reverts to the lender’s standard variable rate (SVR) which can move up or down in line with changes to the mortgage market, so your monthly payments can change.

Variable rate
With a variable rate mortgage, your monthly payments can go up or down depending on the interest rate set by your lender or the LIBOR rate. You might start off with a low rate, but this isn’t guaranteed and may go up at a later date. At the end of the deal the interest rate usually reverts to the lender’s standard variable rate (SVR) which can move up or down in line with changes to the mortgage market, so your monthly payments can change.

  • Tracker rate
    With a tracker mortgage, the interest rate you pay tracks another rate (usually the Bank of England base rate) up and down by an agreed percentage. Your payments will fluctuate in line with the rate changes, unless the base rate drops below the tracker floor – that is, the lowest rate that will be tracked. If the rate being tracked goes below this, the interest rate will not follow it further.

  • Capped rate
    A capped mortgage guarantees your interest rate won’t go beyond an upper fixed interest rate – a limit set by the lender. Like tracker rate mortgages, your monthly payments do change depending on the rate that is being tracked (usually the Bank of England base rate) but with a capped mortgage your interest rate will never go beyond the set limit, even if the rate being tracked does.

  • Discount rate
    With a discount mortgage, you’ll get a discount on the lender’s standard variable rate (SVR) for a set period of time, typically two or three years.

  • Collar Rate
    Prevents your monthly repayments from falling below a certain level. Collar rates are often put on tracker mortgages.

Mortgage features

This gives you an extra lump sum of cash at the beginning of your mortgage, to spend on things like decorating or refurbishing your home. These mortgages often come with a higher interest rate.

See our current cashback special offers.

Flexible mortgages give you the option to overpay, underpay or take a payment holiday. You can also save on interest when you overpay with this type of mortgage, because it's calculated daily.

This links your savings to your mortgage. Instead of earning interest on your savings, that money is balanced against your mortgage so you pay less interest on it. For example, if you have a £100,000 mortgage and £20,000 in savings, you would only be charged interest on £80,000 of the mortgage. This can save you a significant amount in interest and clear your mortgage more quickly.

Joint mortgage
When two or more people, such as partners or a group of friends, take out a mortgage together. This can either be through a joint tenancy, where ownership of the property is shared equally, or as tenants in common, where it’s split based on an agreement between the parties.

Mortgage TLAs (three letter acronyms)

Decision In Principle (DIP)
A lender may give you a certificate showing you the amount they’re willing to lend you. This is not a guarantee, but it can be helpful when negotiating with sellers and estate agents.

Loan–To–Value (LTV)
This refers to how big your mortgage is in relation to to the valuation or purchase price of your property (whichever is the lower) expressed as a percentage. For example, if you have a £150,000 mortgage on a house that’s worth £200,000, you have an LTV of 75%.

Early Repayment Charge (ERC)
An amount of money (a charge) you may have to pay a lender if you either move your mortgage to another lender during the special deal period, or overpay by more than you're allowed within the agreed period.

Other terms you might hear

A feature of a mortgage that allows it to be transferred between properties when you move house.

Redemption statement
This shows you the total amount you would need to pay, including all fees and interest owing, to pay off your mortgage.

Get more guidance on mortgage basics from Money Advice Service.

Nationwide mortgages are available to those aged 18+ and are subject to underwriting and criteria.

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