The most common terms explained in language that we can all actually understand

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Annual Percentage Rate of Calculation (APRC)

A way of comparing the rates charged by different mortgage lenders. A percentage figure is calculated by using a standard formula that takes into account interest rates and associated costs over the term of the mortgage. Although mortgage lenders are legally obliged to quote the APRC in any mortgage schedules they provide, its usefulness is questionable as more sophisticated repayment methods are introduced by lenders, and as mortgage borrowers become accustomed to remortgaging every few years.

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Base Rate

The Bank of England Base Rate, set by its Monetary Policy Committee every month, determines lending rates in the UK. Directly or indirectly, all mortgage rates are linked to the present or past Base Rate.

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Buildings & Contents Insurance

Buildings insurance is a pre-requisite to getting a mortgage. It is advisable to also have your contents insured in the event of any damage. By taking out a Buildings & Contents insurance policy you are protecting yourself should anything happen, for instance, fire, flooding, etc.

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Buy-To-Let Mortgage

A mortgage for a property that is, or will be, let to tenants. This is semi-commercial lending, reflected in the higher set-up costs and marginally less attractive rates available. Income multiples are of secondary importance with this type of lending; mortgage lenders are more concerned with the relationship between rental income and mortgage payments.

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Capital & Interest Mortgage

Another term for a repayment mortgage.

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Capped Rate Mortgage

A mortgage that provides protection against rising rates by setting a maximum payable rate (the cap) for a set period. You won’t pay more than the capped rate but if rates fall and your mortgage lender’s standard variable rate drops below the cap, you will pay less. Unless your cap is combined with a discount, a substantial fall in rates is required before your payable rate is reduced. There are usually early repayment charges during the capped rate period.

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Cashback Mortgage

With this type of mortgage, the lender refunds a percentage of the advance – the cashback and you are then usually tied by way of an early repayment charge to the standard variable rate for a set number of years. Early repayment charges are likely to apply during the time you are obligated to pay the standard variable rate.

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Critical Illness Insurance

This type of policy pays out a lump sum if you were to be diagnosed with a critical illness.

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Current Account Mortgage (CAM)

Essentially, a flexible mortgage with daily interest calculation that has a bank account attached to the mortgage account. This can be a tax-efficient option for some borrowers. Money in the bank account is offset against the outstanding balance of the mortgage on a daily basis, so in effect is earning a net rate of interest equivalent to the payable rate on the mortgage.

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Discounted Rate Mortgage

This gives a discount off a mortgage lender’s standard variable rate for a particular length of time. The advantage of having a discount is that your payable rate will fall if rates generally fall. The disadvantage, however, is that if rates generally rise then your payable rate will rise too – without a ceiling. There are often early repayment charges during the discounted period.

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Early Repayment Charge

The fee you would have to pay for fully repaying your mortgage or making a lump sum reduction of the balance within a particular period. Borrowers may feel that the charges often in place with mortgages – discounts, fixed rates, capped rates etc, – are acceptable during the rate-control period, but that early repayment charges tying them in for a number of years to a lender’s standard variable rate thereafter are unfair. Flexible mortgages tend to have minimal early repayment charges.

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Endowment

A popular method of repaying an interest-only mortgage until its recent disfavour. An endowment policy is a form of life assurance that pays a tax-free lump sum at the end of its term or a guaranteed amount – usually the mortgage debt – in the event of the policyholder’s death. Because of changes in the economic climate since they were sold, many endowments are not now expected to reach their original targets on maturity.

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Energy Performance Certificate

This tells you how energy efficient a home is on a scale of A-G. The most efficient homes should have the lowest fuel bills which are in band A. The certificates are commissioned by the seller from an accredited Energy Assessor. This data includes the date, construction and location of the property. And relevant fittings (e.g. heating systems, insulation, double glazing, etc).

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Equity

The value of property in excess of charges on it. If your house is worth £150K and you have a mortgage for £90K and no other secured loans, you have £60K equity.

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Equity Release

Your equity is the value of your home minus any outstanding mortgage on your property. Equity release is when you are able to turn some of that equity into cash to use now. These schemes are available to people over the age of 55 years.

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Evidence of Title

These documents prove that the seller owns the property and therefore has the right to sell it. Where the property being sold is registered, certain documents that are available on request from the land registry must be included in the Pack. These provide an up-to-date official record of who owns the land, and consist of:

  • Official copies of the individual register (made up of a property register, proprietorship register and, typically, a charges register)
  • An official copy of the title plan
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Fixed Rate Mortgage

A name for mortgages offering a fixed payable rate for a set period, during which there will almost certainly be early repayment charges. This type of mortgage gives shelter from rising rates and allows for easy monthly budgeting, but if rates were to fall substantially during the period of the fix you would be left paying a relatively high rate.

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Flexible Mortgage

A generic name for a fairly recent arrival in the UK market. Flexible mortgages provide more options for borrowers than traditional mortgages.

The features available vary from lender to lender. The defining characteristics of flexible mortgages are their monthly or daily interest calculation (instead of the annual interest calculation methods of traditional mortgages) plus the ability to make overpayments without an early repayment charge at any time.

They tend to have a lower standard variable rate than traditional mortgages, and many allow you to underpay, defer paying by taking so called payment holidays, drawback overpayments, and to drawdown further advances at a beneficial rate.

Generally, flexible mortgages are for borrowers who intend to repay their mortgage early. Current account mortgages embody a further refinement of the principle of flexibility.

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Higher Lending Charge

A one-off premium that mortgage borrowers may be charged. It is generally payable when you want to borrow a high percentage of a property’s value – usually above 75% loan to value; but it is common practice for mortgage lenders to carry the cost of this insurance themselves between 75% and 90%.

The premium pays for the lender to insure against potential losses should the house be repossessed and sold for less than the outstanding mortgage. It is important to note that the insurance protects the mortgage lender, not the borrower.

Irrespective of who pays the premium (lender or borrower), the insurer providing the cover retains the right to pursue the defaulting borrower for any loss made as a result of a lender’s claim on the policy.

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Home Condition Report

This contains information about the physical condition of a property which sellers, buyers and lenders will be able to rely on legally as an accurate report.

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Income Multiples

The factors by which mortgage lenders will multiply the gross annual income of applicants to determine their maximum borrowing capability. Multiples vary among lenders.

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Income Protection

This type of policy pays a monthly amount should you be unable to work, for instance, have an accident or become ill.

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Individual Savings Account (ISA)

ISAs provide a way of repaying an interest-only mortgage.

The type of ISA most suitable for mortgage repayment purposes is the equity (stocks and shares) based one. As such one should remember that the future value will be dependent upon investment growth and investments can go down as well as up.

ISAs enjoy significant tax breaks with no capital gains tax on growth, reduced tax on dividend income and no tax levied upon withdrawals. Whilst contributions can be amended at any time, there is an upper limit on the amount you can pay into an ISA.

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Inheritance Tax

Once your estate is worth £325,000, any amount over this will be taxed at a flat rate of 40% so the tax man gets his share ahead of your beneficiaries – and YOUR family! AGA Mortgages can help you plan to minimize your inheritance tax by the use of a will trust within your will so that your loved ones receive as much as possible and the taxman gets as little as possible.

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Interest Calculation

The frequency with which mortgage lenders calculate the outstanding balance on mortgages – annually, monthly or daily – is an important consideration if you have a repayment mortgage.The annual calculation systems of traditional mortgages mean that you are paying interest on capital repayments already made during the course of that calendar year.The daily or monthly interest calculations used with flexible mortgages enable payments (and overpayments) to have a quicker impact on the outstanding balance. Other things being equal, daily or monthly as opposed to annual calculation saves borrowers money.

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Interest-only Mortgage

Monthly payments consist entirely of the interest due on your mortgage, so that the balance you owe is not reduced during the term.Interest-only mortgages are usually set up in conjunction with investment vehicles such as personal pensions, ISAs or endowment policies (they are sometimes generically known as endowment mortgages) designed to repay the loan at a given date assuming specified levels of growth.

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Letting Your Property

This contains information about the physical condition of a property which sellers, buyers and lenders will be able to rely on legally as an accurate report.

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Life Assurance

Life Assurance is an insurance policy which pays out a lump sum should you die prematurely. This can then be used by your partner to pay off the mortgage.

  • Level Term: This is a policy which pays out a fixed amount of money in the event of your death. The term is usually set to match the term of your mortgage.
  • Decreasing Term: This is a policy which reduces in value in line with your mortgage.
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Loan To Value (LTV)

A percentage figure indicating the size of the mortgage on a property in relation to its value. Thus, a house worth £120K with a mortgage of £60K would have a loan to value of 50%.

Better mortgage deals are available for lower loan to values – 75% and below. At higher loan to values typically from 85% and higher, lenders are far tighter with their criteria and requirements and this is why so many people with small deposits fail to get a mortgage.

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Mortgage Payment Protection (MPPI)

This type of policy pays out a monthly amount for typically a 12 month period if, for instance, you have an accident, become ill, become unemployed or are made redundant.

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Other Charges

Notwithstanding any charges notified with your recommendation or covered elsewhere in this brochure, you should be aware that you may be liable for certain other standard charges. Namely:

  1. Buildings and Contents Insurance: Insuring your home is essential. All mortgage lenders insist you have adequate buildings insurance, in order to safeguard the money they are lending. Most lenders now do not insist on your taking their own block insurance. They do, however, reserve the right to charge an administration fee (typically £25) for checking that your policy is adequate if you elect to arrange insurance elsewhere.
  2. Legal fees: Unless the scheme recommended specifically states that the product carries free basic legal work, you will be liable to pay any such costs in relation to your mortgage application. The solicitors acting would normally be working on both your and the mortgage lender’s behalf and you would ordinarily be responsible for all costs. If the recommendation carries free basic legal work, please note that this covers only the very basic work. The cost of additional work carried out on your instruction or incurred as a result of unusual circumstances will be your responsibility. If you have any doubts as to the implications of this, please call us.
  3. Release fee (sealing fee): An administrative charge imposed by mortgage lenders for releasing the title deeds of your property when you redeem your mortgage (repay in full). This fee is payable because remortgages involve redeeming the mortgage with one lender and transferring it to another. It varies considerably from lender to lender: it can be up to £300 – and although it is not strictly speaking an early repayment charge, borrowers may well feel penalised by fees at the higher end of the scale.
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Payment Protection Insurance

Policies that ensure mortgage payments are met for a given period (usually 12 months) if you are unable to work because you become sick, have an accident or are made redundant.

Income Support for Mortgage Interest (ISMI) is no longer payable for the first 9 months that you are unable to work, and the government has urged homeowners to protect their homes with this type of cover.

Mortgage payment protection insurance is also known as accident, sickness and unemployment (ASU) cover. (Confusingly, some types of life assurance taken in conjunction with a mortgage may be called mortgage protection policies.)

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Permanent Health Insurance (PHI)

A form of cover that pays the policyholder an income for a specified time (usually after a preliminary deferment period) in the event of prolonged illness resulting in loss of earnings.

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Portability

A portable mortgage is one that can be transferred without penalty if you move house during a rate-control period. If you increase your mortgage the rate available for additional borrowing depends on what schemes the lender is prepared to offer you. If you reduce your mortgage, a pro-rata early repayment charge may apply. Most mortgages nowadays are portable.

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Redundancy

The DSS gives no assistance to borrowers for nine months following redundancy, and qualification for help with paying mortgage interest thereafter is means-tested and restricted to interest on the first £100,000 of the loan. If you are anxious about being able to maintain payments in the event of redundancy or long-term illness, you should consider taking out mortgage payment protection insurance.

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Repayment Mortgage

Also referred to as a capital-and-interest mortgage. Part of each monthly payment you make goes towards repaying the capital amount you owe and part goes towards paying interest charged on the loan.

At the end of the term (typically 25 years) the entire debt will be repaid. In the early years payments consist largely of interest; as time goes on the capital-repayment proportion increases.

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Sale Statement

This should provide some basic information about the site, for example:

  • The name of the seller and the address of the property being sold
  • Whether the property is freehold, leasehold or commonhold
  • Whether the property is registered or unregistered
  • Whether or not the property is being sold with vacant possession
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Split Loan

A mortgage that has some of the loan set up on an interest-only basis and some on a repayment basis.

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Stamp Duty

This is a land tax payable when purchasing a property or land in the UK. The amount payable depends upon the purchase price. Stamp duty bands are as follows:

  • Up to £125,000 – 0% stamp duty
  • Above £125,000 and up to £250,000 – 2% stamp duty
  • Above £250,000 and up to £925,000 – 5% stamp duty
  • Above £925,000 and up to £1,500,000 – 10% stamp duty
  • Above £1,500,000 – 12% stamp duty

Please also note an additional 3% stamp duty of the total purchase price is payable for investors buying additional properties or where someone is moving home and not selling their existing main residence. Please contact us for further details on this.

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Standard Searches

The Home Information Pack must include:

  • The local land charges register relating to the property being sold. If the search is carried out by the local authority, an official search certificate will be provided. Alternatively a personal search company can be used.
  • Other records held by the local authority on matters of interest to buyers, such as planning decisions and road building proposals. These are referred to as local enquiries in the Home Information Pack regulations. A local authority or a personal search company can be used.
  • The provision of drainage and water services to the property. The local water company or a personal search company can be used (however, the search must comply with the HIP Regulations).
  • Whether or not the property is being sold with vacant possession.
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Standard Variable Rate (SVR)

Mortgage lenders’ SVRs fluctuate at their discretion as economic conditions change. When the initial rate-control period on a mortgage finishes the SVR will be the payable rate. (Some flexible mortgages nowadays have special lower SVRs linked directly to the Bank of England Base Rate.)

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Tracker Mortgage

These are mortgages with a variable rate set above or below the Bank of England Base Rate. Tracker mortgages are similar to discount mortgages, in that they fluctuate in accordance with prevailing economic conditions without an upper limit on their payable rate; but they have the advantage of being linked to a rate set by an independent party – the Bank of England – rather than the mortgage lender.

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Valuations & Surveys

When you take out a new mortgage on a property (whether house purchasing or a remortgage), the mortgage lender concerned needs to value it in order to ensure that it offers sufficient security. There are three levels of valuation/survey:

  • Basic valuation: is carried out purely on behalf of the mortgage lender even though you may have to pay for it. Most lenders charge valuation fees on a scale depending on the value of properties. The report is basic, and all lenders disclaim any responsibility for the condition of the property. You have no comeback against the surveyor for any defects or problems overlooked in the report.
  • Homebuyers’ report: a more detailed but still limited report to a set format on the readily accessible parts of the property. It may offer you some limited recourse should the surveyor, who is acting on your behalf rather than the lender’s, be negligent.
  • Full structural survey: the most thorough (and most expensive) report. 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.

With any level of survey, if there are potential or actual defects found the surveyor may suggest you obtain additional specialist reports, which could be at your expense and may be time-consuming. If you opt for a homebuyers’ report or full structural survey, you will sign a contract with the surveyor to formalise his responsibilities to you.

Applicants should always check with mortgage lenders before instructing their own valuation or survey. Lenders tend to work with panels of surveyors, and if your surveyor is not known to your lender you may find yourself paying again for a valuation by one who is known.

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Will

A will is the instrument whereby you ensure that your property, possessions and items of sentimental value are dealt with as you would wish. It is important to make your will to ensure that your family is provided for as you would like. Your will is a clear statement of your wishes, helping to avoid extra stress for your family at an already difficult time. A will is essential if you wish to preserve your estate and stop the tax man getting more than he should and getting a big slice of your estate, meaning your family gets less.A will could help you preserve part of your estate should you have to go into care thorough an accident, illness or old age. If you do not make a will, your estate falls under the legal ruling of Intestacy – which means your estate is divided up by people who do not have your best interests at heart.

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