Mortgage and Insurance Jargon Buster

As in many industries there are a wide range of terms you may not be aware of first hand – the mortgage and insurance industry is one such area where this applies. Below we have provided many of the legal and technical terms involved in mortgages, buying property and protecting your home, family and income. If you need a further explanation of a term, please don’t hesitate in contacting ACC Associates on (01249) 599019, where a mortgage and insurance broker advisor will be more than happy to provide further details to you.

Accident, sickness and unemployment insurance (ASU): In the event of an accident, sickness or involuntary redundancy, this insurance will cover your mortgage repayments. Some lenders attach mandatory insurance cover to their most attractive rates, although this is increasingly uncommon despite the increasing need to ensure you are adequately covered against unforeseen circumstances following cutbacks over the years in the state providing financial support.

Additional security fee (also known as a mortgage indemnity guarantee or higher lending fee): Although these fees aren’t common in today’s mortgage market, they are a fee charged to enable you to borrow against a larger percentage of your homes value. This is a premium charged by some lenders in order to indemnify themselves against any financial shortfall they may incur in the event them selling your home following repossession. It is applicable if the amount required is higher than a percentage of your homes value, for example 85%. This fee may either be added to your mortgage or deducted from your mortgage advance on completion.

Adverse credit: This is an umbrella term used of applicants with poor credit history. This may include mortgage arrears, defaults, county court judgements (CCJs), bankruptcy, individual voluntary arrangement (IVAs) or house repossession. Borrowers with elements of adverse credit are offered higher rates than standard full status applicants, usually with terms and conditions relating to the extent of their adverse credit history.

Annual Percentage Rate of Charge (APRC): The APRC is a rate calculated using a generic formula applicable to all lenders which includes all the costs associated with a mortgage. This allows for easy comparisons to be made between the different mortgage products offered by each lender.

Arrangement fee: This fee is charged depending on the specific product you choose and is either payable in advance, added to the loan or deducted from your mortgage advance on completion. It covers the administrative expenses incurred whilst processing your mortgage application.

Arrears: If you miss your mortgage payments then these are known as arrears. You will then owe a sum of money in arrears to your mortgage lender. If you find yourself in this situation, or think you may in the future, then contact your mortgage lender as soon as possible to update them on your situation and let them assist you which may help avoid penalty fees and added stress.

Bank of England base rate: Every month the Monetary Policy Committee sets the Bank of England base rate, to which all mortgage rates are linked either directly, as tracker mortgages, or indirectly, in all other cases.

Booking fee: This fee is charged depending on the specific product you choose and is either payable in advance, added to the loan or deducted from your mortgage advance on completion. It is normally payable in order to reserve funds when a mortgage product is likely to sell out quickly.

Buildings and contents insurance: This insurance covers damage to the insured property and/or its contents in a variety of specified scenarios. It is compulsory for all lenders (in the case of buildings insurance) and if the lender’s own insurance is not taken they will sometimes charge an administration fee. Some lenders attach mandatory insurance cover to their most attractive rates, although this is increasingly uncommon.

Buy-to-let (BTL): A-buy-to let property is purchased with the intention of renting it out to a tenant as an investment.

Buy-to-let mortgage: This is a mortgage for property that will be let by you to tenants. When lenders calculate how large a loan you can afford to repay on buy to let they do so primarily on the basis of projected rental income, rather than your salary.

Capital: This is the amount of money you have borrowed on the mortgage on which interest will be charged by your mortgage lender.

Capital and interest mortgages (also known as a repayment mortgage): With this method the monthly mortgage repayments pay off both the initial loan amount and the interest that is charged upon it. At the end of the loan term the entire debt will be repaid – assuming all mortgage payments are made on time throughout the mortgage term.

Capital rest period: This is the regularity with which a lender calculates the outstanding balance on your mortgage and hence the size of monthly repayments. It is usually annually, monthly or daily. With capital and interest mortgages this can be important; an annual interest calculation means that you will pay interest on capital repayments that have been made in the course of that year. In contrast a daily or monthly interest calculation means that the balance and consequently the interest charged will reduce with every capital repayment made.

Capped rate mortgage: This is a mortgage that is guaranteed not to rise above a specific rate (the ‘cap’) within a set period of time. Unless this is combined with another rate such as a discount or tracker, your lender’s standard variable rate will be charged if it is lower than the capped rate; if it rises above this ceiling the rate charged will remain at the capped level. There are often early repayment charges applicable if the loan is repaid within the capped period.

Cash-back mortgage: This is a mortgage in which the lender refunds a sum of money either as a percentage of the loan, or a flat figure, to you upon completion. With this type of offer you will often be tied to the lender’s standard variable rate by early repayment charges requiring repayment of the cash-back if the loan is repaid within a set period.

Completion: This is the moment when a transfer of property has legally taken place after all legal documentation has been completed and funds have been transferred from the buyer’s solicitor to the seller’s solicitor.

Completion fee: This fee is charged depending on the specific product you choose and is either payable on completion of your mortgage, added to the loan or deducted from the mortgage advance on completion. It covers the administrative expenses incurred whilst processing your mortgage application.

Contents insurance: This insurance covers damage to the contents of the insured property in a variety of specified scenarios. Some lenders attach mandatory insurance cover to their most attractive rates, although this is increasingly uncommon.

Conveyancing: This is the legal process whereby ownership of a property is transferred.

Current account mortgage: This is a fully flexible mortgage combined with a current account. Money in the current account is automatically set against the mortgage balance and interest is only charged on the outstanding amount – meaning interest payments are reduced.

Critical illness cover: This is an insurance that will pay the plan holder a sum of money on diagnosis of a range of specified illnesses – the illnesses included in this type of plan may vary, however generally these will include cancer, heart attack and stroke.

Decreasing term assurance: A form of life assurance where the sum assured reduces over the term of the plan and your mortgage – these are often used to provide a cost effective way of protecting a capital and interest (repayment) mortgage.

Defaulting: If you cannot meet your minimum required monthly mortgage payment and go into arrears on your mortgage, this is known as defaulting. If this happens you should speak to your mortgage lender about how to remedy the situation as soon as possible.

Deposit: This is the sum of money you are required to pay towards the cost of your property. At present you will typically have to pay at least 10% of the value of your property. Typically the more deposit you are able to put down the lower the interest rate is likely to be. There will also be a wider range of mortgage deals for you to choose from.

Disbursements: The fees such as stamp duty and land registry fees which you pay to your conveyancer/solicitor whilst they are completing a property transaction for you.

Discounted rate mortgage: This is a variable mortgage that is discounted from a lender’s standard variable rate by a set percentage within a set period. There are often early repayment charges applicable if the loan is repaid within the discounted period.

Early repayment charge: This is a penalty charged on mortgages when the loan is repaid in full within a set period. Usually it applies on a pro rata basis when capital repayments are made outside of the agreed monthly payments. Many early repayment charge periods are linked to those of offers such as tracker or fixed rates. However, some mortgage rates have extended early repayment charges which will tie you in while you are on your lender’s standard variable rate.

Early redemption penalty (ERP): This is a penalty charged on mortgages should you repay the loan in full within a set period. Usually it applies on a pro rata basis when capital repayments are made outside of the agreed monthly payments. Many early redemption penalty periods are linked to those of special rates such as tracker or fixed rates. However, some mortgage rates have extended early redemption penalties which will tie you in while you are on your lender’s standard variable rate.

Endowment: A repayment vehicle associated with interest only mortgages.

Equity: The value of your property less any mortgage or loan secured on it.

Estate agents fees: These will differ by agent and are charged to you for marketing and selling your property. The cost is likely to be based on a percentage of your properties value so it is best to get a quote and find out what value the agent is going to add, should you decide to proceed with them.

Exchange of contracts: This is the stage in England, Wales and Northern Ireland that the deposit money is paid and both you and your seller or buyer (in the property transaction) is legally bound to fulfil the agreed conditions of the sale and purchase.

Exclusive mortgage: This is a mortgage only available to specific mortgage advisers such as ACC Associates through a specific distribution channel, in conjunction with a lender who provides the funding.

Fixed rate mortgage: This is a mortgage that is charged at a fixed rate within a set period. There are often early repayment charges applicable if the loan is repaid within the fixed period.

Flexible Mortgage: This is a type of mortgage that offers you more flexibility than traditional mortgages. Although specific details vary between lenders the core features of flexible mortgages are:

  • daily or monthly capital rest
  • ability to make overpayments at any point of the loan term without an early repayment charge

In addition many flexible mortgages will allow you to:

  • defer payment by taking payment holidays
  • draw-back overpayments
  • draw-down further advances
  • underpay without penalty (often only to the amount of any previous overpayments)

Freehold: The buyer of a freehold property owns both the property and the land it stands on indefinitely.

Gazumping: This is when a prospective purchaser has an offer for a property accepted before another potential buyer puts in a higher offer for the same property and their offer is accepted over the original offer despite the original offer being accepted subject to contracts.

Guarantor: If your income isn’t enough to secure a mortgage in your own right you could ask a guarantor to guarantee the mortgage payments for you. Your guarantor is fully liable for repaying the mortgage if you default on the mortgage loan.

Higher lending charge (also known as a mortgage indemnity guarantee or additional security fee): Although these fees aren’t common in today’s mortgage market they are a fee charged to enable you to borrow against a larger percentage of your properties value. This is a premium charged by some lenders in order to indemnify themselves against any financial shortfall they may incur in the event of them selling your property following repossession. It is applicable if the amount required is higher than a percentage of your properties value, for example 85%. This fee may either be added to your mortgage or deducted from the mortgage advance on completion.

Homebuyers’ report: This report will include a basic valuation for mortgage purposes and will contain a report on the condition of the property highlighting any defects found. It will include any suggestions as to additional specific reports you may like to have completed such as an electrics, or damp and timber report. You have no recourse against the surveyor for any defects or problems overlooked in the report.

Income multiples: These are the multiples that lenders apply to borrowers’ income in order to determine the maximum loan they will offer you.

Index linked: Where the level of insurance cover provided under a plan increases over time this is often used to ensure your level of cover increases in line with the Retail Price Index.

Individual savings account (ISA): A repayment vehicle associated with interest only mortgages.

Interest: This is the money you are charged for your mortgage borrowing.

Interest only mortgages: With this method the initial loan amount remains the same throughout the term of the loan, while the monthly mortgage repayments only pay the interest being charged on this amount. For this reason interest only mortgages are tied to an investment in one of a number of different repayment vehicles, which ideally should cover the initial loan amount at the end of your mortgage loan term. These repayment vehicles include endowment plans, personal pensions and individual savings accounts.

Joint life: Where insurance, for example life or critical illness cover, is covering two individuals.

Joint life first death: The sum assured will be paid on the death of either life insured. In this case, the two lives assured are normally also the joint holders and the sum assured would be paid direct to the policy/plan holder.

Land registry fee: A fee paid to the land registry for registering your ownership of your property.

Lease: A legal contract which gives the ownership of a leasehold property to the buyer for a fixed period of time.

Leasehold: The buyer of a leasehold property owns the property for a set number of years but doesn’t own the land on which it stands. This form of ownership is common with apartments or flats.

Lender: The lender provides you with the mortgage loan to buy the property.

Let-to-buy mortgage (LTB): This is a mortgage where your current home is let to tenants and the rental income is used to cover the mortgage repayments on a new property bought as your main residence. When lenders calculate how large a loan you can afford to repay on the let to buy they do so primarily on the basis of projected rental income rather than salary income multiples.

Level term assurance (LTA): A form of life assurance where the sum assured under the plan remains constant over the plan term – commonly used if you take an interest only mortgage.

Libor linked mortgage: This is a variable mortgage that is either above or below the London Inter-Bank Offered Rate by a set percentage within a set period. The Libor rate is set independently every three months. It is often associated with lenders that offer loans to borrowers with elements of adverse credit or specialist buy-to-let mortgages.

Life assured: The person on whose life or death the payment of the sum assured depends. The life assured is not always the same person as the plan holder.

Life policy/plan: This insurance repays your mortgage in the event of your premature death prior to the end of your mortgage term.

Loan-to-value (LTV): This is a percentage figure of the loan amount in relation to your property’s value. For instance a £100,000 property bought with a mortgage of £70,000 has a loan to value of 70%. The higher the loan to value, the higher the interest rate charged.

Mortgage: A loan secured against your property to enable you to purchase it. The property acts as security for the loan and so can be repossessed and sold if the mortgage repayments are not made on time.

Mortgage application fee: This fee is charged depending on the specific product you choose and are either payable in advance, added to the loan or deducted from the mortgage advance on completion. It covers the administrative expenses incurred whilst processing your mortgage application.

Mortgage deed: This is a legal agreement which gives the mortgage lender a legal right to your property.

Mortgage indemnity guarantee (MIG) (also known as an additional security fee or higher lending fee): Although these fees aren’t common in today’s mortgage market they are a fee charged to enable you to borrow against a larger percentage of your properties value. This is a premium charged by some lenders in order to indemnify themselves against any financial shortfall they may incur in the event of them selling your home following repossession. It is applicable if the amount required is higher than a percentage of your properties value, for example 85%. This fee may either be added to the mortgage or deducted from the mortgage advance on completion.

Mortgage Offer: This is the formal offer document provided to you by your mortgage lender to confirm they are happy to lend the required sum of money against your property.

Mortgage payment protection insurance (MPPI) (also known as accident, sickness and unemployment insurance): In the event of an accident, sickness or involuntary redundancy, this insurance will cover your mortgage repayments. Some lenders attach mandatory insurance cover to their most attractive rates, although this is increasingly uncommon despite the increasing need to ensure you are adequately covered against unforeseen circumstances following cutbacks over the years in the state providing financial support.

Mortgage term: This is the length of time over which the mortgage will be repaid.

Non-conforming: This is an umbrella term used of applicants with poor credit history. This may include mortgage arrears, defaults, county court judgements (CCJs), bankruptcy, individual voluntary arrangement (IVAs) or house repossession. Borrowers with elements of adverse credit are offered higher rates than standard full status applicants are, usually with terms and conditions relating to the extent of their adverse credit history.

Offset mortgage: With offset mortgages, your savings are used to either reduce your mortgage term or your monthly mortgage repayments, but you still keep instant access to your savings. For example your mortgage is £150,000 and you have £40,000 in savings, so you only pay interest on the difference of £110,000. You pay the mortgage lender each month as with a traditional mortgage, but your savings work as an overpayment. Some offset mortgages have a current account attached. You would not receive credit interest on your savings.

Overpayment: This is when an unscheduled capital repayment is made or when monthly payments are increased in order that the mortgage is repaid before the end of the mortgage term – saving considerable sums in interest. Many traditional non-flexible mortgages include early repayment charges if overpayments are made within a set period. In contrast, flexible mortgages allow unlimited overpayments without penalty and increasingly, mortgages are semi-flexible – allowing you to overpay a certain percentage of your mortgage loan each year without incurring early repayment charges.

On risk: The point at which your insurance plan starts and comes into effect.

Pension: A repayment vehicle associated with interest only mortgages.

Personal equity plan (PEP): A repayment vehicle which was replaced by the individual savings account (ISA) associated with interest only mortgages.

Policy holder: The policy holder is the owner of your insurance policy/plan and responsible for paying the premiums. The sum assured will be paid to the policy/plan holder in the event of a successful claim unless other arrangements are made.

Portability: A portable mortgage is one that can be transferred to another property without penalty (although other charges maybe incurred) if the borrower moves house within an early repayment charge period. The new interest rate that the lender will be prepared to offer depends on whether the loan amount increases or decreases. If the latter, then early repayment charges may apply.

Procuration fee: This is a fee paid by lenders to intermediaries for introducing business to them.

Provider: The company providing the cover for example life assurance or buildings and contents.

Redemption Penalty: This is a penalty charged on mortgages when the loan is repaid in full within a set period. Usually it applies on a pro rata basis when capital repayments are made outside of the agreed monthly payments. Many redemption penalty periods are linked to those of offers such as tracker or fixed rates. However, some mortgage rates have extended redemption penalty periods which will tie you in while you are on your lender’s standard variable rate.

Redemption: When you pay your mortgage off in full.

Remortgage: If you are looking to change your mortgage to a different lender but you’re not moving home then the transaction is known as a remortgage.

Renewable premiums: This is where a premium on an insurance policy/plan you hold is subject to review and potentially will increase over the term of the policy/plan.

Renewable term assurance: This a type of term assurance that contains an option which you can exercise at the end of the term of the policy/plan to renew it for the same sum assured without further medical underwriting.

Repayment mortgage (also known as a capital and interest mortgage): With this method the monthly mortgage repayments pay off both the initial loan amount and the interest that is charged upon it. At the end of the loan term the entire debt will be repaid – assuming all mortgage payments are made on time throughout the mortgage term.

Right-to-buy (RTB): After a period of renting your local authority home from the council, you can qualify to buy your home. This is usually at a reduced cost, as you will receive a discount for being a tenant and for paying rent. Under the right-to-buy scheme you are entitled to a discount off the value of your home once you have lived in it for a set period.

Self Build: This is a mortgage for your new property should you arrange its construction yourself. The loan is paid out in stages as the property is completed in order to ensure the loan to value does not rise too high at any point and the lender is happy with the work being completed.

Shared ownership: This is a scheme operated by a Housing Association where you own part of your home and pay the mortgage on this, while a Housing Association owns the rest of your home and you pay rent on this.

Solicitor/conveyancing fees: Conveyancing is the legal process to transfer the ownership of a property from the seller to the buyer. If you are buying a property, your solicitor will generally work on behalf of the mortgage lender who usually insists on certain searches before they will release money for your home.

Split Loan: This is a mortgage that is taken partly on a capital and interest basis and partly on an interest only basis.

Stamp Duty: When you buy property you may need to pay stamp duty which is payable via your solicitor to Her Majesty’s Revenue and Customs (HMRC). This is a tax calculated as a percentage based on the value of the property above a threshold set in the Chancellor’s annual budget.

Standard variable rate (SVR): This is a variable rate determined entirely at each lender’s discretion. Unless linked to Libor or the Bank of England Base Rate the standard variable rate is the reverting rate at the end of any special offer period such as a capped, discounted or fixed rate mortgage.

Structural survey: This is a detailed report on a property which can include tests on drains or utilities. It could be useful if you are buying an older or unusual property. If the property is defective the surveyor should discover this. If major defects are not discovered, then the surveyor acting for you would have some legal liability and you would be able to claim redress.

Sub-prime mortgage: This is an umbrella term used of applicants with poor credit history. This may include mortgage arrears, defaults, county court judgements (CCJs), bankruptcy, individual voluntary arrangement (IVAs) or house repossession. Borrowers with elements of adverse credit are offered higher rates than standard full status applicants are, usually with terms and conditions relating to the extent of their adverse credit history.

Subject to contract: This is wording included in an agreement when a purchase price of your property is agreed before exchange of contracts. This wording allows the seller or buyer to withdraw from the property sale.

Term assurance: This insurance repays the mortgage in the event of a claimable event on the insured person, for example death or suffering a critical illness.

Terminal illness cover: An option included in life assurance policies/plans, whereby the insurance provider will pay the sum assured if the life assured is terminally ill – this should not be confused with critical illness cover as the two definitions are very different.

Tie-in period: This is the period of time you are locked in to your mortgage and will pay a penalty if you overpay your mortgage by a certain sum of money, for example if you have a three year fixed rate mortgage, your tie-in period could be three years. Once your initial deal has ended you will typically move onto your lenders standard variable rate, which is often higher than the rate you have been paying. If this is the case and you don’t have to pay any early redemption penalty, you may save money by remortgaging.

Title deeds: The legal documents which confirm the official ownership of property.

Tracker rate mortgage: This is a variable mortgage that is either above or below the Bank of England’s Base Rate by a set percentage within a set period, for example 0.19% above the base rate for two years.

Trust: If your life assurance policy/plan is written in trust, then you can help determine who should benefit from your insurance policy/plan in the event of a claim.

Underwriter: The role on an underwriter is to review your individual details for example occupation and lifestyle. For life assurance, the underwriter/s will assess the risk and decide whether to offer insurance cover and if so at what rate. For mortgages, the underwriter/s will decide whether to agree the level of borrowing based on the information supplied and the research obtained from your credit file.

Utmost good faith: This is a minimum standard required by both you (life assured) and the insurance company to act honestly towards each other and not to mislead or refrain from providing important information to the other regarding a proposal.

Valuation: Whether you are buying or remortgaging your existing property, the lender will undertake a valuation of the property to ensure it provides adequate security against your proposed mortgage which will also give you confidence that the price you are paying (if buying) for your new home is correct. Depending on the mortgage product we arrange for you, the cost will either be paid for by your new lender or by you. There are three types of valuation/survey:

  • Basic valuation for mortgage purposes – this is carried out purely on behalf of the mortgage lender even though you may have to pay for it. Most lenders charge valuations fees on a scale depending on the value of the property. The report is basic and all lenders disclaim any responsibility for the condition of the property. You have no recourse against the surveyor for any defects or problems overlooked in the report.
  • Homebuyers report – this report will include a basic valuation for mortgage purposes and will contain a report on the condition of the property highlighting any defects found. It will include any suggestions as to additional specific reports you may like to have completed such as an electrics or a damp and timber report. Again, you have no recourse against the surveyor for any defects or problems overlooked in the report.
  • Full structural report – this report is the most thorough and expensive of the options. If the property is defective the surveyor should discover this. If major defects are not discovered then the surveyor acting for you would have some legal liability and you would be able to claim redress.

Valuation fee: Whether purchasing or remortgaging, the lender undertakes a valuation of the property to ensure it provides adequate security. The charge is borne by the borrower or the proposed mortgage lender and increases proportionally with the valuation/purchase price.

Waiver of premium: This is an additional option that you maybe able to take on insurance, such as life and critical illness cover. The insurance provider will pay your premiums as they become due if you are unable to do so because you are unable to work due to accident or sickness.

What’s the next step?

If you’d like to know more about mortgage and life insurance advice – call ACC Associates on (01249) 599019 to find out what your options are where a broker advisor will be happy to assist you.