If you’re struggling to get your head around the complex language used to describe mortgage lending and the process of buying a home, you’re not alone.
In this jargon-busting blog post we explain the key mortgage terms every buyer should know, to help you feel more confident when making those big decisions.
This might sound like a silly question, but before we delve into more complicated mortgage terminology, it’s important to understand what the word ‘mortgage’ itself really means.
In short, a mortgage (or mortgage loan) is a type of loan specifically used to purchase property. The loan is secured against the value of the property, meaning the lender has the right to repossess it if you fail to keep up with repayments. Mortgages typically involve regular monthly payments over a set term, often 25-30 years, and include both the loan amount (capital) and the cost of borrowing (interest).
When applying for a mortgage, the first thing to consider is the mortgage type. Mortgage types are typically defined by four key factors:
Below, we explain each of these factors and the different mortgage options available in more detail.
This generally refers to the purpose of the mortgage – what it will be used for.
Used to buy a private residential property that the buyer intends to live in themselves.
Used by landlords to buy residential property that they intend to let out to make a profit, but will not live in themselves.
Used to buy any type of commercial property, either for private business use, or to rent out to other businesses for profit.
Used to purchase mixed-use property, such as a shop with a flat above.
The process of replacing your current mortgage with a new one, either with your existing lender or a different provider. This can be done to secure a better interest rate, release equity from your property, or adjust the terms of your loan.
Although often referred to as a mortgage, this product is not intended for the purchase of property and is only open to older applicants. Equity release can be used to raise money for any purpose which is secured against your residential home.
This refers to the features of the mortgage and determines the terms and conditions. The product or deal type is typically catered to your (the buyer’s) personal circumstances, and/or the specific type of property you want to buy.
A flexible mortgage gives you more options around when and how you can make your mortgage repayments. Each has different terms and conditions and often multiple flexible features are found in the same product.
This is another type of flexible mortgage. It links your savings to your mortgage, reducing interest without losing access to your money.
Guarantor mortgages are aimed at people who have trouble getting onto the property ladder due to low income or a poor credit score. Family assist mortgages and JBSP (Joint borrower sole proprietor) mortgages also fall under this category.
These mortgage products are supported by government schemes, which can be helpful for those without access to a guarantor. There are various affordable ownership scheme mortgages available, including the shared ownership scheme, the first homes scheme, the right to buy scheme, and the right to acquire scheme.
Exactly as it sounds, this type of mortgage is for people who want to build their own home, rather than buy a pre-built one.
In the context of mortgages, interest is the cost of borrowing money from a lender. It’s calculated as a percentage of the outstanding loan balance and represents the profit the lender earns for providing the loan.
All mortgages charge interest, but you can choose which type of interest rate you’d prefer. Interest rate types fall into two categories: fixed-rate and variable-rate.
A mortgage with a set interest rate that remains unchanged for an agreed period. Fixed-rate mortgages are typically available for two, three, five, or ten years.
A mortgage where the interest rate can fluctuate (increase or decrease). There are three types of variable-rate mortgage: standard variable rate (SVR), discount rate, and tracker rate. See ‘other interest terms’ for more information about these interest rate types.
All lenders have a standard variable rate – their default interest rate which they set themselves. It’s not a fixed length product, so if you’re on one, you can leave at any time without paying fees. It’s usually (but not always) the most expensive type of variable rate.
A discount rate deal is set at a certain percentage below the standard variable rate (SVR). The percentage value is fixed for the duration of the deal (usually two or five years). The actual interest rate you pay is still variable, as if the SVR changes, so will your discount rate.
The only interest rate determined by an external financial indicator, rather than the lender. This is usually the Bank of England base rate, so your monthly repayments will rise and fall in line with it.
The interest rate set by the Bank of England, which lenders use as a benchmark. This is important if you have a variable-rate mortgage, as it can either influence or, in the case of a tracker rate, directly impact your mortgage interest.
A capped interest rate can sometimes be found on variable rate products. It guarantees that your interest rate won’t go beyond (or is ‘capped’ at) a certain level. While the rate can decrease if interest rates drop, it will never exceed the agreed cap.
The opposite to a capped rate, a collar rate ensures your interest rate can never fall below a certain level. This more common than a capped rate, but less appealing, as it minimises how much you can save when interest rates fall.
The type of monthly payment you’ll make to repay your mortgage loan.
A mortgage where each month you repay some of the capital (the loan that you’ve borrowed) and some interest. Assuming you don’t miss any payments, the mortgage will be fully repaid by the end of the term. This is the most popular repayment type for residential buyers.
A mortgage where you pay only the interest each month, with the loan balance due in full at the end of the mortgage term. This is most commonly used for buy-to-let and commercial mortgages.
A mortgage where you opt to mix the above repayment types together, so you’ll have a part capital repayment, part interest-only mortgage.
An additional payment made on top of your regular monthly repayments. Overpayments can reduce the loan term and overall interest paid.
A mortgage repayment smaller than the regular agreed sum. Some flexible mortgages have this feature, which can be useful for people with irregular income.
A fee charged if you pay off your mortgage or switch deals before the term ends.
A document provided by your mortgage lender that outlines the exact amount you need to pay to fully repay your mortgage. This statement is typically requested when you plan to pay off your mortgage early, switch to another lender (remortgage), or sell your property.
A charge some mortgage lenders apply when you fully repay your mortgage, either because you’ve come to the end of the mortgage term, sold your property, or switched to another lender (remortgaged).
Now that we’ve covered the different mortgage types, here’s an A-Z glossary of other mortgage terms you might encounter when buying or remortgaging a property.
Taking out extra funds on top of your existing mortgage, often by increasing the loan secured against your property.
The lender’s terminology for the level of income you will need in order to afford the loan repayments. They use affordability criteria to assess your mortgage application.
A figure that shows the total yearly cost of a mortgage, stated as a percentage of the loan, taking into account the interest rate and any other fees.
An one-off fee you pay the lender to set up your mortgage. You can usually choose between paying the arrangement fee upfront or adding it to your mortgage (in which case interest will be applied).
The amount of money you originally borrow, excluding interest.
The tax paid on profits made from selling a property. Main residences are usually exempt unless they have been developed specifically for making a profit, for example a house converted into flats.
Cash paid by a lender to incentivise you to take out a mortgage with them.
The final stage of the sale and purchase of a property. This is when the buyer’s solicitor or conveyancer pays the purchase amount to the seller’s solicitor or conveyancer. Once completion has taken place, the buyer can collect the keys to the property.
Permission to let your residential property, if you have a short term letting need. If you have a mortgage, you usually need to apply to your lender for their consent to do this.
A written agreement by the seller and buyer for the sale and purchase of a property. This details the terms and conditions of the sale and purchase, and is not legally binding until the exchange of contracts.
The legal process carried out by a solicitor who specialises in property transactions (a conveyancer). They take part in transferring funds and deeds between buyers and sellers.
Also known as a credit file, this is a record of your financial behaviour held by credit reference agencies. It’s used by lenders when assessing whether they will give you a mortgage and how much they are willing to lend.
Used by lenders to determine how much debt you have in relation to your income and decide how much you can afford to repay on a mortgage.
The down payment you need to provide when taking out a mortgage. The size of the deposit you need will depend on a number of factors, including mortgage and property type, as well as your circumstances.
The portion of property you own compared to it’s current value. This can change both as you repay your mortgage (increasing ownership) and when the property’s market value goes up or down.
The point in the property buying journey where the buyer and seller both become legally bound by the contract to continue with the purchase/sale.
A person who is purchasing a property for the first time.
Ownership of a property and the land on which it stands.
A fee charged by the lender when the amount borrowed exceeds a given percentage of the value of the property, designed to cover any increased risk the lender might incur by lending to you.
The UK Government department responsible for recording and maintaining the official register of land and property ownership in England and Wales. It provides a reliable and legal record of ownership, along with details such as property boundaries, title deeds, and any charges or restrictions (e.g. mortgages) against a property.
Cover for the physical property itself (buildings insurance) as well as the contents inside (contents insurance). Lenders often require borrowers to have building insurance.
A type of property ownership where you own the property for a set period of time, but not the land it stands on. The land is owned by a freeholder, and you (the leaseholder) pay them rent or ground rent, along with other possible fees.
A legal document signed by the borrower which is registered against the property at the Land Registry and used to secure the mortgage against that property.
The percentage of the property’s value you’re borrowing, compared to your deposit. For example, if you have a £20,000 deposit on a £200,000 home, your LTV would be 90%. All lenders have a maximum LTV and this will determine the size of deposit you need.
The industry opinion on how much your property could be bought or sold for by any potential buyer or seller.
Often used interchangeably, both of these terms refer to someone who is qualified to give mortgage advice and help buyers through the mortgage application process.
A legally binding document confirming that you and the lender have agreed to go ahead with your mortgage offer, using the property as security.
Charges associated with applying for, securing, and maintaining a mortgage. These fees can vary depending on the lender, the type of mortgage, and the services involved.
Also known as an agreement in principle or a decision in principle, this is an initial offer from the lender stating how much they would be willing to lend you, assuming your full application is accepted.
Used to describe any type of institution that provides mortgages, such as banks, building societies, specialist lenders, and credit unions.
The length of the entire mortgage, also known as the repayment period.
When you owe more than the current cost of your property.
A property that has been newly constructed, rather than an existing home. New build mortgages often face restrictions because lenders are wary of the risk of property value falling post-purchase (as a result of the home no longer being ‘new’) and want to protect their interests.
A document issued by a prospective lender to a prospective borrower, setting out the lender’s offer of a loan to the borrower. It’s normally subject to a number of terms and conditions (usually detailed in a separate accompanying document).
A feature of a mortgage that allows it to be transferred between properties when you move house without penalties. Not all lenders allow this, but many modern mortgages are portable.
Also known as a conveyancer, a solicitor manages the legal aspects of purchasing a property, including the contracts, searches, transferring funds and providing legal advice.
A tax paid when purchasing property or land in the UK. The amount of stamp duty depends on the property’s purchase price and the buyer’s circumstances, such as whether they are a first-time buyer, buying a second home, or a property investor.
An inspection of the property you are looking to purchase, conducted by a qualified surveyor to assess its condition, value, and any potential issues. Most lenders will only insist on a valuation survey, but you can also ask a surveyor to complete a more thorough structural assessment for your own peace of mind.
The formal written document which lists exactly who owns a property and enables transfer of a property’s ownership from seller to buyer. A mortgage lender will record details of their mortgage on these deeds, meaning they can take ownership of the property if you fail to keep up with your mortgage loan repayments.
An assessment of a property’s current market value, carried out by a surveyor for the lender.
The seller of a property.
Navigating the world of mortgages doesn’t have to be complicated. As one of the UK’s leading fee free mortgage brokers, we’re perfectly positioned to answer all your questions and assist you in securing the top mortgage deals for your unique needs.
Whether you’re looking to get on the property ladder, purchase your next home, or remortgage, we’ll work to find you the perfect option, stress-free, hassle-free, and most importantly, fees-free.
If you didn’t find the answers you were looking for in this article, or need a little more help understanding mortgage loans, get in touch – our friendly mortgage advisors will be happy to help.
UK’s Leading Mortgage Protection Providers
Secure the property you've worked for with our comprehensive mortgage protection services. Ready to get started? Fill in our simple form to speak with a friendly advisor.
