Applying for a mortgage is one of the most important financial decisions you will ever make, and mortgage products come with many important elements that must be understood before signing. When you begin the process, it can feel like stepping into a world of jargon. For first-time buyers and seasoned homeowners alike, understanding mortgage terms is crucial to navigating the process confidently and avoiding mistakes.
This glossary brings together some of the most important mortgage terms you are likely to encounter. Whether you are comparing mortgage products, exploring different mortgage types or simply trying to understand what your adviser is telling you, this guide can potentially help you cut through the confusion.
Key Mortgage Terms and Definitions
Agreement in Principle (AIP)
Also known as a Decision in Principle (DIP), this is a statement from a lender confirming how much they may be willing to lend to you. An AIP helps you show estate agents and sellers that you are a serious buyer.
Annual Percentage Rate of Charge (APRC)
This figure represents the total annual cost of your mortgage, including interest rates and arrangement fees, expressed as a percentage. It is designed to help borrowers compare the costs of different mortgage products.
Arrears
When you fall behind on your mortgage payments, the outstanding balance is called arrears. Persistent arrears can put your property at risk of repossession.
Arrangement Fee
A charge from the lender for setting up your mortgage. Some lenders let you add this to your loan, but that means you will pay interest on it.
Base Rate
The interest rate set by the Bank of England, which influences how much lenders charge for borrowing. Many variable-rate mortgages move up or down in line with changes to the base rate.
Buy-to-Let Mortgage
A mortgage designed for people buying a property to rent out rather than live in. Lending criteria and deposit requirements differ from residential mortgages.
Capital
This is the original amount of money you borrow from a lender; separate from the interest you will pay on top. Over time, your repayments reduce the capital, building up equity in the property.
Completion
The final stage of a property purchase when the money is transferred and you officially become the legal owner of the home.
Conveyancing
The legal process of transferring property ownership from the seller to the buyer, usually handled by a solicitor or licensed conveyancer.
Deposit
The upfront lump sum you pay towards the cost of a property. The larger your deposit, the smaller your mortgage and potentially the wider the choice of mortgage products you are likely to have.
Early Repayment Charge (ERC)
A fee some lenders charge if you pay off your mortgage early or make overpayments beyond the permitted annual limit, which is usually 10%. Early repayment charges are especially common with fixed-rate mortgage products.
Equity
How much you ‘own’ of your property. Equity is the difference between the current value of your property and the outstanding amount of your mortgage. If your home is worth more than you owe, you have equity in it.
Equity Release
A way of unlocking some of the money tied up in your home without having to move. Lifetime mortgages are a common equity release product, often used by older homeowners.
Fixed-Rate Mortgage
A type of mortgage where the interest rate is fixed for a set period, giving you certainty over your monthly payments.
Guarantor
A guarantor is usually a parent or close relative who agrees to cover your mortgage payments if you are unable to. Some lenders offer guarantor mortgages as a way of helping buyers with smaller deposits or weaker credit histories.
Interest-Only Mortgage
With this type of mortgage, you only repay the interest each month, not the capital. At the end of the term, you will need a plan in place to pay back the full original loan amount.
Loan-to-Value (LTV)
Expressed as a percentage, this measures the size of your loan compared to the value of your property. For example, borrowing £180,000 on a £200,000 home gives you a 90% LTV.
Negative Equity
When the value of your home falls below the amount you still owe on your mortgage. This can make it difficult to sell or remortgage.
Offset Mortgage
A type of mortgage that links your savings account to your mortgage. The balance in your savings offsets the mortgage debt, reducing the interest you pay.
Porting a Mortgage
The process of transferring your existing mortgage deal to a new property when you move home. Porting can be useful if you want to keep your current interest rate and avoid early repayment charges.
Redemption Statement
A document from your lender that shows exactly how much it will cost to pay off your mortgage, including any outstanding mortgage balance, interest and early repayment charges.
Repayment Mortgage
The most common type of mortgage, where each monthly payment covers both the interest and a part of the capital. By the end of the term, the mortgage is fully paid off.
Stamp Duty Land Tax (SDLT)
A tax paid on property purchases based on rates that apply above certain price thresholds.
Standard Variable Rate (SVR)
The default interest rate set by a lender after your initial mortgage deal ends. SVRs are usually higher than fixed or tracker rates, so many borrowers refix their rates or remortgage before reaching this stage.
Tracker Mortgage
A type of variable-rate mortgage that tracks the Bank of England’s base rate, moving up or down in line with changes.
Valuation Survey
A basic check carried out by your lender to confirm the property’s value before they approve the mortgage. This is not the same as a full structural survey.
Conclusion
Understanding mortgage terms is essential for anyone entering the property market or reviewing their current mortgage. From LTV and SVR to offset mortgages and arrears, knowing the terms enables you to compare and evaluate mortgage products effectively, avoiding surprises. The more familiar you are with these mortgage terms, the more confident you can be in making one of life’s biggest financial commitments. Where in doubt, speak to a mortgage advisor to ensure you understand the terms of your mortgage deal clearly.
FAQs
Q. What is LTV in mortgage terms?
A. LTV, or Loan-to-Value, is the mortgage amount as a percentage the property’s value. It helps lenders assess risk, with lower LTVs usually securing better mortgage deals.
Q. What is a DIP in mortgage terms?
A. A Decision in Principle is an initial confirmation from a lender showing how much you may be able to borrow, based on a soft credit check and your financial details.
Q. What is an AIP in mortgage terms?
A. An Agreement in Principle is another term for a DIP. Both give you an idea of your borrowing capacity before you make an offer on a property.
Q. What does SVR mean in mortgage terms?
A. SVR stands for Standard Variable Rate. It is the default interest rate you pay after your deal period ends, unless you enter into another rate deal.
Q. What is an AVM in mortgage terms?
A. An AVM, or Automated Valuation Model, is a computer-based property valuation system that uses data such as recent sales and market trends to estimate a property’s value.
Q. What is an early repayment charge?
A. An early repayment charge is a fee some lenders impose if you repay your mortgage early or make overpayments beyond your annual allowance. It is usually a percentage of the outstanding balance.
Q. What are arrears in mortgages?
A. Arrears are missed mortgage payments. Falling into arrears can harm your credit rating and may ultimately lead to repossession if left unresolved.
Q. What mortgage can I get as a first-time buyer?
A. The mortgage you can get depends on your deposit, income, credit history and the lender’s criteria. Common mortgage types include fixed-rate, tracker and shared ownership products.
Q. How do mortgage products differ?
A. Mortgage products vary by interest rate type, fees, repayment structure and eligibility. Comparing different products helps you choose the one most aligned with your financial goals.
Q. What is the difference between repayment and interest-only mortgages?
A. Repayment mortgages cover both interest and capital, reducing your loan over time until it is cleared. Interest-only mortgages cover only interest during the term, with the capital to be repaid at the end.
Additional Sources
https://www.uswitch.com/mortgages/guides/mortgage-terminology/
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