Mortgage Terminology – What you need to know

Mortgage Types Explained

• Mortgage types refer to the purpose for which the mortgage is intended. There are several types to consider:
• Residential Mortgage: This type of mortgage is used to purchase a private residential property that the buyer intends to occupy as their primary residence.
• Buy-to-Let Mortgage: Landlords use this type of mortgage to purchase residential properties that they intend to rent out for profit, but will not reside in themselves.
• Commercial Mortgage: A commercial mortgage is utilised to purchase any type of commercial property, either for private business use or to generate rental income from other businesses.
• Semi-Commercial Mortgage: This mortgage is used to acquire mixed-use properties, such as a shop with a flat above.
• Remortgage: This term is used when property owners switch from an existing mortgage to another mortgage product. It can apply to any of the aforementioned mortgage types. For example, if you already own a commercial property and wish to switch mortgage products, you would require a commercial remortgage. You have the option to remortgage with the same lender (known as a product transfer) or with a different lender.
• Equity Release Mortgage: Although often referred to as a mortgage, this product is not intended for property purchase. It is exclusively available to older applicants (typically 55 or 65+ depending on the type) and allows them to release funds secured against their residential home for any purpose.

Repayment Types

The repayment type determines the structure of your monthly mortgage payments. There are three main repayment types to consider:

• Capital Repayment Mortgage: With this type of mortgage, each monthly payment consists of both the repayment of the borrowed capital and the accrued interest. Assuming all payments are made on time, the mortgage will be fully repaid by the end of the term. This is the most popular repayment type for residential buyers.
• Interest-Only Mortgage: With an interest-only mortgage, you only pay the interest each month throughout the mortgage term. However, at the end of the term, you are required to repay the entire loan amount in a lump sum. This repayment type is more commonly used for buy-to-let and commercial mortgages rather than residential mortgages.
• Part and Part Mortgage: This repayment type allows you to combine elements of both capital repayment and interest-only mortgages. You can opt for a part capital repayment and part interest-only mortgage, providing flexibility in your repayment structure.

Mortgage Product or Deal Type

The product or deal type refers to the specific features and conditions of the mortgage. It is tailored to suit the buyer’s personal circumstances and the type of property they wish to purchase.

Here are some common product types:

• Flexible Mortgage: This type of mortgage offers greater flexibility in terms of when and how you make your mortgage repayments. Different flexible features may be included in the same product, each with its own terms and conditions.
• Offset Mortgage: An offset mortgage, often referred to by name, is a type of flexible mortgage. It is particularly beneficial for buyers with substantial savings, as it allows them to link their savings account to their mortgage account, reducing the amount of interest they pay.
• Guarantor Mortgage: Aimed at individuals with low income or a poor credit score, a guarantor mortgage provides assistance to those struggling to enter the property market. Family assist mortgages and JBSP (Joint borrower sole proprietor) mortgages fall under this category and offer more modern and flexible options.
• Affordable Ownership Schemes: These mortgages are associated with government schemes designed to make homeownership more accessible. Examples include the shared ownership scheme, the first homes scheme, the right to buy scheme, and the right to acquire scheme. These products are particularly helpful for individuals without access to a guarantor.
• Self-Build Mortgage: As the name suggests, this type of mortgage is intended for individuals who wish to construct their own home rather than purchasing a pre-built property.
• Islamic Mortgage: Although not technically a mortgage, this product serves the same purpose and is referred to as such. It provides a sharia-compliant form of finance that enables Muslims to purchase a home while adhering to the principles of their religion.

By understanding these mortgage product terminologies, you will be better equipped to make informed decisions and find the mortgage that best suits your needs.

Interest rate terminology

When it comes to mortgages, understanding interest rates is crucial. Buyers have the option to choose between different types of interest rates, which can be categorised into two main headings:

• Fixed rate mortgage A fixed interest rate remains unchanged throughout the duration of the mortgage deal. This means that you can be certain of the interest charges for the entire period that you choose to fix your mortgage for.

Fixed-rate mortgages are available for different lengths, such as two, three, five, or ten years. In some cases, there are even fixed rates for the entire mortgage term, which can range from 25 to 40 years, although this is not very common due to potential disadvantages.

• Variable rate mortgage A variable rate mortgage is characterised by an interest rate that is not fixed and can change during the mortgage deal period. There are three types of variable rate mortgages:
• Standard variable rate (SVR): All lenders have their own standard variable rate, which serves as their default interest rate. Unlike fixed-rate mortgages, SVRs do not have a fixed length, allowing borrowers to leave at any time without incurring fees. However, SVRs are usually, but not always, the most expensive type of variable rate.
• Discount rate: A discount rate deal is set at a certain percentage below the SVR. While the percentage value remains fixed for the duration of the deal (usually two or five years), the actual interest rate paid is still variable. If the SVR changes, the interest rate will also change accordingly.
• Tracker rate: Unlike other rates, the tracker rate is determined by an external financial indicator, typically the Bank of England base rate. As a result, monthly repayments rise and fall in line with this indicator. Other interest-related terms

To fully grasp the mortgage landscape, it’s important to familiarise yourself with other key terms:

• Initial rate: Also known as the initial period, this term refers to the length of time that the fixed-rate, tracker-rate, or discount rate is set for. During this period, early repayment charges may apply if you decide to leave the deal. Once the initial rate period has passed, you are usually free to remortgage without penalty.
• The Bank of England base rate: This rate is set by the Bank of England and affects variable-rate customers, as it can influence or directly impact mortgage interest rates. While it also has an indirect influence on fixed rates, it does not directly determine them.
• APR and APRC: These acronyms stand for Annual Percentage Rate and Annual Percentage Rate of Charge, respectively. Lenders are required to display both figures to help customers compare mortgages, taking into account both interest and fees. However, it’s important to note that APR and APRC do not consider the possibility of remortgaging to a new deal once the initial deal has ended, making it impossible to predict future interest rates.
• Capped rate: A capped interest rate can be found on certain variable rate products and guarantees that the interest rate will not exceed a certain level, regardless of how much the base rate rises.
• Collar rate: In contrast to a capped rate, a collar rate ensures that the interest rate will never fall below a certain level. While this limits potential savings when interest rates decrease, it is more common than a capped rate. By understanding these terms, you can navigate the mortgage market with confidence and make informed decisions throughout the homebuying process.