Mortgages


Frequently used terms

 

Affordability calculator
A method used by mortgage providers to work out how much to lend you, the person wanting to borrow their money. The calculation is based on your income and outgoings and tries to determine how capable you’ll be of repaying what you’ve borrowed. Trying to predict the future is a ‘crystal ball’ exercise and, although some calculations are more sophisticated than others, the outcome is still likely to be conservative; lenders have to be cautious as they don’t want to repossess your home unless they have to.

Base rate
The Bank of England Base Rate (sometimes referred to as the ‘BOEBR’), or official bank rate, is the interest rate the Bank of England charges banks for overnight lending. Some mortgages ‘track’ the BOEBR which means the interest rate you pay is directly linked to its movement; a typical tracker mortgage may, for example, be BOEBR + ‘x’%.

But-to-let (mortgage)
A mortgage specifically designed for either buying or refinancing a residential property that is to be rented to tenants rather than occupied by the borrower. Letting a property is considered a commercial activity and this means the loan is calculated differently: the amount you’ll be able to borrow is assessed using rent-to-interest (‘RTI’) and loan-to-value (‘LTV’) calculations. Interest rates and fees are usually higher than residential mortgages.

Capital
A mortgage is made up of two parts: ‘capital’ and ‘interest’. Capital is the amount you, the borrower, borrow from the mortgage provider and, consequently, have to pay back.

Conveyancer
‘Conveyance’ is the legal process of transferring property from one owner to another; a ‘conveyancer’ is a specialist lawyer who specialises in the legal aspects of that process. Conveyancers must be licenced, their activities being regulated by the Council for Licenced Conveyancers (for more information, please visit their website at www.conveyancer.org.uk). Conveyancers are not necessarily qualified lawyers.

Deposit
This is the ‘cash’ amount you’ll be expected to put toward the purchase of your home. A deposit of 5% is generally considered the minimum amount although some providers expect more. Having a deposit greater than the minimum expected is useful as it’ll open up the potential mortgage market: you’ll be able to approach a wider range of lenders and get better mortgage offers.

Equity
‘Equity’ is the financial difference between what you owe on your property, usually your mortgage, and its market value, eg if your property is worth £175,000 and your mortgage is £60,000, your equity is £115,000. During dips or slumps in the market, the value of your property may fall and, if you’re unlucky, its value may fall below the value of your mortgage. This unfortunate circumstance is known as ‘negative equity’.

Equity release
A method of accessing the equity accumulated in your home. The two commonly used methods of doing so are ‘lifetime mortgages’ and ‘home reversion’ schemes. You must get advice before embarking on equity release as, depending on your circumstances, there may be major pitfalls. Equity release has been regulated by the FCA since 2004,

Equity Release Council (ERC)
The Equity Release Council is an industry body that represents all participants in the equity release market and sets standards which protect consumers providing assurance. The ERC has a voluntary code of conduct and provides a number of safeguards and guarantees.

Fees
Although the mortgage will be the greatest expense, there are many other fees that may have to be paid, for example: arrangement fees, booking fees and valuation fees to name just three. It’s important to know what they are and whether you’ll have to pay them, and it’s best to do so when they arise rather than allow them to be added to your monthly mortgage repayments.

Financial adviser
The cost of getting it wrong can be both irreversible and financially catastrophic so it’s important to get specialist advice before making a commitment. The FCA requires firms to ensure that individuals acting for them have ‘appropriate qualifications’ as determined by the Financial Services Skills Council. A qualified financial adviser who specialises in mortgages will have a comprehensive understanding of what’s available and how the mortgage market works. They’ll discuss what you want to do, assess your needs, recommend a plan that will meet them and guide you through the process.

Financial Conduct Authority (FCA)
The Financial Conduct Authority, the ‘FCA’, is the financial service industry’s regulatory body. It regulates the conduct of over 50,000 businesses; its aim being to ensure the industry is run with integrity, that firms provide consumers with appropriate products and services and that consumers can trust the advice they receive.

Further advance
A further advance is an additional loan secured against your property, maybe to fund home improvements or raise a deposit for a second property, perhaps on a buy-to-let basis. Although it’s usual to get a further advance from your principal mortgage lender it is possible to get one from an alternative source on a ‘second charge’ basis. It’s rarely a good idea to use a further advance to pay off debts.

Help-to-buy schemes
A government-backed initiative introduced in 2013 to help people buy their own home. A number of schemes are available offering help with saving for a deposit, providing interest free equity loans and giving mortgage guarantees. As housing is a devolved policy, there are regional variations in what’s available. A Ministry of Defence scheme offering interest free loans to members of the armed forces is being trialled.

Help-to-buy: Equity Loan
This aims to help first-time buyers and existing homeowners buy a new-build home up to the value of £600,000. A government loan covers up to 20% of the cost of the property leaving the homebuyer to raise a 5% cash deposit and find a 75% mortgage.

(London) Help-to-buy: Equity Loan
This scheme was introduced on 1 February 2016. It’s the same as the ‘standard’ scheme (above) but offers a government loan of up to 40% of the cost of the property to mitigate higher property prices in London. It’s only available for properties in the capital’s 32 boroughs and the City of London.

Help-to-buy: ISA
This aims to help first-time buyers save for a deposit by boosting their savings with a government-funded bonus of 25%. For every £200 you save, the Government adds £50 up to a total bonus of £3,000. The Help to Buy ISA is available on a personal, rather than property, basis which means if you’re buying a property jointly, you could have two ISAs and receive a bonus totalling £6,000.

Help to Buy: Mortgage Guarantee
This aims to help mortgage providers by offering a government-backed guarantee on the loan they make. Protected by a guarantee, mortgage providers can then offer borrowers a higher loan-to-value mortgage, say 80%-95%, meaning that it’s possible to arrange a 95% mortgage with a small, 5% deposit.

Home reversion
A method of equity release that involves selling all, or just part, of your home to a third party in exchange for a regular cash income or lump sum. However, doing so means that you may lose legal title to the property and this may have serious consequences. As with any form of equity release, you must get expert financial advice before making any commitment.

Income multiplier
The factor used to multiply a person’s income to provide a starting figure for affordability calculations. It’s an imprecise and very crude method of assessing someone’s financial capabilities, its use becoming severely tarnished when some providers started to multiply income unrealistically. The knock on effect was that borrowers often struggled to meet the consequent, equally unrealistic level of repayment expected.

‘In principle’
Agreeing your mortgage ‘in principle’ means that you know how much your mortgage provider is prepared to lend you (subject, of course, to satisfactory surveys on the property). Apart from knowing how much you have to spend, it means your loan is effectively agreed when you come to make an offer and this can really work in your favour. If you haven’t got it, you’ll have to delay confirming you offer until you find a mortgage and, providing you find one, the time taken to do so may seriously compromise your success.

Interest
A mortgage is made up of two parts: ‘capital’ and ‘interest’. Interest is the money you, the borrower, pay the lender, the mortgage provider, for borrowing the capital.

Lifetime mortgage
A popular type of equity release scheme that involves taking out a long-term loan secured against your property. The amount you borrow depends on your age and the value of the property. The loan, plus accrued interest, is repaid when the property is sold.

Loan-to-value ratio (LTV)
The loan-to-value ratio is the ratio of your loan, usually your mortgage, against the value of your property and is an indicator of potential risk. It’s usually expressed as a percentage figure, eg if you’ve a £60,000 mortgage and your property is valued at £175,000, your LTV is 34.3%. High LTV ratios mean lenders will invariably charge a higher interest rate to mitigate the risk.

Mortgage
A legal agreement between a ‘mortgagor’ (the borrower) and a ‘mortgagee’ (the lender) arranging a loan to buy either property or land. A mortgage is a huge commitment, one that most of us will have for the rest of our working lives. The consequences of getting it wrong can be catastrophic so it’s vital to get expert advice before making any commitment.

Mortgage (types)
Although there are a variety of different types of mortgage, all are based on the same principle: you borrow an amount of money and pay interest to the lender for doing so. How you repay the loan and the interest on it varies: you may pay a fixed amount every month which pays off both the capital and interest over the agreed term of the mortgage, or you may pay just the interest on a monthly basis followed by a lump sum to repay the capital at the end of the mortgage term. There are many ‘helpful and tempting’ offers but all are variations of the same basic theme.

Mortgage provider
The financial institution, usually a bank or building society, that lends money to buy property or land. They are sometimes referred to as the ‘mortgagee’.

Mortgage term
The mortgage term is the period of time over which you have to repay the loan. Historically this was 25 years but, driven by rising property prices, mortgage terms up to 35 years are now becoming common.

Mortgagee
The lender in a mortgage agreement: the mortgage provider.

Mortgagor
The borrower in a mortgage agreement; typically, the person buying the property.

One Financial Solutions
An independent firm of financial advisers who can help you with all aspects of mortgages no matter whether you’re a first-time buyer, thinking about ‘buy-to-let’ as an investment opportunity or wanting to know the pros and cons of equity release. Please call 020 3714 9565 for a confidential discussion about how we may be able to help you.

Paying off (the mortgage)
The process by which the capital borrowed, together with the interest due, is repaid during the mortgage term. There are a number of ways of paying off the mortgage but most involve either making regular monthly payments until both the capital and interest are fully repaid or making regular monthly payments to pay the interest and then repaying the capital with one lump sum at the end of the term.

Rent-to-interest calculation (RTI)
One of the principal methods of working out the sum of money that will be lent for a buy-to-let mortgage. Unlike residential mortgages which use an ‘affordability calculation’ to assess the borrower’s income and outgoings, buy-to-let mortgages assess the extent to which the rental income will cover the interest on the mortgage.

Residential mortgage
A loan used to finance the purchase of a residential property in which the borrower intends to live. The key phrase is in which the borrower intends to live as this defines that the loan is being taken for residential rather than commercial purposes. Residential mortgages may also be used to pay for improvements to the property.

Right to Acquire
A government scheme aimed at giving eligible housing association tenants the opportunity to buy their home from their landlord. Although your landlord may be a housing association, you may qualify for the preferential Preserved Right to Buy or Voluntary Right to Buy schemes. As with Right to Buy, there are regional differences in how Right to Acquire is offered.

Right to Buy
A government scheme introduced in 1980 that gives eligible council tenants the opportunity to buy their home from the council. As housing is a devolved policy, the governments of Scotland, Wales and Northern Ireland have legislative power over the scheme which has resulted in major regional differences in both eligibility requirements and the discount offered.

Secured
Mortgage loans are usually ‘secured’ against the property that the loan is being used to purchase. It gives the lender legal entitlement to repossess the property or land if the borrower can’t repay the loan, meaning the lender can then sell the property to get their money back.

Solicitor
A solicitor is a qualified lawyer with extensive training; they can offer a full range of legal services and must be a member of the Law Society to practice. Although they could carry out your conveyancing they will be more expensive than using a specialist conveyancer. Many solicitors’ practices employ a conveyancer to carry out conveyancing work.

 

How can One Financial Solutions help you?

One Financial Solutions is here to help you no matter whether you’re a first-time buyer, thinking about ‘buy-to-let’ as an investment opportunity or wanting to know the pros and cons of equity release.

Buying a property is probably the greatest financial undertaking most of us will ever make; it’s a huge commitment and one that needs to be thoroughly considered, ideally with the help of an expert guide. As a truly independent firm of financial advisers we’ll make sure the mortgage we recommend to you is selected from the entire market and is the one that is best for you.

So, if you’re looking for a mortgage or just want advice on an associated subject, please call us on 020 3714 9565 or ask us to call you by sending an email to admin@onefinancialsolutions.co.uk.

 
 

Your home may be repossessed if you do not keep up repayments on your mortgage.