Mortgage Types Jargon Busting

What does a fixed rate mean?

It means that the rate you’ve taken is fixed, regardless of any other rate changes, so if the Bank of England puts their rate up and you’re on a fixed rate, you wouldn’t be affected until the end of that deal. For example, a two-year Fixed-rate is fixed for two years at the rate you’ve taken, then you revert to the lender’s Standard Variable Rate when it ends. You’re then no longer tied to that particular lender.

What is a Variable rate?

This type of rate varies from lender to lender and is subject to change at any time. The only benefit of this really is that you’re not tied in, so if you want to Remortgage with a different lender to get a better rate, that option is available to you.

What is a Tracker-rate?

This is a type of variable-rate mortgage, but it tracks the Bank of England’s base rate. This means that the interest you pay on your mortgage could change every month, should the Bank of England raise their interest rates.

What is a Discount rate?

This is a fixed period of time where the lender gives you a discount on its Standard Variable Rate.

What is an Offset rate?

An Offset mortgage links with your savings and offsets the amount of savings on your mortgage interest to save you money. For example, if you’ve got a £100,000 mortgage and say £40,000 in savings, interest on your mortgage is only charged on the remaining £60,000, which is a big plus as you are saving on the mortgage interest rate. However, you don’t receive any interest on your savings.

What’s the difference between Capital Repayment and Interest-only?

Capital Repayment is where you pay off some of the capital and the interest each month meaning at the end of the term, the mortgage is repaid. It’s advisable on residential homes.

Interest-only is solely paying the interest on the amount you’ve borrowed, so although the monthly payment is lower, the overall capital is not being paid at all. It tends to be quite popular on Buy to Lets, because you’re able to sell that property and pay off the mortgage. That’s why a repayment mortgage is probably better for someone residentially, because if you’re living in the property, you’re going to end up having to move to repay the mortgage.

What is a Flexible Mortgage?

One of the main benefits of a flexible mortgage is a cash back. This is where lenders give cash back at the end of the transaction, normally through your solicitor. These are quite common with First Time Buyers, especially if they’re using all their money for the deposit.

Allowing overpayments is also a common benefit of Flexible mortgages. Most lenders will allow a certain percentage of overpayment on their mortgage products, but you’re only able to overpay by around 10% per year. The nice thing with overpayments is that any amount you overpay by is coming off the mortgage balance with no interest involved. People that are maybe in a commission-based job quite like the idea of the overpayment facility.

A mortgage payment holiday is another potential benefit with a Flexible mortgage, and this is an agreement with you and the lender to temporarily reduce or actually stop paying your mortgage for a couple of months. It’s been quite popular in the pandemic, but it’s very much a last resort, and we found that a lot of lenders were putting down on credit files that people were potentially having late or missed payments, which has come as quite a surprise for a lot of people.

What is Porting?

Porting is particularly good if you’ve entered into a five-year Fixed-rate mortgage and two years in, want to move. Porting is just taking your existing mortgage product onto a new home. The nice thing about that is that you don’t have any penalties, whereas if you come out of a Fixed-rate deal early, there could be a potential penalty.

What is the Help to Buy Equity Loan Scheme?

It’s a government-backed scheme for First Time Buyers where the buyer puts down a minimum of 5% deposit and can apply for a government equity loan of up to 20% of the value of the property to help with the deposit. You don’t actually have to take the full 20% and can take it in smaller brackets.

The loan is interest-free for the first five years and then interest is charged after this point. The idea is to get you on the property ladder and if after five years you can afford to buy the property outright, it’s possible to Remortgage for the full amount and pay off the Help to Buy Equity Loan. You can only have one property, so you can be a Home Mover, but you can’t retain a property in the background.

What is a Joint Borrower Sole Proprietor Mortgage?

This is sort of the modern day version of the guarantor mortgage. Only a select number of lenders offer this and they’re quite popular with single First Time Buyers whose parents want to help them, but they might have their own mortgage outgoings, so are not in a position to give you a £100,000 deposit.

The joint borrower would be whichever parent is the highest earner going onto the mortgage, but the exclusive owner would be their son or daughter and they therefore won’t go down on land registry as owning another property, so won’t have the extra Stamp Duty to pay. Using the parents’ income bumps up the affordability of a prospective First Time Buyer, helping them get on the property ladder.

What is the Shared Ownership Scheme?

This is where a housing association owns a property and allows you to buy a share of it and pay rent on the outstanding amount. So if you buy 50% of a property at £200,000, you only need to be able to purchase at £100,000 and then you just pay a nominal rent for the 50% that you don’t own.

After two years generally, but it will differ depending on the housing association you’re able to staircase (increase ownership in increments) up to 100% ownership. If you speak to a broker. you’d be quite surprised at how beneficial something like this could be, especially for a young couple or a single person.

What are Right to Buy and Right to Acquire?

This is for council tenants who’ve lived in their property for many years and they’re able to purchase it at quite a significant discount. Lenders often allow that discount to be used as a deposit, which can be very useful if renting has meant you were unable to save a deposit. The longer the person has been living in the property, the more discount they’re able to apply for.

Other terms that are often misunderstood

Equity

Is just money built up in the property and it’s the difference between what the property is worth, compared to what you owe on your mortgage. As an example £100,000 property that you owe £80,000 on would mean you have £20,000 of equity.

Conveyancing

This is the legal work involved when you purchase a property. A conveyancer is someone that does the legal work specifically surrounding the purchase or sale of a property.

Freehold and Leasehold

They don’t really apply in Scotland, but in england, a Freehold is where you buy the property and the land that it’s on, whereas a Leasehold, which you tend to find in blocks of flats and larger buildings, is where you buy the property, but you don’t own the land that it’s on. You pay ground rent each month for the land that it’s on.

In England it’s very important to find out how long is left on a lease, because the lease ticks down. It might start at one hundred and twenty five years, or properties that were built in the sixties could be down to thirty or forty years, which is quite low. Certain lenders have criteria where they will not lend based on a lease less than a set amount.

Always speak to a mortgage adviser, as we’ll be able to go through these things in a lot greater detail.

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