Jargon busting

Feb 22 2006

Don't panic if you don't know your early redemption charges from your elbow, here's our guide to some of the most frequently used house-buying and mortgage terms. Annual Percentage Rate (APR) Annual percentage rate of the total charge for credit: this is the standard way (laid down by the Financial Services Authority) of working out the true interest rate and means you're able to make informed comparisons between offers made by different lenders which might otherwise be muddied by cashback offers, low interest periods or other short term special offers designed to turn the head of a potential customer. Buildings Insurance When you buy the mortgage company will insist that you take out buildings insurance to cover the cost of rebuilding the house if it burns down etc. Lenders often offer their own policies but, remember, it may be cheaper to buy elsewhere. Buy to let A mortgage used to buy property which is to be used solely for the purposes of renting out to a third party. CAT Mortgage (Charges Access Terms) A mortgage that complies with specific guidelines laid down by the government in terms of the charges applied, the flexibility of the mortgage and the terms applicable to it. Capped Rate Mortgage A loan where a maximum rate of interest is set at the start of the mortgage. During the capped rate period the interest rate can fall below the capped rate but will never rise above it. Capital Repayment (aka Capital and Interest) There are 2 ways of repaying a mortgage - capital repayment or interest only. With a capital repayment mortgage, the capital and interest elements of the loan are paid off with each monthly instalment so that the balance reduces over time. At the end of the mortgage term the balance will be nil. Chain This refers to the line of buyers and sellers involved in each house move. eg, While you're selling your home, you'll be buying a new house from another vendor who's buying from someone else - and everyone has to wait for everyone else's deals to go through. First time buyers are chain-free as they don't have to sell anything. Completion The term used when the seller and buyer finally exchange money via their respective solicitors. The buyer becomes legal owner of the flat or house, and can move in. Conveyancing The process where ownership of the property is transferred from the seller to the buyer. Performed by a solicitor, or qualified conveyancer. Daily Interest If interest is calculated daily then any payments made to your mortgage that reduce the balance immediately reduce the amount of interest you pay. If you have a mortgage which calculates interest monthly or annually you will pay more interest over the term of your mortgage than you would with daily interest Disembursement The legal costs incurred during conveyancing. Easement A right of way over another person's property. Early Redemption Charges If you want to sell your house or change to another lender, you'll end up paying back your loan early. Many mortgage lenders charge a penalty fee, particularly during any period of fixed, capped or discounted rate. Check it out in advance, so you know what you're letting yourself in for. Endowment Mortgage This is a type of interest only mortgage. Only interest is paid throughout the term so the balance never changes. The mortgage is designed to be repaid at the end of the term with the proceeds of an endowment policy. (Also, Endowment Assurance, A life assurance savings scheme that pays out a lump sum at the end of an agreed period. If the Endowment is linked to an interest only mortgage, the lump sum from the endowment policy is designed to pay off the outstanding loan at the end of the mortgage term.) Equity The part of the value of the house that belongs to you. For example: if you buy a £100,000 property and put down a 10% deposit, then you have £10,000 equity in the property. Negative Equity, on the other hand, is when the value of your property in current market value, is worth less than your mortgage, making it hard and expensive to move. When house prices plummeted in the early Nineties recession many homeowners went into negative equity. Examination of Title When your solicitor checks the public records to confirm that the person you're buying from actually owns the property in question. Exchanging Contracts The contract is the written agreement that sets out terms between the buyer and the seller. When both parties exchange contracts - usually several weeks before completion - the deal becomes legally binding. Freehold As freeholder, you legally own the property and the land it is built on for an unlimited time - unless you sell it, of course! Gazump Gazumping happens when your offer is accepted, and then the seller pulls out when someone else offers a higher offer, often resulting in the buyer having wasted money on surveys and the like and left with little to show for it except a broken heart. Gazundering When a buyer reduces their offer in a falling market after it's already been accepted. Home Buyer's Report A combination of a valuation and survey, which should identify any major faults or things that need work. A full in-depth building survey - the most expensive option - is mainly recommended for very old buildings, or those that need loads of work. Interest Only Mortgage There are 2 types of mortgage, interest only or capital repayment. With an interest only mortgage the balance of the mortgage stays the same throughout the mortgage term. Interest and a premium to an investment vehicle are paid monthly. At the end of the term, the proceeds from the investment vehicle are intended to repay the mortgage. The amount will depend on the performance of the investment vehicle. If you choose an interest only mortgage you will be responsible for ensuring that you have sufficient funds available to repay your mortgage at the end of the term. Leasehold If you buy leasehold, you own the property for an agreed length of time but you don't own the actual land it's built on. After the agreed period, the ownership of the property reverts to the freeholder. The value of your property will decrease as the lease gets shorter. Life Insurance If you've got a joint mortgage, you'll probably want to take out life insurance - this means the cost of the property will be paid off if one of you dies. Stamp Duty A tax that must be paid on bought properties - 1% for properties over £60,000, 3% for properties over £250,000, 4% for properties over £500,000. Valuation An independent assessment of the value of a property carried out by an approved surveyor. Paid for by the customer, the valuation is used by the bank to decide how much they are prepared to lend. Many customers also choose to arrange a more comprehensive survey for their own purposes before they decide to buy a property.