Mortgage Jargon Buster

Here we provide a breakdown of a range of commonly encountered industry terms that you may be unclear on.

Arrangement Fee
This is the amount of money that a lender will charge in order to setup the loan. This can vary quite broadly and can incorporate other fees such as booking and valuation. This cost can often be added onto the loan but will incur interest and lost equity on your property.
Loan to Value (LTV)
Basically the size of your loan when compared to the value of your property. For example; a home valued at £200,000 with a mortgage of £180,000 will have an LTV of 90%.
Benefit Period
This refers to a period at the start of a mortgage where a special rate lower than their standard variable rate is offered by the lender.
Capped
A ‘capped’ mortgage will never increase above a specified rate. I.e. a mortgage capped at 4% will never exceed this. This is an assurance that can create peace of mind for the borrower.
Collared
As opposed to a ‘capped’ mortgage, a collared mortgage works the other way by never dropping below a set rate. This offers a level of security for the lender, which as a result can result in them offering a better rate.
Stamp Duty Land Tax
A tax payable if you are purchasing a house worth over £125,000. The rate is dependent upon the purchase price of the property.
This rate could vary depending on whether it is a main residence or second property being purchased, and where it is within the UK.
Equity
Your equity is the value of your property once the value of mortgages and secured lending have been subtracted. Dependent on the housing market and your property’s value this can also be negative.
Standard Valuable Rate (SVR)
The interest rate payable at the completion of any fixed/tracker period. This rate is set by the lender and can vary at any time. It is generally changed in conjunction with the Bank of England’s base lending rate changes.
Early Repayment Penalty (ERP)
This is the amount it will cost you to leave a lender or pay off a mortgage completely. These are generally enforced by lenders as a method of keeping borrowers with them and are often 2-3% of the value of the loan during an initial benefit period.
Tracker Mortgage
The interest rate of a tracker mortgage is directly linked to a specific bank’s rate. This rate will vary based on interest rates so has a tendency to fluctuate. It will offer lower repayments if interest rates fall.
Lifetime Mortgages
If you were to utilise equity release to untie money in your home, then you may take on a lifetime mortgage. This can incur no monthly payments or fixed repayment dates and amount, but will be repaid when the house is sold. This can be a useful method of accessing your home’s value in the present, but will affect inheritance or money available to buy a new house in the future.
Protection
A general term that often refers to various insurance policies associated with mortgages such as income protection, unemployment or critical illness cover.
Offset
This type of mortgage is run in parallel to a bank account. Essentially, you do not receive interest on cash in your bank account as this is offset against interest on your loan. The amount you have in your account reflects how much of your loan you can offset. For example, if your mortgage was £100,000 and you had £20,000 in your bank account you would only pay interest on £80,000 of your mortgage.