Can't tell a MIG from an LTV? Take a look at our handy guide to mortgage terms.
APR
Annual Percentage Rate. This is an indication of the true cost of credit. It takes into account the upfront and ongoing costs involved in taking out a mortgage, and is therefore a useful way of comparing the cost of borrowing overall.
Capital and interest mortgage
Your monthly payments are partly to pay the interest on the amount you borrowed and partly to repay the outstanding mortgage. Also known as a capital repayment mortgage.
Capped rate
A mortgage arranged for a set period of months or years which can go up and down with the variable rate, but there is a maximum (capped) interest rate which it cannot go above.
Cashback
A cash payment you receive when you complete a mortgage. It may be a fixed amount, or a percentage of the amount of the mortgage.
Conveyancing
The legal process involved in buying and selling property.
Discounted rate
A guaranteed reduction to the standard variable mortgage rate. This often lasts for an agreed period.
Endowment
A life assurance and investment policy that is designed to produce a lump sum to pay off an interest-only mortgage. There are different types of endowments: for example, 'with profits'; 'unit-linked'; and 'unitised with profits. There is no guarantee that an endowment will generate enough to pay off the mortgage at the end of the term.
Freehold
This is when you own the property and the land it is on.
Interest-only mortgage
Your monthly payments to your lender are simply made up of interest. You do not pay off any of the capital debt during the term of the mortgage. You finally pay off the mortgage using the proceeds of a separate investment plan, for example, an ISA, endowment or personal pension.
ISA
Individual savings account. This is a tax-free way to own either shares, a cash savings account or life assurance. Depending on the lender, you can use an ISA to repay an interest-only mortgage.
Leasehold
Leasehold means the freehold of the building is owned by someone else. Almost all flats in England and Wales are leasehold.
As leaseholder you're responsible for the upkeep of your own property. The freeholder is responsible for maintaining and insuring the building and the communal areas - although the leaseholders pay the bills. The lease you buy runs for a set amount of time - usually 99 years - before it reverts to the freeholder.
LTV
Loan to value. This is the size of the mortgage as a percentage of the value of the property or the price you are paying for the property. So for example, a £90,000 mortgage on a house valued at £100,000 would mean an LTV of 90 per cent.
MIG
Mortgage Indemnity Guarantee. This is a type of insurance some lenders insist on that covers the lender in the event of your defaulting on your mortgage. It can cost thousands of pounds. You should find out if you will have to pay this when selecting your mortgage lender.
Mortgage
A loan to buy a home where the property is used as security against repayment of the loan.
Negative equity
This is where the money owed on the mortgage is greater than the value of the property.
Repo rate
The Bank of England base rate.
Remortgage
Changing your mortgage to a new deal provided either by your existing mortgage provider or a new provider. In many cases, this could save you money and knock years off your mortgage term.
Repayment mortgage
Where monthly payments are partly to pay the interest on the amount you borrowed and partly to repay the outstanding mortgage. Also known as a capital and interest mortgage.
Searches
These are checks carried out by a solicitor during the conveyancing process. These checks are made with local authorities and other official organisations to check planning proposals and other matters that may affect the value of the property and its saleability in the future before making a loan.
Stamp duty
A tax you pay to the government when you purchase a property.
Valuation for mortgage purposes
A simple check of the property for the lender in order to find out how much it is worth and whether it is suitable to lend a mortgage on. You usually pay the bill and get a copy of the report.
What type of mortgage?
A mortgage is probably the biggest loan you're ever likely to have, so it's important you get it right. And that means understanding the different borrowing options available so you can choose the right one for you.
Buy to let mortgage
If you're buying to let, banks usually lend up to 75% of the value of the property (or the purchase price, whichever is lower).
Capital repayment mortgages
With a capital repayment mortgage, you pay off some of the capital and all the interest due each month. By the end of the mortgage term - usually 25 years - the loan will have been completely repaid. During the early years, more interest than capital is paid, but over time this changes so that by the end of the mortgage, it is mostly capital that is being repaid. A repayment mortgage doesn’t include any life cover so it is recommended that borrowers arrange a separate life assurance policy to repay the loan if they die before the end of the mortgage term.
Endowment mortgage
With an endowment policy, none of the loan is repaid during the term. Instead, you make two payments each month - one to the mortgage provider to cover the interest on the loan, and one to a life assurance company. At the end of the mortgage, the life policy matures and should provide enough money to pay off the mortgage. However, you need to check the performance of your insurance policy regularly to make sure it’s still on track to provide sufficient funds. Some lenders do this automatically on behalf of their customers and will let you know if you need to start topping the policy up.
An endowment policy must be viewed as a long-term commitment. Most of the costs of setting a policy up are deducted from your premiums in the early years, and so if you cash your endowment in within the first five years or so, you’re likely to get back less than you've paid in. If you cash it in within two years you might not get anything at all.
There are three types of endowment policy:
- With-profits policy - Bonuses reflecting the profits made by the insurance company are added to the policies. Once a bonus has been added, it cannot be taken away.
- Unit-linked policy - Premiums are directly linked to an investment fund or funds. If the markets are good, unit-linked policies are likely to generate a better return than with-profits policies. However, if investment conditions are poor, the opposite is true, as you do not have the security of with-profits bonuses.
- Unitised with profits - This is a hybrid unit-linked endowment, designed to smooth out price fluctuations that occur with unit-linked policies.
If your home is worth more than your outstanding mortgage an equity release loan can let you unlock this value to provide you with a cash lump sum that can be used elsewhere - a holiday, to fund your retirement, or simply for a rainy day.
HomeStart mortgage
Combining the capital repayment and interest-only mortgage types, this is a revolutionary way to buy your home. It's ideal for first time buyers because the repayments are lower in the first say three years - when your monthly costs are likely to be higher - because you're paying only the interest element of your borrowing. After the initial agreed period, your repayments will increase and cover both the interest and the repayment of the capital you've borrowed.
Interest only mortgage
With our Interest Only Mortgage, you can borrow up to 75% of the purchase price or valuation of your home, whichever is lower. It can be taken out for up to 40 years, depending upon your age at the end of the term.
Pension linked mortgages
Borrowers who are self employed or who have a personal pension plan can link their mortgage to their pension rather than to an endowment policy. As with endowment mortgages, you make two payments every month - one to cover the interest on your loan, and the other into your pension. The idea is that the capital is repaid at the end of the term from the maturity of your pension plan. Again it is recommended that you take out additional life insurance to cover the loan in case you die before you retire.
Pension plan mortgages can be very tax efficient because of the tax relief granted on contributions.
Fixed or variable interest rate?
Most lenders allow you to choose between fixed and variable rate mortgages.
Fixed rate
The interest is set for a pre-agreed period - anything from one to twenty years depending upon the lender. This is an attractive option if you need to know exactly what your mortgage will cost over the next few years, but if you wanted to transfer to a variable rate at any point you would normally have to pay an early repayment fee. Also most lenders ask for a non-refundable booking fee when arranging this kind of loan.
Variable rate
The cost of your mortgage will move up and down, broadly in line with the general movement of interest rates in the economy.
Important notes
YOUR HOME IS AT RISK IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOAN SECURED ON IT.