MORTGAGE TERMINOLOGY
There are a number of terms you will come across when taking out a mortgage which relate to specific elements of the mortgage process and the fees charged. Some of the most common are outlined below as well as revealing a few money saving secrets and facts that you may not have been aware of but need to know. As ever, if there is something that you are sill not sure about or require further information you can call or e-mail us.
FEES, CHARGES & SEARCHES
These include:
Advice Fee - an amount we, as independent mortgage advisers, may charge you for advising on and / or arranging a mortgage.
Procuration Fee (sometimes referred to as (‘commission’) - an amount we may receive from the lender for placing a mortgage with it. This may be used to offset the Advice Fee or you can agree that we receive the whole amount and waive any Advice Fee. Importantly, you pay us nothing up front.
Arrangement Fee- Depending on the mortgage you eventually choose, some lenders may require a fee to set up the loan. Other names for the fee include ‘Application Fee’, ‘Booking Fee’ and ‘Reservation Fee’. They are usually not refundable if the mortgage doesn’t complete.
Valuation Fee- Before a lender will offer you mortgage funds, it will usually require a qualified surveyor to inspect the property and to submit a valuation report. This is to ensure that the property is suitable for the loan requested; the report does not necessarily give you an indication as to the condition of the property. Technically, if the report is flawed and there is a major problem with the property that the report missed, it gives you little or no protection. This is because it was commissioned by the lender not you. For the same reason, some lenders don't even give you sight of the report. If the property is new and building not completed, you may have to pay an additional fee for a second valuation when it is finished.
Survey Fee - In addition to the valuation fee, you may wish to have your own survey carried out by a qualified surveyor; this can take the form of a ‘Home Buyers Report’ or ‘Building Survey’. Most lenders will allow you to have this carried out at the same time as the valuation report.
Reservation Fee- In some cases, especially for new homes, you may be expected to pay a reservation fee or deposit. You should check whether this is returnable or not and obtain a receipt from the builder, the developer or their agent.
Legal Fees- Your solicitor or legal adviser will make a charge for both the sale and purchase or remortgage of the house: this is called ‘conveyancing’. For preferential terms click here.
Land Registry Fee - This is a once-only charge to reimburse your solicitor or legal adviser who carries out the registration work on your behalf.
Estate Agent Fees - If you are selling your house through an Estate Agent, their fee will normally be paid by your Solicitor or legal adviser on your behalf from the sale proceeds. Estate Agent’s fees are not payable when you are buying a house.
Local Authority Search - This procedure, carried out by your solicitor or legal adviser, is to check whether any official plans, decisions or restrictions affect the property you intend to buy. This may take some weeks.
Bankruptcy Search - Your solicitor or legal adviser will undertake on behalf of the lender a bankruptcy search on you and your partner immediately prior to completion of the purchase.
Stamp Duty Land Tax - This is a Government tax imposed on most purchases and some specialised transfers of properties.
Telegraphic Transfer Costs - It is usual for the lender to transfer your mortgage funds to your solicitor’s or legal adviser’s bank by telegraphic transfer. A charge for this will be added to your final account.
Mining Search - If you live in an area where mining has been or is likely to be carried out, the lender may request your solicitor or legal adviser to carry out an appropriate search on its behalf.
Early Repayment Charges - If you decide to clear all or part of your mortgage early, you may find the lender applies a penalty. The penalty is typically a number of months' interest, or a percentage of the total loan amount. This is most common on the most specialised mortgage types such as fixed or discounted.
Overhang period - Some lenders continue to impose the Early Repayment Charges beyond the initial period of the special deal. So you could have a 3-year fixed rate with an early repayment charge of one month’s interest which the lender will apply until the end of the 5th year.
Mortgage Exit Administration Fee - some lenders will charge fees at the end of the mortgage. These commonly cover deed release and related administration activities. Always check with the lender what its fees will be.
Portable mortgage - you can carry forward the special rate to a mortgage on a new property for the remainder of the special rate period.
Own Insurance charge. A charge, typically around £25 levied by the lender if you do not use their own buildings insurance, payable for checking the suitability of the policy that you have bought elsewhere. We can help you get round this.
MORTGAGE TYPES
There are a number of alternative types of mortgage that can be available at any given time. The most common are:
A Variable Rate mortgage, where the amount of your monthly repayment is linked to the mortgage interest rate charged by your lender. If the mortgage rate is increased, the amount of your monthly repayment increases. Conversely, when the mortgage rate decreases, so does the amount of your monthly repayment. The change in your monthly payment is calculated to ensure that the mortgage loan is on course to be repaid within the agreed term. Many lenders put rates up faster than they come down!
Tracker Mortgage,a variation of a variable rate mortgage. In this case your mortgage rate is guaranteed to follow the base rate by a specific percentage difference. However, lenders often reserve the right to vary the percentage difference if it is in their interests to do so.
An Offset Mortgage Gives you option of linking your mortgage to your savings account and/or current account balances and instead of receiving interest on the savings and/or current account balances, you will pay no interest on the equivalent amount of mortgage. Typically your mortgage rate will be higher than any rate you could earn from your savings or current account (and that’s before tax is deducted from the interest earned). There is a clear gain therefore in offsetting. This factor, coupled with making either regular or occasional over payments to the mortgage, has an extraordinary impact on how much sooner your mortgage can be fully repaid. We never cease to be amazed at how many years you can reduce your mortgage by when you do this and if this is of particular interest to you, we can provide you with these answers.
A Current Account mortgage (CAM) combines your mortgage, your current account, your savings account and even your personal loans and credit cards into one account. Your salary is paid into this account, something insisted upon by some lenders, and should you not spend all your income at the end of the month, that amount is taken off what you owe on your mortgage.
A Fixed Rate mortgage, where the interest rate charged is fixed at a certain level for a set period of time. Whilst during this period you would be protected from any increase in monthly payments, caused by an increase in variable mortgage rates, you would not benefit from any decrease in monthly payments, caused by a reduction in those rates. However, during the fixed rate period, you would know exactly how much your gross mortgage payments would be.
A Capped Rate mortgage is a variable rate mortgage, with a specified maximum interest rate that can be charged, for a set period. In other words, whilst your monthly payments can be affected by movements in the mortgage rate, you will know the maximum rate that could be charged during the set period and hence be protected from rates higher than the maximum limit. (A collared rate is a specified minimum rate; hence a capped and collared mortgage will be a variable rate mortgage, where the rate will be limited between a known minimum and maximum).
A Discounted Rate mortgage is a variable rate mortgage, which allows a known reduction in the mortgage rate charged for a set term. This differs from a deferred rate mortgage, where instead of allowing a discount in the rate charged, a reduced monthly payment is allowed, with the shortfall being added to the mortgage debt.
At the end of any fixed, capped or discounted rate period, your mortgage normally reverts to the lender’s standard variable rate. This may be higher than the rate you have been paying. In some cases, the lender may offer you an alternative rate. Please refer to your mortgage offer letter for details. Some fixed, capped and discounted rate mortgages can be continued if you move house during the term of the offer rate. Please refer to your mortgage offer letter to see if this applies.
A Self Certification Mortgage (Self Certified Mortgage) is a specific mortgage arrangement originally intended for the self-employed. This mortgage requires no proof of income, no length of self-employment and even if you have only been self-employed for one day, it is still possible to get a Self Certified Mortgage. However, lenders often view them as higher risk and apply a higher interest rate than a normal mortgage.
A number of these arrangements may have ‘cashback’. With cashback, you receive a sum (which may be a percentage of the amount borrowed) shortly after you take up the loan. You will normally have to repay some or all of the cashback if you repay the mortgage in the early years.
REPAYMENT TYPES
There are two ways in which you can repay your mortgage. These are:
Capital and interest repayment (the associated mortgage is called a repayment mortgage). With a repayment mortgage, your monthly payments cover the interest charged and also include an element of capital repayment. You will therefore see your mortgage debt decreasing over time. It should be noted that in the early years, most of each payment is used to cover the interest charged. As the mortgage debt decreases, a higher proportion of each monthly payment is used towards capital reduction. The lender may insist that life cover be in place to cover the mortgage debt.
Interest repayment (the associated mortgage tends to be referred to as an interest only mortgage). With an interest only mortgage, your monthly payments only cover the interest charged and therefore the mortgage debt will remain at a constant level. In most cases, the lender will insist that you have an investment plan that will pay out a lump sum at the end of the mortgage term to repay the mortgage debt. In addition, the lender may insist that life cover be in place to cover the mortgage amount. The plans most commonly used for this purpose are a low cost endowment plan, ISA, a unit trust type plan or a pension plan. Endowment plans have life cover built into them, whereas pension plans and unit trust type plans do not. In these cases, separate life cover would be necessary.
HIGHER LENDING CHARGE / MORTGAGE INDEMNITY PROTECTION (MIP)
If your mortgage represents a high percentage of the price or valuation of your property (usually 80% or more) you may have to pay a ‘higher lending charge’. Some or all of this money may be used by the lender, at its discretion, to obtain mortgage indemnity insurance to act as extra security for its sole benefit. Effectively you pay for it but receive no direct benefit but the lender will not lend without it. The lender will usually allow you to add the cost incurred to the mortgage to pay for it. If this is the case, the lender will give you a written explanation, stating that: Such insurance will not protect you if your property is subsequently taken into possession and sold for less than the amount you owe. You will remain liable to pay all sums owing, including arrears, interest and your lender’s legal fees. If a claim is paid to your lender under such insurance, the insurers generally have a right to recover this amount from you. In recent years we have noticed that lenders have not been charging this fee to gain competitive advantage over the lenders that do. It will come as no surprise if we see this charge re-emerging during the so called credit crunch.
REPAYMENT OF YOUR MORTGAGE
You may lose your home if you do not keep up payments on the mortgage during its term. You may also lose your home if you do not repay your mortgage loan at the end of its term. It is your responsibility to ensure that your mortgage is repaid on time. If you have an interest only mortgage, you will need to have some form of repayment scheme to clear the mortgage debt at the end of its term.
EARLY REPAYMENT OF YOUR MORTGAGE
If you wish to repay your mortgage early, perhaps to move again or re-mortgage, you may have to pay an extra amount of money to the lender as a penalty, this is called the early repayment charge. Please check the details of any mortgage offer you receive so that you are aware of the conditions and that they suit your requirements, before accepting it. If you have an existing mortgage, your lender may make a charge to cancel the current arrangements. With your written authority we can find out the details from the lender on your behalf.
CHANGES IN PERSONAL CIRCUMSTANCES
If you are taking out a mortgage with a partner, or with others, each person is responsible jointly and individually for the repayments. Therefore, if there is a breakdown of the relationship, the lender can seek repayment of the full amount of the loan from each of the parties to the mortgage.
MORTGAGE PAYMENT PROTECTION
Should you be unable to work due to perhaps accident, sickness or unemployment, you will still have to meet your repayments. Insurances are available to cover you against these possibilities. For your peace of mind, we suggest you protect your payments in the event of sickness, accident or unemployment. If you have dependants, we recommend that you have adequate life assurance cover for your mortgage debt at the very least.
OTHER MORTGAGE RELATED SERVICES
Lenders usually require you to arrange Buildings Insurance (and have their interest in your property duly noted with the property insurer), to cover the rebuilding of your property should it be damaged. Some lenders also insist that you take out Contents Insurance and/or Payment Protection Insurance (also known as Accident, Sickness and Unemployment Insurance). Some lenders may insist that any insurance cover is arranged through them (known as ‘tied insurances’). Since this may not be the most competitive option available to you, we would usually highlight this to you when we are researching the best mortgage deal for you.
CREDIT REFERENCE AGENCIES
These are organisations, licensed under the Consumer Credit Act 1974, which hold information about individuals that is of relevance to lenders. Lenders may refer to these agencies for information that may assist them with making various decisions, for example whether or not to provide a mortgage loan. The enquiry they make may also be recorded on your file at a Credit Reference Agency. Details of the conduct of your account may be passed to a Credit Reference Agency by the lender if your repayments fall into arrears. They have a duty to advise you if this should occur.