Glossary of Terms

A
accident, sickness and unemployment insurance (ASU)
insurance cover arranged by the borrower to protect against inability to meet mortgage payments. This cover should be more accurately described as accident, sickness and redundancy insurance as unemployment cover is generally seriously restricted to cover only events that are entirely beyond the control of the insured person. Typical exclusions include dismissal following professional misconduct and any act of voluntary redundancy. The accident and sickness cover will also be subject to major restrictions such as any act of self-injury or any injury related to the use of alcohol or drugs.

annual equivalent rate (AER)
annual equivalent rate illustrates what the interest rate would be if interest was paid and added each year. If monthly interest is not added to your account, then the AER will not be achieved.

annualised percentage rate (APR)
a definition intended to identify the true cost of borrowing and to provide the consumer with a method of comparing the true costs of different types of loan. Mortgage loans were originally excluded from a requirement to quote an APR, possibly because it is a highly inappropriate way of comparing mortgage loans. APR was designed more to reflect the cost of different types of hire-purchase contracts which, at the time the legislation was drafted, were frequently quoted on flat and fixed basis giving headline rates which were often half the APR. It is a legal requirement that a true APR figure be provided with any loan illustration.

arrangement fee
fee charged by a lender for setting up the loan. Normally payable upon completion but may sometimes be added to the loan

B
building society
an institution regulated by the Building Societies Act. Building Societies are mutual organisations owned by their members and are restricted as to the amount of their funds which they are allowed to raise from the money markets. In addition, the Building Societies Commission lays down restrictions on their lending criteria. Thus building societies are less able to help with certain categories of loans than are banks.

buildings insurance
insurance covering the structure of the building which you must have. Where the property is leasehold the buildings insurance will normally be arranged by the freeholder and the cost charged on to the leaseholder within the service charges payable. As a general rule of thumb any item which cannot be taken away by the owner is covered by the buildings insurance, anything which can be removed should be covered by the contents insurance. This is only a guideline and any doubts should be raised with insurers as this definition can prove problematic in some instances, such as fitted carpets.

C
capital
the principal part of a loan, i.e. the original amount borrowed.
capital and interest
otherwise known as a repayment loan. The borrower pays an amount each month to cover the amount borrowed or principal and the interest charged on that. There are two main types of capital & interest mortgage, constant net payment and gross profile.

capital raising
when you remortgage, (change your mortgage but stay in the same property) your new loan pays off the existing/outstanding mortgage but leaves a surplus at the disposal of the borrower. If the surplus is to be used for home improvements (i.e. increase the value of the property) then some lenders do not regard this as capital raising. See also remortgage.

capped rates
the mortgage interest rate will not exceed a specified value during a certain period of time, but it will fluctuate up and down below that level. Some capped products will have a ceiling and a floor between which the rate payable may move, such loans may be known as cap and collar mortgages.

completion
the point at which the legal formalities of a property purchase or mortgage are finalised and the funds are drawn down from the lender, normally into the solicitor's account. In the case of a purchase, the purchasers should not be allowed to take occupation until after completion has taken place.

contents insurance
the insurance of property within your home i.e. furniture, clothing, personal possessions etc. as distinct from the buildings insurance. Whilst lenders will be keen to offer contents insurance to borrowers, it is not essential that you should have it. Cover is normally provided for insurance of fire, a full range of perils (e.g. water damage) and theft. Some policies offer a wider, all-risks wording. Contents policies normally cover goods within the home, although most will extend to include small amounts of cover outside the home, possibly upon payment of an additional premium.

credit check
enquiry made on the credit history of an applicant, normally by reference to one of the major credit agencies such as Equifax, CCN.

credit scoring
method of loan assessment carried out by scoring the various answers given on a loan application. Almost all loan applications are credit scored and as a result it becomes essential for all questions on any application to be fully completed Missing answers on an application will normally result in the maximum negative score being allocated to that question.

criteria
the lender's standard terms and conditions for acceptable loan applications. These vary from mortgage to mortgage.

D
discount rate
the mortgage interest rate is lower than the current normal standard variable rate for a certain period, usually shown as a fixed percentage reduction to the lender's normal variable rate e.g. 2.00% discount for 2 years.

E
early repayment charge
a charge by the lender for withdrawing from a mortgage before a given date specified in the mortgage conditions. Lenders will normally impose such a charge on a fixed or discounted loan.

F
fixed rates
a loan where the initial payments are based on a certain interest rate for a stated period and the rate payable will not change during that period regardless of changes in the lender's standard variable rate.

H
home buyer's valuation fee
the fee paid for a fuller inspection of the property you are thinking of buying which is more thorough than the normal lender's valuation. This is frequently referred to as an Option 2 valuation fee.

home buyer's report
a more thorough survey than the simple valuation carried out on the property by the lender (although you still have to pay for it). If your lender does not offer this as an alternative to the basic valuation, you can negotiate with the surveyor carrying out the valuation for the fuller inspection and this may cost you less than a separate inspection.

I
individual saving account (ISA)
a new way of holding cash deposits, life assurance policies and investments in stock and shares in a tax privileged way. ISA's are intended to build upon the experience of PEP's and TESSA's. The Government have stated that ISA's will be available for a minimum of ten years.

initial rate
interest rate that is payable from the commencement of the loan. Many mortgage products, e.g. fixed and discount, have an initial rate of interest which will change at the end of the initial period.

interest
gross interest is the payment of interest (subject to any required certification) without deduction of tax.
Net interest is the payment of interest from which the basic tax rate has been deducted.

J
joint application
mortgage application involving more than one person as the borrower.

L
loan to value ratio (LTV)
is the ratio of the loan amount to the property valuation expressed as a percentage. E.g. if a borrower is seeking a loan of £20,000 on a property worth £40,000 it has a 50% loan to value rate. If the loan were £30,000, the LTV would be 75%. The higher the loan to value the greater the lender's perceived risk. Lenders will be more cautious in underwriting high loan to value loans. Loans above normal lending LTV ratios may require additional security

M
mortgage
loan secured by land.

mortgage deed
legal document establishing a loan on property.

mortgage term
length of time before the mortgage loan must be repaid.

O
other income
income in addition to basic annual salary or, in the case of self-employed, annual net profits.

P
postcode area
the first one or two letters of the first part of the postcode. e.g. B for Birmingham, TW for Twickenham.

R
redemption
paying off the mortgage, either to move to another property or at the end of the mortgage term.

repayment
payment made to cover interest or reduction in principal of a loan; monthly amount due to the lender

S
self employed
working on one's own account. For mortgage purposes this will include partners in unlimited liability businesses and professional practices.

T
typical APR
example of the annual percentage rate for a given mortgage product, normally used in an advertisement in order to comply with the requirements of the Consumer Credit Act (Advertising Regulations).

V
valuation
inspection carried out for the benefit of the mortgage lender to ascertain if a property forms good security for a loan. Whilst the borrower may be given a copy of the valuation this is only a limited form of inspection and should not be relied upon on when deciding whether to purchase a property. Purchasers should be advised to obtain either a House or Flat Buyer's report or a full structural survey before proceeding with a purchase.

valuation fee
fee paid by the prospective borrower for the lender's inspection of the property. Normally paid on application.

variable rate
interest rate that will vary over the term of the loan, normally in line with the general cost of borrowing.