Mortgage Terminology

APRs

Every mortgage has an APR, a number representing its Annual Percentage Rate. And common sense suggests that a mortgage with an APR of 7.5% is more expensive than one with an APR of 6.5%. Not necessarily, and APR tries to explain the inexplicable.

Higher Lending Charges

A property costs £100,000, and you want to borrow £50,000. Your loan-to-value (LTV) is 50%.

If you want to borrow £90,000 or £95,000 on that same property, you jump into 90% and 95% LTV territory. The same principle operates whatever the property costs. With a property selling for £500,000, the 90% threshold is £450,000, and 95% is £475,000.

The bad news about these higher percentages is the increased likelihood of an additional fee: the higher-lending charge.

Early Repayment Charge

The terminology is clear: you may be charged a fee if you pay all or part of your mortgage early. The charge can be in the form of one or more months of interest payments, or a percentage of the loan, or both. A few of one per cent may not sound like much, but if the loan is £100,000, your fee is £1,000.

So far, so clear. Problems arise when the ERC is excessive, or if you don't know it exists because its terms are buried in the small print. Some people don't realise that remortgaging can involve your early redemption.

Remember that you may be hit with this charge for remortgaging a year or two down the line, as well as moving to a new home ten years later.

Early and Extended Redemptions

"Early repayment charges - If you repay (redeem) your mortgage at any time prior to the end of the mortgage term you may have to pay certain fees or an interest penalty (redemption penalty). If the mortgage is repaid in the early years there may be a heftier penalty, a product penalty. An extended redemption tie-in means that this penalty will continue to be payable beyond the initial term of the mortgage." From moneyfacts.co.uk

"Teaser Rates"

This nickname for a certain kind of low-interest mortgage tells you what it is—and should also serve as a warning. A mortgage may have a very low initial rate of interest, so low that it is hard to resist. So you sign up for it only to find that the initial period is much shorter than you realised, and your new rate is much higher. Like a "loss leader" in a supermarket, you might be getting a bargain that depends on how much you spend overall. As in the supermarket example, if you pay well over the odds for other items, the original bargain may be anything but.

Cashback

"A cashback mortgage provides a cash rebate on completion of the purchase. The sum is either a percentage of the advance or fixed. This cashback could help you to cover some of the expenses of setting up home, but this bonus is often subject to higher repayment rates and may include penalties for repaying the loan early." (Source: MoneyFacts)

Never forget that banks and other lenders are in the business of earning money, not giving it away. The lender that giveth cashbacks has ways of taking it back. Those ways are located in the small print. If you are tempted by a cashback, make sure you understand how and when you will pay it back. The amount of the cashback will be added to your mortgage one way or another - plus interest.

Offset

If you have savings, you can use the interest you receive on those savings to reduce - offset - your mortgage interest.

A simplified (oversimplified, actually) example: You have a £100,000 mortgage (on which you pay interest) and a savings account with £25,000 (in which you receive interest, at a lower rate than you are paying for your mortgage). Your lender will treat your mortgage as if you borrowed only £75,000 (£100,000 minus your savings total of £25,000), which means you will pay less interest. However, you forego the interest you would receive from your savings account. Lenders actually have different ways of offsetting your savings, with some methods making you pay less interest over a longer period of time, and others having a higher interest rate.

Bank of England Base Rate (aka Repo Rate)

The thing that trackers and other mortgages follow (track) is the Bank of England's Base (or Repo) Rate. This is the rate that makes headline news every month when the Banks's Monetary Policy Committee (MPC) decides what to do with the base interest rate: raise it, lower it, or leave it unchanged.

Website: bankofengland.co.uk

LIBOR - London Inter-Bank Offered Rate

Before the subprime crisis and credit crunch of 2007, the London Interbank Rate was familiar only to bankers and financiers; now, many ordinary people know that the rate at which banks lend to one another affects the rate of interest, and availability, of ordinary homeowner loans. The British Bankers Association website had more on LIBOR: www.bba.org.uk/bba/jsp/polopoly.jsp?d=141

"Down Valuation"

Seller and buyer agree a price, say, £500,000. But the surveyor acting for the buyer's mortgage lender reports that the property is worth less, say, £450,000, even £425,000. If the seller refuses to lower the price, the buyer may not be able to get a mortgage—or may have to obtain a larger, costlier one. Such valuation problems help neither buyer nor seller, but they can be challenged. Valuing property is not an exact science, and when lenders are worried, surveyors tend to give lower valuations than when both the property and money markets are buoyant. And after the subprime crisis in America and the consequent credit crunch here in the second half of 2007, down valuations have become more common.

Drop Lock

With a "drop lock" mortgage, you have a variable rate with an option to drop into a fixed rate. Droplock sometimes appears as a single word.

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