Glossary of mortgage terms

Contractor Mortgages

Contractor mortgages are specifically designed home loans for contractors, freelancers, and self-employed professionals who might find it challenging to secure a traditional mortgage due to the nature of their income.

Instead of requiring a consistent income over several years, lenders in contractor mortgages take into account the contractor’s day rate or annual contract rate, considering that together with the contract length and history to ascertain their ability to repay a mortgage loan.

Here’s a general way of how a contractor’s potential income might be calculated: Lender could multiply your daily contract rate by the number of days you work in a week, then multiply this by the number of weeks you work in a year (this can usually vary from 44 to 48 weeks).

The borrower should typically have at least a year’s contract experience, along with a current contract or a history of contract renewals. However, some lenders may consider less experienced contractors too.

Just like with traditional mortgages, contractor mortgages could be Fixed Rate, where interest rates stay the same for a set number of years, or Variable Rate, where interest rates may change.
Moreover, keep in mind contractor mortgages, like all mortgages, are subject to the usual credit checks and assessment of your finances. It is also advisable to seek advice from a specialist contractor mortgage broker who can navigate the particular requirements of these mortgages and has relationships with lenders in this market.

Director’s Mortgage

A director’s mortgage is a type of home loan designed for company directors, particularly those of limited companies. Often, traditional lenders find it challenging to calculate company directors’ affordability due to the way in which they typically draw a low salary and pay themselves through dividends. This can make it difficult to secure a residential mortgage.

A director’s mortgage, however, allows lenders to consider both salary and dividends, and in some cases retained profits within the company, when assessing income. This can considerably increase borrowing potential.

The amount of loan that can be approved depends on one’s individual circumstances such as the company’s profitability, credit history, the size of deposit available, and the value of the property intending to be purchased.

Most lenders require at least one year of company accounts to approve a mortgage. However, some specialist lenders might consider applications from directors with only six months of trading history.
Interest rates, repayment terms, and conditions for a directors mortgage will vary from lender to lender, and it can be a fixed-rate mortgage or a variable rate one.

It is highly recommended to seek advice from a mortgage broker experienced in directors’ mortgages to ensure a wide range of potential lenders are considered and all income is correctly accounted for.

Equity Release Mortgages

Equity release mortgages, also known as ‘later life lending’, are a way for homeowners aged 55 and over to release some of the equity of their home into a tax-free lump sum, while still retaining ownership of the property.There are two types of equity release mortgages available: lifetime mortgages and home reversion.

Lifetime Mortgages: This is the most common type of equity release. Here, you take out a mortgage secured on your property while retaining ownership of the property. You can choose to make repayments or let the interest roll-up. The loan amount and any accumulated interest is generally paid back when you die or move into long-term care.

Home Reversion: This involves selling part or all of your home to a home reversion provider in return for a lump sum or regular payments. You have the right to continue living in the property until you die, rent-free, but you have to agree to maintain and insure it. At the end of the plan, your property is sold, and the sale proceeds are shared according to the remaining proportions of ownership.

With equity release mortgages, you can typically borrow between 20-50% of the value of your home. The exact amount will depend on several factors, including your age, health, and the value of your home.

It’s important to note that equity release mortgages can be quite complex and may not be suitable for everyone. They can impact your entitlement to state benefits and reduce the value of your estate.

Therefore, it’s vital to seek advice from a qualified equity release adviser before deciding on this route. It’s also a good idea to discuss your plans with your family.

Fixed Mortgage

A fixed mortgage is a type of home loan where the interest rate is set at a specific rate for a duration of 2, 3, 5 or 10 years. This means that the monthly mortgage payment stays the same for the entire period, regardless of interest rate fluctuations in the marketplace. This type of mortgage offers stability and predictability for budgeting purposes.

Usually, a deposit is required, typically a minimum of 10-20% of the property’s value, to secure a mortgage. The remaining amount is then divided into equal monthly payments over the negotiated 10-year term. Payments contribute to both principal and interest.

Providers of such mortgages often require you to be within a certain age limit (often up to 75 or 85 at the end of the mortgage term), and their affordability assessments would determine the maximum amount that could be borrowed.

Early repayment charges are typically applied if you pay off all or part of your mortgage before the end of the agreed term. Potential charges and their duration vary from one lender to another.
Finally, at the end of the fixed period, unless the mortgage is repaid fully, the mortgage will usually transfer to the lender’s Standard Variable Rate (or another rate determined by the lender). This could result in higher monthly payments, so it would be advisable to consider remortgaging to a new deal.

Guarantor Mortgage

A guarantor mortgage is a type of home loan where a third party (usually a parent, guardian, or close relative) agrees to be responsible for paying the mortgage if the borrower can’t. It’s often an option if the borrower doesn’t have a large enough deposit, or their income or credit history isn’t strong enough to secure a regular mortgage on their own.

In a guarantor mortgage, the guarantor typically offers their own house as security or commits some of their savings to the lender. The guarantor is not the co-owner of the property, and they won’t have a right to live in the house or to any profits from its potential sale.
There are risks for the guarantor, such as:

• If the borrower doesn’t make their mortgage repayments, the lender could pursue the guarantor for the money, which could mean the guarantor has to sell their own home to raise the funds.
• If the guarantor puts their savings up as security, the lender will hold these funds in a locked account for a set period of time or until a certain proportion of the mortgage has been paid off. This means the guarantor won’t have access to their money during that time.

As a result of these risks, it’s strongly recommended that both the borrower and the guarantor get separate legal advice before signing a guarantor mortgage.

Finally, a guarantor mortgage should only be considered as a last resort. Most lenders prefer borrowers to have a mortgage they can afford on their own. Also, there are schemes like Help to Buy and shared ownership that could help someone buy a house without needing a guarantor.

Holiday Let Mortgage

A Holiday Let Mortgage is a type of mortgage specifically designed for properties that are rented out on a short-term basis to tourists as a source of income. Unlike buy-to-let mortgages, with a holiday let mortgage, you’re expecting the property to be occupied on a short-term basis by various guests throughout the year.

One of the key eligibility criteria for a holiday let mortgage is that the property must be available for letting for a minimum of 210 days per year. In addition to this, it usually needs to be capable of being let for at least 20 weeks (140 days) annually.

Lenders will consider the potential income from the holiday rental as a primary factor in determining whether or not to approve the mortgage. The income generated by the property is often required to be 125%-145% of the mortgage repayments. It’s important to note that these requirements can vary significantly between lenders.

Interest rates on holiday let mortgages generally tend to be higher than those for owner-occupied properties. The deposit required is also often larger, usually around 25-40% of the property’s value.
Just like any other mortgage, holiday let mortgages can be on a fixed or variable rate basis, and there could be penalties for early repayments.

Applying for a holiday let mortgage typically involves detailing your business plan, historical occupancy rates, and potential income from the property. It’s advisable to work with a mortgage broker that specializes in holiday let mortgages, as they can be more complex than regular residential mortgages.

Interest-only Mortgages

Interest-only mortgages are a type of home loan where the borrower only pays the interest on the loan each month and doesn’t reduce the loan’s principal balance. The full loan amount, known as the principal, is repaid when the mortgage term ends.

This type of loan contrasts with a repayment mortgage, where the borrower pays off a part of the capital – the original loan amount – and some interest each month. With an interest-only mortgage, the monthly payments are lower, but at the end of the mortgage term, the borrower still owes the amount borrowed.

At the end of the term, repayment could come from savings, investments, or other assets. Borrowers can also sell the property to repay what they owe. Some lenders may ask borrowers to show proof of an investment or other means to pay off the debt when the mortgage term ends.

Interest-only mortgages are riskier for the lender than standard repayment mortgages, as they depend on the borrower’s investment performance or property prices. Therefore, they are less common and often subject to stricter criteria. These usually include a larger deposit (often 25% or more of the property’s value) and tangible evidence of a high income.

These types of mortgages are mainly suited to certain people, such as buy-to-let landlords and those with large or irregular incomes. It’s important to get financial advice if you’re considering an interest-only mortgage to fully understand how it works and the risks involved.

New Build Mortgages

New build mortgages are types of home loan specifically designed for the purchase of newly built properties. This could be a house or an apartment that’s been recently completed or is still under construction.

When you are buying a property off-plan (yet to be built), the mortgage process has two key stages. First, the lender will agree ‘in principle’ to lend you the amount required. This mortgage offer is usually valid for six months but can sometimes be extended. Once the property is built and ready for occupation, the mortgage process moves to completion, and the money is released.

Securing a mortgage for a new build property can be more challenging than for an existing home. Some lenders consider new build properties to be a higher risk because, in the short term, they might depreciate in value, especially if the housing market declines.
Because of this perceived risk, it’s not uncommon for lenders to require a larger deposit for new builds than they do for existing properties. Often, the deposit required can be up to 20% of the property’s value.

Most mortgage lenders will also have specific requirements for new build properties. For example, they might stipulate that the developer must provide warranties (like NHBC’s 10-year warranty) or certain construction standards and certifications.

It’s recommended to work with a mortgage advisor when considering a new build mortgage, as they can help navigate the unique aspects of this type of home loan. They can also advise on available government schemes that could assist, such as the Help to Buy equity loan scheme for England, targeted specifically towards new builds.

Offset Mortgage

An offset mortgage is a type of mortgage that allows you to use your savings to reduce your mortgage payments or shorten the term of your mortgage. This is done by ‘offsetting’ your savings against your mortgage loan.

With a traditional mortgage, you pay interest on the total amount you owe. However, with an offset mortgage, you only pay interest on the difference between your mortgage and your savings. Essentially, your savings are used to ‘offset’ your mortgage debt.

For example, if you have a mortgage of £200,000 and savings of £20,000, you’d only pay interest on £180,000 of your mortgage.

There are two types of offset mortgages:

• Interest Reduction: Your savings are used to reduce the mortgage interest you pay each month, thereby reducing your monthly payments. Still, the mortgage term stays the same, and you’ll have to pay back the full mortgage amount.
• Term Reduction: Your savings are used to pay off your mortgage more quickly. Your monthly payments stay the same, but you could potentially shave years off your mortgage term.

Some offset mortgages also allow you to borrow back your savings if needed, which can provide flexibility.

One of the main benefits of an offset mortgage is potential tax efficiency, as no interest is earned on the savings, so no tax is payable on them. It can also give a higher return for your savings compared to traditional savings accounts, especially in a low-interest-rate environment.

Offset mortgages aren’t right for everyone, especially if you don’t have significant savings or you tend to spend your savings on a regular basis. As always, it’s crucial to get advice from a financial adviser or mortgage broker before choosing such a mortgage, as they can be more complex and occasionally more expensive than traditional mortgages.

Remortgaging

Switching to a new mortgage deal is often referred to as remortgaging. This can be done for several reasons, including to take advantage of a better interest rate, change the type of mortgage, borrow more money or because your current deal is about to end.

Although interest rates are a big factor, they’re not everything. The cheapest rate isn’t always the best deal. You also need to consider the overall cost during the term of the deal. There could be big arrangement fees, booking fees, valuation fees, and legal fees to pay. Some lenders will offer fee-free deals to tempt borrowers.
Following are steps usually involved in the process:

• Research: Look at the rates available from other mortgage providers in comparison to your current deal. Remember to factor in any fees that you might incur throughout this process.
• Approval in Principle (AIP): If you find a better deal, get what’s called an ‘Approval in Principle’ from the new lender. This isn’t a binding contract, but a statement saying that in principle, they’ll lend you the amount needed.
• Application: Once you have your AIP, you can proceed with the full application. This is when you would submit the necessary documentation needed by the lender.
• Property Valuation: The lender will usually arrange for a valuation to be done on your property to ensure it’s worth the amount you are looking to borrow.
• Legal Process: The lender may instruct solicitors to undertake some legal work, such as checking the property title. Some lenders may cover this expense.
• Final Mortgage Offer: Once everything has been checked and the lender is happy, you will be sent a final mortgage offer. If you accept it, the deal is then finalised and the lender will set up your new mortgage.

It’s always wise to begin this process several months before your current deal is up to give yourself plenty of time. Also, keep in mind that if you switch your mortgage before your current deal is up, you might have to pay an ‘early repayment charge’ which can often be quite substantial.

As with any financial decision, it could be helpful to seek advice from a mortgage broker or financial adviser to find the best deal based on your specific needs and circumstances.

Right to Buy Mortgage

A Right to Buy mortgage is a type of home loan in the UK that helps council tenants or those in other types of social housing to purchase their homes at a discounted price. The Right to Buy scheme was established to enable tenants who’ve lived in their council home for a certain period to buy it.

The discount you get on the property value depends on how long you’ve been a tenant, the type of property, and its value. The longer you’ve been a tenant, the larger the discount could be.
A Right to Buy mortgage is like any other mortgage, only it takes into account the discount you receive. Some lenders might allow this discount to serve as your deposit. This means you could potentially buy your council home without needing to save for a deposit beforehand.

However, the criteria for getting a Right to Buy mortgage can be strict. Lenders will look at your income, outgoings, credit score, and other financial commitments, just as they would with any mortgage application.

One thing to be aware of with the Right to Buy scheme is that if you sell the home within five years, you’ll usually have to repay some or all of the discount. The amount you have to pay back depends on how long you’ve owned the home since buying it through Right to Buy. So it is worth considering this commitment before deciding on a Right to Buy loan.

As with any mortgage, it’s recommended to seek advice from a mortgage advisor or broker to ensure it’s the right option for your circumstances.

Retirement Interest Only (RIO)

Retirement Interest Only (RIO) mortgages are a type of home loan designed for older borrowers, typically retirees. Much like conventional interest-only mortgages, with a RIO mortgage, you only pay the interest on the loan each month. The key difference is that the loan does not have a set term – it’s paid off when a specified life event occurs, like moving into long-term care or upon the borrower’s death.

The main benefit of RIO mortgages is the affordability of monthly payments because you’re only required to pay the interest and not repay the capital. However, the overall amount of the mortgage loan remains the same throughout the mortgage term.

Eligibility criteria for RIO mortgages are designed around retirement circumstances. Lenders will assess affordability based on pension income, social security benefits, and other retirement incomes. The borrower must prove they can afford the monthly interest repayments for the life of the loan.
It’s important to note that RIO mortgages are not the same as equity release or lifetime mortgages. With RIO mortgages, you’re required to make monthly payments, whereas, with equity release, the interest is added to the loan and repaid when the property is sold.

Before choosing a RIO mortgage, it’s important to explore all options and seek financial advice. For instance, traditional repayment mortgages, downsizing, or equity release might be more suitable, depending on personal circumstances and needs.

Self-employed Mortgage

A self-employed mortgage is a type of home loan designed for individuals who work for themselves, such as freelancers, contractors, sole proprietors, and business owners. However, the mortgage itself isn’t different from others; the distinction lies in the application and approval process.
The primary challenge for self-employed individuals when applying for a mortgage is proving a stable income. Lenders typically require proof of steady income to ensure that borrowers can make their mortgage payments. For people in traditional employment, this tends to be straightforward – they can provide payslips and W-2 forms. However, for self-employed people, income might fluctuate more, making it appear less stable.

In terms of what self-employed applicants will need:

• Proof of income: This is typically provided through SA302 forms or a tax year overview (from HMRC) for the last 2-3 years. Some lenders may also want to see your business accounts.
• Evidence of upcoming contracts (if you’re a contractor) or projections of your business performance might also be required.
• A good credit score: As with any mortgage, having a clean credit history will help.
• A sizeable deposit: The bigger the deposit you can put down, the less risky you are to lenders.
• An accountant: Having your accounts prepared by a certified or chartered accountant can give lenders more confidence.

Each lender will have its criteria, so it may make the process easier if you consult with a mortgage broker who can guide you based on your specific circumstances.

Remember, just because you’re self-employed doesn’t mean you won’t have access to the variety of mortgage deals available in the market. Whether it’s fixed-rate, tracker, or offset, you should be able to find a self-employed mortgage that suits your needs.

Shared Ownership Mortgage

A Shared Ownership mortgage is a government-backed scheme specifically designed to help lower income households and first-time buyers get on the property ladder. The scheme allows you to buy a share of a property (between 25% and 75% of the home’s value) and pay rent on the remaining share, which is owned by the local housing association.

To fund your share of the home’s purchase price, you would need a Shared Ownership mortgage unless you can afford to pay for your share outright. The rent you pay on the rest of the property is typically less than market rates. Over time, as your income allows, you can buy more shares in the property in a process known as “staircasing” until you own 100% of the property.

To be eligible for a Shared Ownership scheme, you need to have a household income of less than £80,000 (or less than £90,000 in London), be a first-time buyer or a previous homeowner who can’t afford to buy now, or be an existing shared owner.

When considering a Shared Ownership mortgage, you should keep in mind that as well as mortgage payments and rent, you will have to pay other costs such as service charges and potentially ground rent.

While Shared Ownership can make homeownership more accessible, there are downsides, too. For example, if you don’t own 100% of the property, when you come to sell, you and the housing association may both be involved in the selling process, which can complicate matters.

As always, you should consider seeking advice from a financial advisor or a mortgage broker experienced with Shared Ownership mortgages before making a decision.

Tracker Mortgages

Tracker Mortgages are a type of variable rate mortgage. What sets them apart from other mortgage types is that they explicitly track – hence the name – a nominated interest rate, which is usually the Bank of England’s base rate.

With a tracker mortgage, your interest rate will go up and down as per the changes in the tracked rate. So for example, if the tracker mortgage was set at 1% above the Bank of England base rate, and the base rate is 0.5%, you would be charged 1.5% interest. If the base rate rises to 0.75%, your tracker rate would consequently rise to 1.75%.

A key point about tracker mortgages is that they offer transparency, as you can be certain that your rate will only increase if the base rate does (and by the same margin), which isn’t the case with a standard variable rate (SVR) mortgage.

Tracker mortgages can be for the life of the loan, known as lifetime tracker mortgages, or they can be for a specified period, reverting to the lender’s SVR or another rate after the initial phase.
Payment amounts could change from month to month, making it harder to budget for them. However, typically, there are lower early repayment charges than with fixed-rate deals, and some deals even allow for unlimited overpayments.

Before choosing a tracker mortgage, it’s essential to consider whether you could afford to keep up repayments if interest rates rise. Speaking to a qualified mortgage adviser could be useful in this decision-making process.