mortgage glossary

Annual Management fee - For certain investments, a charge made every year for running your fund. It is usually a percentage of the amount you've built up.

APR - There are many ways that lenders can calculate interest, and this makes it difficult for comparisons to be made between the different mortgage offers. To try to get around this, regulations require the lender's advertisement or offer to show a percentage rate, which takes into account the charges you have to pay as well as interest.

Capital & Interest or Repayment Mortgage - Each payment consists of capital and interest, so that at the end of the mortgage term the capital, together with the interest is completely repaid. Some lenders require a term assurance be taken out to cover the mortgage in the event of death before the end of the mortgage term.

The Financial Services Authority does not regulate mortgages, or advice on some types of term assurance, although it does regulate the financial soundness of insurance companies

CAT Standards - were introduced by the Government to help the public understand which mortgages fulfil standards for low charges, access and fair terms.

Endowment Backed Mortgage - An interest-only mortgage repaid using an endowment policy as the investment vehicle. An endowment policy combines life assurance and savings. This type of policy is intended, but not guaranteed, to repay the loan at maturity, but will also repay the loan if you should unfortunately die during the term of the policy. Because the endowment policy may leave a shortfall, many companies offer review facilities to ensure that the policy stays on track.

The Financial Services Authority does not regulate mortgages.

Flexible mortgage - The lender may allow you to make extra loan repayments, to underpay, or to suspend payments for a certain amount of time or to borrow additional monies. If the flexible mortgage is a capital and repayment one, some lenders require a term assurance be taken out to cover the mortgage in the event of death before the end of the mortgage term.

The Financial Services Authority does not regulate mortgages, or advice on some types of life assurance, although it does regulate the financial soundness of insurance companies

Income Support for Mortgage Interest (ISMI) - ISMI is a benefit payable by the DSS in the event of a change in personal circumstances that results in a loss of job. For those taking out a mortgage after October 1995, the benefit is not payable for the first nine months, but thereafter full benefit is payable. For loans taken out prior to October 1995, benefit is not payable for the first two months, then partial benefit is payable for the next four months before full benefits are paid thereafter. It should be noted that the ISMI will only cover interest on the first £100,000 of any mortgage.

Insurance - Homebuyers should consider the following types of insurance:

• Buildings and Contents - Your lender will require the property to be covered by buildings insurance and in some cases mortgages are conditional on the buildings and contents insurance being taken with the lender.
• Payment Protection Insurance - This can be arranged for a monthly premium. It will cover your mortgage repayments if you have an accident or are sick or unemployed, usually up to a period of twelve months. Check the policy carefully to make sure that you are covered and when you will receive the money, as some will not start your payments until a certain period has elapsed.
• Mortgage Indemnity Insurance - This is an important item to consider when looking at your total mortgage costs. Where a mortgage exceeds a certain percentage of the valuation of the property, usually 75%, you may be required to pay a single fee. This is the Mortgage Indemnity Guarantee (MIG) fee, which is to cover the lender if you cannot pay your mortgage and your property is subsequently taken into possession. The fee varies from lender to lender, but can be substantial. The fee is normally paid upon completion, although in some cases it can be added to your mortgage. This insurance will protect the lender and will not protect you if your property is subsequently taken into possession and sold for less than the amount you owe. You will remain liable to pay all sums owing including arrears, interest and your lender's legal fees. If a claim is paid to your lender under such insurance, the insurers generally have the right to recover this amount from you. There are a number of lenders, which choose not to charge this fee to their customers providing certain criteria are met. Please contact us if you require any clarification or further information.

The Financial Services Authority does not regulate advice on general insurance, mortgage indemnity guarantee policies, accident, sickness and unemployment insurance policies, and some types of life assurance, although it does regulate the financial soundness of insurance companies.

Interest Only Mortgage - This is a mortgage where interest only is payable and the capital is intended to be repaid at the end of the term by an appropriate repayment vehicle such as ISAs, PEPs, pensions or endowment policies. Thus, the amount of the loan remains relatively constant during the mortgage term.

The Financial Services Authority does not regulate mortgages.

Interest Rates:

• Variable Rate - This is the standard interest rate of the lender. The rate will change whenever the lender alters its lending rate, going up or down (as do your payments) in line with market forces. There can be quite a difference between lenders and it is worthwhile shopping around.
• Discounted Rate - This is a specified discount off the variable rate for a nominated period. Therefore, during the discounted period, the rate payable will change whenever the lender changes its variable rate. At the end of the discount period the rate usually reverts to the variable rate.
• Fixed Rate - The interest rate is fixed for a specified period at a specified rate. At the end of the fixed term, the rate will either change to the lender's variable rate or, subject to the terms offered by the individual lender, a new rate.
• Capped Rate - The interest rate provided by the lender is guaranteed not to rise above a specified level for an agreed period of the loan, but may fall below it. At the end of this period the interest rate will revert to the lender's variable rate.
• Capped & Collared Rate - The interest rate will not exceed a maximum rate (cap) or fall below a minimum rate (collar) for a fixed period. At the end of the period the rate reverts to the lender's variable rate.

ISA Mortgage - ISAs are savings accounts that let you save in cash, equities (bonds, gilts, shares and unit trusts), life insurance policies or any combination of the three, without having to pay tax on the income you get from them or on any gain you make when you sell them. They can be used in conjunction with interest only mortgages to pay off the loan at the end of the term. There are specified limits on how much can be paid into the different types of ISAs. If the ISA does not have a life insurance element, some lenders may require a separate term assurance be taken out for the term of the loan.

The Financial Services Authority does not regulate mortgages, or advice on some types of life assurance, although it does regulate the financial soundness of insurance companies.

Life Assurance - A general term for life cover, which may or may not include an investment element, whether mortgage related or not. The Financial Services Authority does not regulate advice on some types of life assurance, although it does regulate the financial soundness of insurance companies.

Maturity - The word used to describe the date, other than when a claim is made, on which a contract taken out for a specific length of time becomes payable by the product provider.

Mortgage Term - The length of time agreed by the lender for you to repay your mortgage.

PEP mortgage - Personal Equity Plans (PEPs) were replaced by ISAs in April 1999. You can no longer invest new money in a PEP, but can continue to hold an existing one for as long as you like, or transfer an existing PEP to a new provider. They can be used in conjunction with interest only mortgages to pay off the loan at the end of the term.

The Financial Services Authority does not regulate mortgages.

A Pension-Linked Mortgage - is an interest only mortgage that uses the lump sum from a personal pension to pay off the loan amount at the end of the loan term. As a personal pension benefits from tax relief, a pension-linked mortgage is tax efficient, although levels and bases of, and reliefs from, taxation are subject to change and the value of the tax relief will depend on the circumstances of the individual investor. If the pension arrangement does not have sufficient life insurance linked to it, some lenders may require a term assurance be taken out to cover the loan for the term of the mortgage. The Financial Services Authority does not regulate mortgages, or advice on some types of life assurance, although it does regulate the financial soundness of insurance companies.

Stamp duty - The tax a buyer pays if the property they are buying costs over £60,000.
Current rates are:

• Up to £60,000 - no duty is payable
• £60,001 to £250,000 - 1% of the total purchase price
• £250,001 to £500,000 - 3% of the total purchase price
• £500,001+ - 4% of the total purchase price

Stock Market - Where stocks and shares are bought and sold.

Unit Linked - Your contributions buy units in the selected fund. The value of the units depends on the underlying assets in the fund. Consequently the value of your fund can go down or up. There is a wide range of funds to choose from: some are relatively low risk and others can be very speculative.

With Profits - At the end of each year the company declares two types of bonus – the reversionary bonus and the terminal bonus. The reversionary bonus is added to the value of the fund and is guaranteed to be paid at either maturity or on the earlier death of the life assured. The terminal bonus is paid to policies which mature during the following year (or those where the life assured dies).

Written quotations available on request. Loans subject to status and only available to persons aged 18 and over. Loans are secured on your property and a life policy may be required.