Glossary

Common borrowing terms explained

Wherever possible we’ve tried to avoid using jargon on our site, but sometimes we need to use common terms that you will come across in communications from your adviser and lender. So we’ve put together this glossary to help explain what these mean. You can click the letters below to jump to a particular part of the glossary.

A

B

C

D

E

F

G

H

I

J

K

L

M

N

O

P

Q

R

S

T

U

V

W

X

Y

Z

A

Affordability assessment

An affordability assessment is a financial evaluation conducted by lenders to determine whether a borrower can afford to repay a loan or mortgage. This assessment typically considers the borrower’s income, expenses, debts, and overall financial situation. By analysing these factors, lenders can make informed decisions about the suitability of a loan for the borrower, helping to ensure responsible lending and prevent borrowers from taking on more debt than they can manage.

Annual Equivalent Rate (usually shortened to ‘AER’)

The AER shows the interest you’ll earn or be charged on savings or loans over a year, assuming you leave the interest to compound. It accounts for the effect of compounding (interest on interest), making it a useful way to compare savings accounts or investments. The higher the AER, the more you’ll earn or pay over time.

Annual Percentage Rate (usually shortened to ‘APR’)

The APR is the annual cost of borrowing money, shown as a percentage. It includes both the interest rate and most fees associated with the loan, providing a complete view of what you’ll pay over a year. It’s designed to help borrowers compare loans and credit options more easily.

B

Bridge or Bridging loan

A bridge loan is a short-term loan used to bridge the gap between the purchase of a new property and the sale of an existing one. It provides immediate cash flow to help cover the costs of a new home while waiting for the sale of the current property. Bridge loans are typically repaid quickly, often within a year, and can be beneficial for buyers needing to act quickly in a competitive housing market.

C

Certificate in Mortgage Advice and Practice (CeMAP)

CeMAP is a professional qualification for individuals who wish to become mortgage advisers in the UK. It is widely recognized and required by the Financial Conduct Authority (FCA) for anyone providing mortgage advice to consumers. CeMAP covers various aspects of mortgage law, regulation, and practice, ensuring that advisers are knowledgeable and qualified to offer sound advice to clients. The qualification consists of several modules, including mortgage law, regulations, and practical mortgage advising.

Certificate in Regulated Equity Release (CeRER)

CeRER is a specialist qualification for financial advisers who want to offer advice on equity release products, such as lifetime mortgages and home reversion plans. It is an extension of the CeMAP qualification, providing the additional knowledge and skills needed to work within the equity release market. CeRER ensures advisers understand the legal, regulatory, and ethical aspects of equity release, enabling them to give accurate and responsible guidance to clients seeking to release equity from their property.

Compound interest

Compound interest is the interest calculated on the initial capital that you borrow, and also on the accumulated interest from previous periods. Unlike simple interest, which is calculated only on the capital amount, compound interest grows exponentially over time. This means that the longer you allow interest to compound, the more you owe and the faster the debt accumulates.

Conveyancing

Conveyancing is the legal process of transferring property ownership from one person to another. It involves several steps, including the preparation of legal documents, conducting property searches, and ensuring all conditions of the sale are met. A conveyancer or solicitor typically handles this process to ensure that the transaction is completed smoothly and legally, protecting the interests of both the buyer and the seller.

Credit score

A credit score is a numerical representation of a borrower’s creditworthiness, based on their credit history and financial behavior. Lenders use credit scores to assess the risk of lending to an individual; higher scores generally indicate lower risk, which can lead to better loan terms and interest rates. Maintaining a good credit score is important for accessing favorable borrowing options.

D

Default

Default refers to the failure to meet the legal obligations of a loan, such as missing payments. When a borrower defaults, it can lead to serious consequences, including repossession of the property by the lender. Understanding default and its implications is important for borrowers to avoid potential financial pitfalls.

Downsizing

Downsizing refers to the process of moving to a cheaper (usually smaller) home, often to reduce living costs or free up equity tied up in property. This is a common option for individuals or families looking to simplify their living situation, especially for retirees or those whose housing needs have changed. It can provide financial benefits and allow for a more manageable lifestyle.

Drawdown

Drawdown refers to the process of accessing funds from a loan or a financial product, which includes certain mortgage products. In the context of a lifetime mortgage, for example, it allows homeowners to take out money as needed rather than receiving a lump sum upfront. This flexibility can help manage finances more effectively, as borrowers can withdraw funds when they require them, often for specific expenses or investments, while only paying interest on the amount drawn.

E

Early Repayment Charges (usually shortened to ‘ERCs’)

ERCs are fees that lenders may charge if you pay off your loan or mortgage earlier than agreed. These charges are designed to compensate the lender for the lost interest income they would have received had the loan been repaid over its full term. Understanding ERCs is important, as they can affect your overall cost if you decide to pay off your debt early.

Equity release

Equity release is a financial product that allows homeowners to access the equity tied up in their property, typically in retirement. This can be done through schemes such as lifetime mortgages or home reversion plans, providing cash without the need to sell the home. Equity release can help fund retirement living expenses, home improvements, or other financial needs while allowing the homeowner to remain in their property.

Equity Release Council (often referred to as ‘The ERC’)

The Equity Release Council (ERC) is a trade body in the UK that represents the equity release sector, promoting high standards and best practices among its members. Established to ensure that equity release products are safe, fair, and transparent, the ERC provides guidance for consumers and helps protect their interests. It also works to raise awareness of equity release options, offering resources and support to help individuals make informed decisions about accessing the equity in their homes. Members of the ERC must adhere to a strict code of conduct, ensuring that customers receive responsible advice and service.

European Standardised Information Sheet (usually shortened to ‘ESIS’)

ESIS is a detailed document provided to mortgage applicants across Europe that outlines the key features of a mortgage offer in a clear and standardised format. It was introduced to help consumers easily compare mortgage products from different lenders and understand the terms of the loan before committing. The ESIS includes important information such as the loan amount, interest rate, repayment schedule, fees, and total cost of the mortgage. It also details the risks involved, such as the possibility of interest rate changes. In the UK, ESIS replaced the Key Facts Illustration (KFI) for most mortgage products, ensuring transparency and consistency in lending.

F

Financial Conduct Authority (usually shortened to ‘FCA’)

The Financial Conduct Authority (FCA) is the regulatory body in the UK responsible for overseeing and regulating financial markets and firms. Its primary role is to ensure that consumers are treated fairly, that markets function well, and that financial services firms adhere to high standards of conduct. The FCA regulates activities such as mortgages, insurance, pensions, and investments, ensuring that products and advice are transparent, fair, and in the best interest of consumers. The FCA also has the authority to take action against firms or individuals that fail to meet its standards.

Financial Ombudsman Service (known as ‘FOS’)

The Financial Ombudsman Service (FOS) is an independent body in the UK that helps resolve disputes between consumers and financial services firms, such as banks, insurance companies, and mortgage lenders. If a consumer has a complaint about a financial product or service that cannot be settled directly with the firm, they can escalate the issue to the FOS. The FOS reviews the case and makes a fair and impartial decision based on the evidence. Its goal is to provide free, accessible, and fair solutions for consumers, and its decisions are binding on financial firms if the consumer accepts them.

Fixed-rate mortgage

A fixed-rate mortgage is a loan where the interest rate remains constant throughout the term of the loan. This means that monthly payments will not change, providing borrowers with stability and predictability in their budgeting. Fixed-rate mortgages are popular among homeowners who prefer the security of knowing their payment amounts will not fluctuate with market interest rates.

Forbearance

Forbearance is a temporary agreement between a borrower and lender that allows the borrower to pause or reduce their loan payments for a specified period due to financial hardship. During this time, the lender agrees not to take legal action or enforce the loan agreement. Forbearance can be a helpful option for individuals facing temporary difficulties, such as job loss or medical emergencies, but it’s important to note that interest may still accrue during this period, and the borrower will need to repay the missed payments later.

Further advance

A further advance is an additional loan that a borrower can take out from their existing mortgage lender, secured against the same property. It allows homeowners to borrow more money on top of their current mortgage, often for purposes like home improvements or debt consolidation. The new loan is usually added to the original mortgage balance, and it may come with different terms, such as a new interest rate or repayment period. A further advance is typically available only to borrowers with sufficient equity in their property, and lenders will assess affordability before approving the additional borrowing.

G

Gross Rental Yield

Gross rental yield is a measure used by property investors to assess the potential return on an investment property. It is calculated by dividing the annual rental income by the property’s purchase price (or current market value) and then multiplying by 100 to express it as a percentage. This figure provides a quick overview of the income generated by the property before accounting for expenses like maintenance, taxes, and management fees. A higher gross rental yield indicates a more profitable investment, making it a valuable metric for comparing different rental properties.

H

Home Reversion

A Home Reversion Plan is a type of equity release scheme that allows homeowners, typically over the age of 55, to sell a portion of their property in exchange for a lump sum or regular payments while retaining the right to live in the home for life. Under this plan, the homeowner receives a cash payment based on the current market value of the home but does not have to repay the money until they move out or pass away. The reversion company then takes ownership of the sold portion of the property, allowing homeowners to access funds for various needs while still enjoying their home.

I

Interest Coverage Ratio (usually shortened to ‘ICR’)

The Interest Coverage Ratio (ICR) is a financial metric used to assess a borrower’s ability to meet interest payments on a loan. It is calculated by dividing a property’s net rental income by the total interest payments on the mortgage. That number is then multiplied by 100 to give a percentage. In the context of property investment, especially buy-to-let mortgages, lenders use the ICR to determine if the rental income is sufficient to cover the mortgage interest payments.

For example, if a property generates £10,000 in rental income and the annual interest on the mortgage is £5,000, the ICR would be 2.0 (or 200%). This indicates that the rental income is twice the amount of the interest, giving the lender confidence in the borrower’s ability to maintain payments.

A higher ICR generally signifies a lower risk for lenders, and it is an important criterion in approving buy-to-let mortgages.

Interest served/serviced

Interest serviced refers to the payments made by a borrower to cover the interest charges on a loan. This term typically applies to loans where the borrower is responsible for paying the interest regularly, which helps prevent the loan balance from increasing. In some cases, borrowers may only need to service the interest for a specified period before beginning to repay the principal amount. Servicing interest is crucial for managing debt and maintaining a good credit rating, as it ensures that borrowers stay current on their obligations.

J

Joint mortgage

A joint mortgage is a loan taken out by two or more individuals to purchase a property together. All borrowers are equally responsible for repaying the loan, which can help improve the chances of approval and allow for higher borrowing amounts. Joint mortgages are common among couples or family members buying a home collectively.

Joint tenants

Joint tenants is a legal term that refers to a form of property ownership in which two or more individuals hold equal shares in a property. Under this arrangement, all joint tenants have the right to use and occupy the entire property, and if one owner passes away, their share automatically transfers to the surviving joint tenants through the right of survivorship. This means that the property does not go through probate and is not included in the deceased’s estate. Joint tenancy is often used by couples or family members who wish to ensure that ownership remains within the group in the event of death.

K

Key Features Illustration (usually shortened to ‘KFI’)

A Key Features Illustration (KFI) is a document provided by lenders and financial institutions that outlines the main features, costs, and terms of a mortgage or financial product. It is designed to help borrowers understand the key aspects of the product they are considering, including interest rates, repayment options, fees, and any associated risks. The KFI is typically presented in a clear and straightforward manner, enabling borrowers to compare different products and make informed decisions. Providing a KFI is a regulatory requirement, ensuring transparency and consumer protection in the lending process.

L

Lasting Power of Attorney (usually shortened to ‘LPA’)

A Lasting Power of Attorney (LPA) is a legal document that allows someone to make decisions on behalf of another person in the event they become unable to do so themselves. There are two types of LPA: one for health and welfare decisions, and another for property and financial affairs. Having an LPA in place can ensure that your wishes are respected and that your financial and personal matters are managed by someone you trust, even if you’re no longer able to oversee them.

Lifetime mortgage

A lifetime mortgage is a type of equity release product specifically designed for older homeowners, typically aged 55 and above, that allows them to borrow against the value of their home while retaining ownership and the right to live in it for life. The loan, along with any accrued interest, is repaid when the homeowner moves into long-term care or passes away. Borrowers can choose to receive the funds as a lump sum or in smaller increments through a drawdown option. Lifetime mortgages can be a helpful financial solution for those looking to access cash for retirement needs or to enhance their quality of life without the need to sell their home.

Loan to Income (usually shortened to ‘LTI’)

Loan to Income (LTI) is a financial ratio used by lenders to evaluate a borrower’s ability to repay a loan based on their income. It compares the total amount of the loan to the borrower’s gross annual income, expressed as a ratio. A lower LTI indicates that a smaller portion of the borrower’s income is required to repay the loan, suggesting a lower risk for the lender. This metric helps lenders assess affordability and make informed lending decisions, ensuring that borrowers can comfortably manage their repayment obligations.

Loan to Value (usually shortened to ‘LTV’)

Loan to Value (LTV) is a financial ratio used by lenders to assess the risk of a loan. It compares the amount of the loan to the appraised value of the property being purchased or refinanced. Expressed as a percentage, a lower LTV indicates less risk for the lender, as it means the borrower has a larger equity stake in the property. Conversely, a higher LTV can signal higher risk and may result in higher interest rates or additional requirements for the borrower, such as mortgage insurance.

M

Monthly Equivalent Rate (usually shortened to ‘MER’)

The Monthly Equivalent Rate (MER) is a way of expressing the annual interest rate of a loan on a monthly basis. It allows borrowers to understand the impact of interest rates when payments are made monthly rather than annually. The MER is useful for comparing different financial products that have varying compounding periods or payment frequencies. By converting an annual rate to a monthly rate, individuals can better assess the cost of borrowing, helping them make more informed financial decisions.

Mortgage deed

A mortgage deed is a legal document that outlines the terms of the mortgage agreement between the borrower and lender. It includes details such as the loan amount, interest rate, repayment terms, and the property being financed. The mortgage deed serves as evidence of the lender’s interest in the property and is recorded in public records to protect their rights in the event of default.

N

Net Rental Yield

Net rental yield is a measure of the profitability of an investment property after accounting for all expenses associated with owning and managing it. It is calculated by taking the annual rental income, subtracting all operating costs (such as maintenance, property management fees, insurance, and property taxes), and then dividing the result by the property’s purchase price (or current market value). This figure is then expressed as a percentage. Net rental yield provides a more accurate picture of the property’s financial performance compared to gross rental yield, helping investors make informed decisions.

No Negative Equity Guarantee (usually shortened to ‘NNEG’ or ‘No NEG’)

The No Negative Equity Guarantee (NNEG) is a feature automatically included in equity release plans (lifetime mortgages and home reversion plans). It ensures that, upon the sale of the property – which takes place after the death or long-term care of the homeowner – the estate will never owe more than the property’s value, even if the loan balance exceeds it. This guarantee provides peace of mind for equity release customers, as it protects them from potential financial shortfalls, allowing them to access their home equity without the risk of their family being left in debt after the property is sold.

O

Offset mortgage

An offset mortgage is a type of mortgage that links a borrower’s savings account to their mortgage account. The balance in the savings account is offset against the mortgage balance, reducing the amount of interest charged on the mortgage. This can help borrowers pay off their loan more quickly or reduce monthly payments while still maintaining access to their savings.

Older borrower mortgage (sometimes called a later life mortgage)

An older borrower mortgage is a type of mortgage product specifically designed for individuals aged 50 and above. These mortgages cater to the unique financial needs and circumstances of older borrowers, often taking into account factors such as retirement income, equity in existing properties, and potential future financial situations. This type of mortgage aims to provide access to financing for older individuals looking to purchase a new home, downsize, or remortgage their existing property.

P

Power of Attorney (usually shortened to ‘POA’)

Power of Attorney (POA) is a legal arrangement that allows one person to act on behalf of another in legal or financial matters. This can be set up for various reasons, such as when someone is unable to manage their affairs due to illness or absence. A POA can be general, granting broad authority, or specific, limited to certain tasks. It ensures that important decisions can still be made by a trusted individual when the principal is unable to do so themselves.

Prudential Regulation Authority (usually shortened to ‘PRA’)

The Prudential Regulation Authority (PRA) is a part of the Bank of England responsible for regulating and supervising banks, building societies, credit unions, insurers, and major investment firms in the UK. The PRA’s primary focus is on promoting the safety and soundness of these financial institutions to ensure the stability of the financial system. It sets standards and policies to reduce risks and ensures that firms have sufficient capital and risk management in place to withstand economic shocks. The PRA works closely with the Financial Conduct Authority (FCA) but focuses more on the stability and prudence of financial firms.

R

Repayment mortgage (sometimes called a ‘Capital & Interest mortgage’)

A repayment mortgage is a type of loan where borrowers make monthly payments that cover both the capital borrowed and the interest. As they pay down the mortgage, the outstanding loan balance gradually decreases until it is fully paid off by the end of the mortgage term. This structure ensures that borrowers will own their home outright once the loan is repaid, providing peace of mind and financial security. Repayment mortgages are common among homeowners who prefer to clear their debt over time rather than just servicing the interest.

Retirement Interest Only mortgage (usually shortened to ‘RIO’)

A Retirement Interest Only (RIO) mortgage is a type of loan designed for older homeowners who want to borrow against their property while only paying off the interest each month. Unlike traditional mortgages, there are no set repayment terms, meaning the loan can remain in place until the homeowner dies or moves into long-term care. This option allows retirees to access funds for living expenses or other needs while staying in their homes.

S

Shared ownership

Shared ownership is a housing scheme that allows individuals to purchase a share of a property (typically between 25% and 75%) while paying rent on the remaining share owned by a housing association or developer. This option makes homeownership more accessible for those who may struggle to afford a full mortgage, enabling them to gradually increase their ownership stake over time.

Stamp Duty

Stamp Duty, formally known as Stamp Duty Land Tax (SDLT), is a tax paid by buyers when purchasing a property or land over a certain value. The amount of Stamp Duty depends on the purchase price of the property and can vary based on factors like whether the property is residential or non-residential, if it’s a first-time purchase, or if it’s a second home. Different thresholds and rates apply, with first-time buyers often benefiting from reduced rates or exemptions. Stamp Duty is an important cost to consider when budgeting for buying a home.

Standard Variable Rate (usually shortened to ‘SVR’)

The Standard Variable Rate (SVR) is the default interest rate that a mortgage lender applies once a borrower’s initial mortgage deal, such as a fixed or tracker rate, comes to an end. The SVR is set by the lender and can change at their discretion, often in response to changes in the Bank of England base rate or market conditions. Unlike fixed-rate or tracker mortgages, the SVR can go up or down without prior notice, meaning monthly payments may vary. Borrowers on an SVR often have the flexibility to make overpayments or switch to a new mortgage deal without penalties. However, SVR rates are typically higher than introductory rates, so many borrowers look to remortgage to a better deal when their initial period ends.

Survey

A survey is an inspection of a property conducted by a qualified surveyor to assess its condition and identify any potential issues before a sale or mortgage approval. There are different types of surveys, ranging from basic valuations to detailed structural assessments. The most common types include:

Mortgage Valuation: A basic survey carried out on behalf of the lender to ensure the property’s value is adequate to cover the loan.

Homebuyer Report: A more detailed survey that assesses the condition of the property and highlights any major defects or repairs needed.

Full Structural Survey: The most comprehensive survey, often used for older or larger properties, that examines the structure and condition in detail.

T

Tenants in common

Tenants in common is a legal term that describes a form of property ownership where two or more individuals hold shares in a property, but these shares can be unequal. Each tenant in common has the right to use and occupy the entire property, regardless of their ownership percentage. In contrast to joint tenancy, if one owner passes away, their share does not automatically transfer to the surviving co-owners; instead, it becomes part of their estate and can be inherited according to their will or local laws. This arrangement is often chosen by friends, family members, or business partners who want to invest in property together while retaining the ability to pass on their share to heirs.

V

Valuation

Valuation is the process of determining the current market value of a property, which is essential in the context of lending and real estate transactions. This assessment is typically conducted by a professional appraiser or surveyor who considers various factors, including the property’s location, size, condition, and comparable sales in the area. The valuation helps lenders assess the risk of lending, ensuring that the loan amount aligns with the property’s worth. Accurate valuations are crucial for borrowers as they can influence mortgage approval, terms, and overall affordability.

W

Wills

A will is a legal document that outlines a person’s wishes regarding the distribution of their assets and the care of any dependents after their death. It specifies who will inherit property, money, and personal belongings, and can also appoint guardians for minor children. Having a will ensures that a person’s wishes are honored and can help prevent disputes among family members. In the context of lending and property, a will is important for ensuring that any real estate owned by the deceased is transferred according to their wishes, which can impact mortgage responsibilities and estate planning. It is advisable to create a will with the assistance of a legal professional to ensure it complies with local laws and accurately reflects one’s intentions.

Y

Year-end statement

A year-end statement is a summary document provided by mortgage lenders to borrowers at the end of each calendar year. It outlines key financial information regarding the mortgage account, including the total payments made, interest charged, outstanding balance, and any fees or charges incurred during the year. This statement helps borrowers review their mortgage status, track their repayment progress, and confirm that all payments have been correctly applied. It is a useful tool for financial planning and tax purposes, particularly for homeowners who need to report interest payments for deductions or other financial reporting.

To understand the features and risks of a lifetime mortgage, ask for a personalised illustration.

Think carefully before securing other debts against your home.

Some Buy to Let & Commercial mortgages are not regulated by the Financial Conduct Authority.

Your home may be repossessed if you do not keep up repayments on your mortgage.

A Protection plan will have no cash in value at any time, and will cease at the end of the term. If premiums are not maintained, then cover will lapse and you may not be covered if a claim is made

Advice Guru is a trading style of One Stop 4 Equity Release Ltd which is authorised and regulated by the Financial Conduct Authority (FCA). FCA No 952887. One Stop 4 Equity Release Ltd is a registered company in England and Wales with Company Registration Number 13452621. Registered Office: 14 North Street, Bourne, Lincolnshire, PE10 9AB.

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