Introduction

The UK mortgage

Mortgage loan

A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...

 market is one of the most innovative and competitive in the world. Most borrowing is funded by either mutual organisations (building societies and credit unions) or proprietary lenders (typically bank

Bank

A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...

s). For a number of years the market operated with minimal state intervention, although this changed at least temporarily following the 2008 nationalisation of Northern Rock

Northern Rock

Northern Rock plc is a British bank, best known for becoming the first bank in 150 years to suffer a bank run after having had to approach the Bank of England for a loan facility, to replace money market funding, during the credit crisis in 2007.  Having failed to find a commercial buyer for...

 (one of the country's largest mortgage banks).

Since 1982, when the market was substantially deregulated, there has been substantial innovation and diversification of strategies employed by lenders to attract borrowers. This has led to a wide range of mortgage types:

Repaying the capital

• Repayment mortgage
  Repayment mortgage
  A repayment mortgage is a term generally used in the UK to describe a mortgage in which the monthly repayments consist of repaying the capital amount borrowed as well as the accrued interest, so that the amount borrowed decreases throughout the term and by the end of the loan term has been fully...
  
   - a mortgage repayment method where the capital and interest is repaid.
• Interest-only mortgage where the capital is not repaid until the end of the mortgage. For example, if the mortgage value is 90000, interest rate is 5.6% and the mortgage is for 30 years, monthly interest payment will be {(90000*5.6%)/12}=420.
• Endowment mortgage
  Endowment mortgage
  An endowment mortgage is a mortgage loan arranged on an interest-only basis where the capital is intended to be repaid by one or more endowment policies. The phrase endowment mortgage is used mainly in the United Kingdom by lenders and consumers to refer to this arrangement and is not a legal...
  
   - an interest only mortgage where the capital is repaid by one or more endowment policies
  Endowment policy
  An endowment policy is a life insurance contract designed to pay a lump sum after a specified term or on death. Typical maturities are ten, fifteen or twenty years up to a certain age limit...
  
   at the end of the mortgage term.
• An investment backed mortgage - an interest only mortgage where the capital is repaid with the proceeds of a PEP
  Personal Equity Plan
  In the United Kingdom a Personal Equity Plan was a form of tax-privileged investment account. They were introduced by Nigel Lawson in the 1986 budget for Margaret Thatcher's Conservative government to encourage equity ownership among the wider population. PEPs were allowed to contain collective...
  
   or ISA
  Individual Savings Account
  An Individual Savings Account is a financial product available to residents in the United Kingdom. It is designed for the purpose of investment and savings with a favourable tax status. Money is contributed from after tax income and not subjected to income tax or capital gains tax within a holding...
  
   or other investment plan at the end of the mortgage term. (Note: PEPs are no longer available to new investors). Sometimes these are referred to as PEP
  Personal Equity Plan
  In the United Kingdom a Personal Equity Plan was a form of tax-privileged investment account. They were introduced by Nigel Lawson in the 1986 budget for Margaret Thatcher's Conservative government to encourage equity ownership among the wider population. PEPs were allowed to contain collective...
  
   mortgages or ISA
  Individual Savings Account
  An Individual Savings Account is a financial product available to residents in the United Kingdom. It is designed for the purpose of investment and savings with a favourable tax status. Money is contributed from after tax income and not subjected to income tax or capital gains tax within a holding...
  
   mortgages
• Pension mortgage where the tax-free cash lump sum of a personal pension scheme
  Personal pension scheme
  A Personal Pension Scheme , sometimes called a Personal Pension Plan , is a UK tax-privileged individual investment vehicle, with the primary purpose of building a capital sum to provide retirement benefits, although it may also be used to provide death benefits.These plans first became available...
  
   is used to repay an interest-only mortgage at retirement.

Types of interest rate

• Variable rate - the rate varies at the discretion of the lender.
• Standard variable rate - the default variable rate the lender offers to mortgage borrowers with a standard residential mortgage.
• Tracker rate - a variable rate that is linked to an underlying public interest rate (typically Bank of England
  Bank of England
  The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
  
   repo rate) by a predetermined margin. For borrowers the rate is often linked to the LIBOR.
• Fixed rate - the interest rate remains constant for a set period; typically for 2, 3, 4, 5 or 10 years. Longer term fixed rates (over 5 years) whilst available, tend to be more expensive and/or have more onerous early repayment charges and are therefore less popular than shorter term fixed rates.
• Discount rate - where there is reduction in the standard variable rate (e.g. a 2% discount) for a set period; typically 1 to 5 years. Sometimes the rate is stepped (e.g. 3% in year 1, 2% in year 2, 1% in year three).
• Capped rate - where similar to a fixed rate, the interest the rate cannot rise above the cap but can vary beneath the cap. Sometimes there is a collar associated with this type of rate which imposes a minimum rate. Capped rate are often offered over periods similar to fixed rates, e.g. 2, 3, 4 or 5 years.

Other types

• Buy to let
  Buy to let
  Buy-to-let is a British phrase referring to the purchase of a property specifically to let out. A buy to let mortgage is a mortgage specifically designed for this purpose....
  
   mortgage - a semi-commercial mortgage on residential property let to tenants.
• Right to buy mortgage - a mortgage arranged under the right to buy your home legislation for council or housing association tenants.
• Let and buy mortgage - you let your existing property and buy a new property with a mortgage.
• Flexible mortgage
  Flexible mortgage
  The term flexible mortgage refers to a residential mortgage loan that offers flexibility in the requirements to make monthly repayments. The flexible mortgage first appeared in Australia in the early 1990s , however it did not gain popularity until the late 1990s...
  
   - allows additional capital payments without penalty and often allows payment holidays or underpayments.
• Adverse credit mortgage - mortgage to borrowers with credit problems, e.g. county court
  County Court
  A county court is a court based in or with a jurisdiction covering one or more counties, which are administrative divisions within a country, not to be confused with the medieval system of county courts held by the High Sheriff of each county.-England and Wales:County Court matters can be lodged...
  
   judgements.
• Self-cert mortgage
  Mortgage loan
  A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
  
   - a mortgage where the lender does not seek proof of income to demonstrate affordability; but instead relies on a statement of earnings as certified by the borrower(s).
• Non-status mortgage - a mortgage where the borrowing is not dependent on the income of the applicant and the applicant states they can afford the repayments.
• Deferred interest mortgage
• Offset mortgage - a mortgage where the borrower can reduce the interest charged by offsetting a credit balance against the mortgage debt.
• Foreign currency mortgage
  Foreign currency mortgage
  A foreign currency mortgage is a mortgage which is repayable in a currency other than the currency of the country in which the borrower is a resident...
  
   - where the debt is transferred to one or more foreign currencies to reduce capital and interest payments through fluctuation in exchange rates.

Fees

• Product fee - a fee payable by the borrower to obtain a (usually incentivised) product.

• Early repayment charge, redemption penalty or tie-in - With each incentive the lender may be offering a rate at less than the market cost of the borrowing. Therefore, they typically impose a penalty if the borrower repays the loan within the incentive period or a longer period (referred to as an extended tie-in). These penalties used to be called a redemption penalty or tie-in, however since the onset of Financial Services Authority
  Financial Services Authority
  The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
  
   regulation they are referred to as an early repayment charge.

• Valuation fee, which pays for a chartered surveyor to visit the property and ensure it is worth enough to cover the mortgage amount.

• Higher lending charge
  Higher lending charge
  A higher lending charge is a charge made by mortgage lenders in the UK when the loan-to-value ratio of a mortgage is higher than they are prepared to accept at standard rates....
  
   (HLC) - a fee levied by lenders in respect of mortgages exceeding a pre-defined loan-to-value (LTV) percentage threshold. Until the 1990s these were typically levied on all mortgages with an LTV percentage over 75%, but the market generally moved to a 90% threshold at this time. Subsequently certain lenders have moved away from charging an explicit HLC, in favour of charging an increased interest rate on higher LTV mortgages. It can justifiably be claimed that this is the same thing by another name.

Other

• 100% mortgage
• First time buyer
  First time buyer
  A first-time buyer is a term used in the British and Irish property markets, and in other countries, for a potential house buyer who has not previously owned a property....
  
  
• Negative equity
  Negative equity
  Negative equity occurs when the value of an asset used to secure a loan is less than the outstanding balance on the loan. In the United States, assets with negative equity are often referred to as being "underwater", and loans and borrowers with negative equity are said to be "upside down".People...
  
  
• Mortgage Interest Relief At Source
  Mortgage Interest Relief At Source
  Mortgage Interest Relief at Source, or MIRAS, was a scheme introduced in the United Kingdom by Chancellor of the Exchequer Roy Jenkins in 1969 in a bid to encourage home ownership; it allowed borrowers tax relief for interest payments on their mortgage....
  
   - MIRAS

Statistical and industry jargon

• Arrangement fee - Either a percentage of the loan advance or a set fee charged by the mortgage lender or mortgage brokers to provide and arrange a mortgage.
• Loan to Value
  Loan to value
  The loan-to-value ratio expresses the amount of a first mortgage lien as a percentage of the total appraised value of real property. For instance, if a borrower borrows $130,000 to purchase a house worth $150,000, the LTV ratio is $130,000/$150,000 or 87%.Loan to value is one of the key risk...
  
  (LTV) - The total loan size in relation to the value of the property.
• Mortgage gross lending - all new lending done in a given period including remortgaging and new loans for house purchase.
• Mortgage balances outstanding - the total mortgage balances outstanding at a given point of time.
• Net mortgage lending - the total change in balances outstanding between two point in time, this can also be calculated by adding together the total gross lending in a period less repayments, redemptions and loan losses in the same time period.
• Redemption - paying back a mortgage 'early' as opposed to paying back a mortgage following a set repayment plan, typically when remortgaging to another mortgage provider or by way of some other lump sum payment (e.g. when selling of the property).
• Remortgaging - refinancing of a mortgage, usually understood to mean moving from one provider to another.