Glossary

Mortgage Terms

Getting a mortgage to buy a home is one of the biggest financial decisions you’ll make. The process can be complicated, with lots of terms and phrases to understand. To make it easier, we’ve created this helpful glossary to explain the words you might hear during your mortgage application.

Affordability

This is a lender’s way to calculate how much they are willing to let you borrow and if they think you can keep up with payments. To work this out, they will look primarily at your annual income and outgoings to see what they think you can afford. Lenders also consider affordability based upon higher interest rates to ensure that the mortgage is affordable in the event interest rates rise in the future.

Agreement In Principle

An agreement in principle (also called a mortgage in principle or decision in principle) is an initial indication from a lender of how much they may lend you. It is not a mortgage offer, as you’ll still need to complete a full application when you find a property, but it’s useful for understanding your borrowing capacity and giving you confidence when searching for a home.

Annual Percentage Rate of Charge (APRC)

APRC, or Annual Percentage Rate of Charge, shows the total cost of a loan as an annual percentage. It helps you compare mortgage offers and includes the lender’s initial and standard variable rates, one-off costs, and regular fees. Some costs, like legal fees and the Land Registry Fee, are not included, as they are outside the lender’s control. APRC gives a clear overview of the mortgage’s overall cost..

Capital & Interest Mortgage

A capital and interest mortgage, often called a repayment mortgage, means you pay both the capital and interest over the agreed mortgage term. If all repayments are maintained, the mortgage will be fully repaid by the end of the term. Early payments consist mostly of interest with smaller amounts of capital, gradually shifting so later payments include more capital and less interest, ensuring the mortgage is cleared on time.

Capped Rate

A capped rate mortgage is a type of variable rate mortgage. The interest rate can rise or fall with the lender’s standard variable rate or the Bank of England Base Rate. It has a maximum limit, or “cap,” so your interest won’t exceed this level. You benefit from lower payments if rates fall, while enjoying the security of knowing your monthly repayments won’t rise above the capped amount.

Credit Score

Your credit score, held by credit reference agencies, records your financial behaviour. Lenders review it when deciding whether to offer a mortgage and how much to lend. Scores can vary between agencies, so lenders carry out their own credit checks to see how you manage agreements and repayments. They then interpret this information according to their criteria to determine if a mortgage offer is possible.

Deposit

A deposit is the down payment you must provide when taking out a mortgage. The amount required depends on factors such as the type of mortgage, the property, and your personal circumstances. Typically, deposits range from 5% to 40% of the property’s value. In general, lenders ask for larger deposits on higher-value properties to reduce their risk and ensure the mortgage is affordable for the borrower.

Discount Rate

A discounted mortgage is a variable rate mortgage where the interest rate is set below the lender’s standard variable rate (SVR). The discount may apply for a fixed period or the entire mortgage term. The rate changes if the lender adjusts their SVR, so your monthly payments can go up or down. This type of mortgage allows you to benefit from lower rates while remaining linked to the lender’s standard rate.

Early Repayment Charge (ERC)

An early repayment charge is a fee a lender applies if you repay all or part of your mortgage before the initial rate period ends. The charge varies depending on when you make the repayment and is shown on your illustration. Some lenders allow a set overpayment each year without penalty, but unused amounts cannot be carried over. Any excess repayment will incur the early repayment charge.

Fixed Rate

A fixed-rate mortgage is one where the initial interest rate remains constant for a set number of years or until a specific end date. During this period, your monthly payments stay the same, provided you make all payments in full and on time. Missing payments, underpaying, or making overpayments can cause your lender to recalculate the amount due, potentially altering your monthly repayments.

Guarantor Mortgage

A guarantor mortgage, also called a family-assisted mortgage, involves another person—usually a family member or close friend—agreeing to be part of the mortgage. This helps applicants whose income alone may not be enough to secure a loan. The guarantor takes responsibility for repayments if you cannot pay. Both you and your guarantor are jointly liable for the mortgage secured against your property.

Interest Only Mortgage - Residential

An interest-only mortgage means your monthly payments cover only the interest, leaving the original loan amount unchanged. At the end of the term, you must repay the full mortgage. This can be done through investments such as ISAs or stocks, using another property, or selling your home and downsizing. Interest-only mortgages require careful planning to ensure the outstanding loan is fully repaid when the term ends.

Interest Only - Buy To Let

An interest-only mortgage means your monthly payments cover only the interest, so the loan amount does not reduce. At the end of the term, the full mortgage must be repaid. This can be done using investments such as an ISA or stocks, selling another property, or selling the current property. Careful planning is essential to ensure the outstanding loan is fully repaid at the end of the mortgage term.

Initial Rate Period

The initial rate period, sometimes called the initial period, is the time a fixed, tracker, discounted, or capped mortgage rate applies. During this period, the interest rate is set according to your mortgage type. If you choose to repay some or all of your mortgage early, early repayment charges may apply. Understanding this period helps you plan repayments and manage your mortgage costs effectively.

Loan to Value (LTV)

LTV, or Loan to Value, is the ratio of your mortgage loan compared to the property’s value, expressed as a percentage. It shows how much of the property’s value you are borrowing. Lenders use LTV to assess risk and determine the mortgage deals available to you. A lower LTV often results in better interest rates, while a higher LTV may limit your mortgage options and increase costs.

Mortgage Term

The mortgage term, sometimes called the repayment period, is the total length of the mortgage. Lenders usually allow terms between 5 and 40 years. For example, you might have a 25-year mortgage with a 5-year fixed rate; the term refers to the full 25-year period. The mortgage term determines how long you take to repay the loan and can affect monthly payments and interest costs.

Negative equity

Negative equity occurs when you owe more on your mortgage than the current value of your property. It reflects the market opinion of what a property could realistically sell for, based on potential buyer or seller expectations. Negative equity can affect your ability to remortgage, sell, or move home, as lenders may be reluctant to offer a new mortgage until the property value increases or the loan is reduced.

Offset Mortgage

An offset mortgage links your mortgage to a bank account with the same lender. The money in this account doesn’t pay off the mortgage but reduces the interest charged each month. The lender subtracts your savings from the mortgage balance when calculating interest. While you won’t earn interest on savings, this arrangement can lower monthly repayments or shorten the mortgage term, helping you save on interest over time.

Part and Part Mortgage

A part and part mortgage means your loan is split into two sections: one is a capital and interest mortgage, where monthly payments reduce both the loan and interest, and the other is an interest-only mortgage, where you pay only the interest each month. At the end of the term, the interest-only portion must be repaid in full, often using investments, another property, or the sale of your home.

Porting

Porting allows you to transfer your existing mortgage product to a new property. If your lender confirms portability, it depends on their current policy. They will check the new property as suitable security and ensure the mortgage is affordable, especially if borrowing more. If you don’t port at the same time as your new purchase, you could lose your current rate, so always check your lender’s policy beforehand.

Product Transfer

A product transfer allows you to move to a new mortgage rate with your existing lender. This can happen when your initial rate ends or if you are on the lender’s standard variable rate. Unlike a remortgage, a product transfer doesn’t require a solicitor because the property’s legal title doesn’t change. It’s a simple way to secure a better rate while keeping your existing mortgage in place.

Re-mortgage

Remortgaging is when you move your mortgage from one lender to another. The most common reason is to secure a better interest rate after your current initial rate ends. Unlike a product transfer, remortgaging requires a solicitor to handle the legal process, as the mortgage is technically a new loan. This ensures the transfer is completed correctly and your property’s ownership and mortgage terms are properly updated.

Self-Build Mortgage

A self-build mortgage helps you finance the construction of your own home. Lenders base the loan on the land’s value and the cost of building works, as well as the final mortgage against the property’s completed value. Typically, you have one to two years to complete construction. Affordability is assessed on your ability to repay the full mortgage once the property is finished.

Standard Variable Rate (SVR)

A standard variable rate (SVR), also called a standard mortgage rate (SMR), is the default interest rate a lender applies once your initial mortgage rate ends. To avoid reverting to the SVR, you can either transfer to a new product with your current lender or remortgage to a different lender on the day your initial rate expires. Planning ahead helps maintain lower monthly repayments.

The Bank of England Base Rate

The Bank of England Base Rate is set to help control inflation. It influences interest rates offered by banks and building societies. When the Base Rate rises, most mortgage, loan, and savings rates typically increase. Conversely, when the Base Rate falls, these rates generally decrease. Understanding the Base Rate helps borrowers anticipate changes in mortgage repayments and make informed decisions about borrowing and financial planning.

Tracker Mortgage

A tracker mortgage is a variable rate mortgage that follows the Bank of England Base Rate or another specified index for a set period. The interest rate is a fixed percentage above the chosen rate. Your monthly payments will rise or fall in line with changes to the Base Rate or specified index, allowing you to benefit from rate reductions while being exposed to potential increases.

Variable Rate Mortgage

A variable rate mortgage is a type of mortgage where the interest rate is not fixed and can change during the mortgage term. Rates may rise or fall depending on the lender’s standard variable rate, the Bank of England Base Rate, or another specified index. This means your monthly payments can increase or decrease over time, so it’s important to plan your budget carefully when choosing a variable mortgage.