Understanding Mortgage Terms

Why Understanding Mortgage Terms Matters

Mortgage terminology can be overwhelming, but understanding key terms is essential for making informed decisions. This guide explains the most important mortgage concepts in simple, clear language.

Quick Reference

Use the alphabetical navigation below to jump to specific terms, or read through each category to build your knowledge systematically.

Essential Terms by Category

Financial Terms

APR (Annual Percentage Rate)

The total yearly cost of borrowing including interest and fees

APR helps compare different mortgage deals by showing the true cost, not just the interest rate. Look for the lowest APR when comparing similar products.

Arrangement Fee

Upfront charge for setting up your mortgage

Can range from £0 to £2,000+. Sometimes called booking, completion, or product fees. Can often be added to the loan but will accrue interest.

Deposit

The upfront cash payment towards your property purchase

Usually expressed as a percentage of the property value. Larger deposits typically secure better mortgage rates and lower monthly payments.

Interest & Rates

Base Rate

The Bank of England's official interest rate

Influences all UK mortgage rates. When base rate changes, variable mortgages typically move in the same direction within days or weeks.

Fixed Rate

Interest rate that stays the same for a set period

Provides payment certainty. Common periods are 2, 3, 5, or 10 years. After the fixed period, you typically move to the lender's standard variable rate.

SVR (Standard Variable Rate)

The lender's default interest rate after promotional periods end

Usually higher than promotional rates. Most borrowers remortgage before moving to SVR to secure better deals.

Property Terms

LTV (Loan-to-Value)

The mortgage amount as a percentage of the property value

For example, a £180,000 mortgage on a £200,000 property is 90% LTV. Lower LTVs typically access better rates and more lender options.

Valuation

Professional assessment of the property's market value

Required by lenders to confirm the property is worth the loan amount. Different from a structural survey, which checks the property's condition.

Equity

The portion of your property that you own outright

Calculated as property value minus outstanding mortgage. Builds over time through mortgage payments and property value increases.

Legal & Process

Completion

The final stage when property ownership legally transfers

You receive the keys and become the legal owner. Mortgage funds are released to your solicitor on completion day.

Conveyancing

The legal process of transferring property ownership

Handled by solicitors or licensed conveyancers. Includes searches, contract review, and money transfer. Essential for protecting your interests.

Exchange of Contracts

When the sale becomes legally binding

Both parties are committed to complete the transaction. Completion date is confirmed, and deposit is paid. Pulling out after exchange incurs penalties.

Payment Terms

Repayment Mortgage

Monthly payments cover both interest and capital

Gradually reduces the outstanding balance. At the end of the term, the mortgage is fully paid off. Most common type of mortgage.

Interest-Only Mortgage

Monthly payments only cover the interest

Lower monthly payments but the original loan amount remains. Requires a separate repayment plan to pay off the capital at the end of the term.

Overpayment

Paying more than your required monthly payment

Reduces the outstanding balance and shortens the mortgage term. Most lenders allow 10% overpayments annually without penalty during fixed periods.

Protection & Charges

ERC (Early Repayment Charge)

Penalty for paying off your mortgage early during fixed periods

Typically 1-5% of the outstanding balance. Protects lenders from losing profitable customers. Usually applies during promotional rate periods.

MPPI (Mortgage Payment Protection Insurance)

Insurance that covers mortgage payments if you can't work

Covers accident, sickness, and unemployment. Optional but worth considering if you don't have other income protection or savings.

Buildings Insurance

Insurance covering the physical structure of your property

Compulsory requirement for mortgage approval. Covers repair costs from fire, flood, storm damage, etc. Must be maintained throughout the mortgage term.

Advanced Mortgage Concepts

Porting

Transferring your existing mortgage to a new property

Useful if you want to keep your current rate when moving. Subject to affordability checks and the new property meeting lender criteria.

Product Transfer

Switching to a new deal with your existing lender

Often simpler than remortgaging to a new lender. May not require new valuation or legal work, but rates might not be as competitive.

Tracker Mortgage

Variable rate that follows the Bank of England base rate

Rate moves directly with base rate changes, usually base rate plus a fixed margin (e.g., base rate + 1.5%). Transparent but payments can fluctuate.

Government Schemes & Support

Help to Buy

Government schemes designed to help people buy homes

Includes equity loans, ISAs, and mortgage guarantees. Specific eligibility criteria apply. Most schemes focus on first-time buyers and new-build properties.

Right to Buy

Scheme allowing council tenants to buy their homes at a discount

Discounts based on length of tenancy. Special mortgage products available. Property must be your main home and you must have been a public sector tenant.

Shared Ownership

Part-buy, part-rent scheme for those who can't afford full ownership

Buy a share (typically 25-75%) and pay rent on the remainder. Can increase your share over time through "staircasing." Available through housing associations.

Remember the Basics

While mortgage terminology can seem complex, focus on understanding the terms most relevant to your situation. Don't hesitate to ask your lender or mortgage advisor to explain any terms you're unsure about—it's their job to help you understand.

Key Takeaway

Knowledge is power in mortgage decisions

Understanding these terms helps you ask better questions, compare deals effectively, and make confident decisions about one of life's biggest financial commitments.