Frequently Asked Questions

In many cases the questions we are asked relate to specific terms and jargon relating to the mortgage being applied for, therefore we have summarised the commonest terms and offer a basic explanation. If the following information does not help in your case please contact us by clicking


Advance

This is another term for a mortgage loan. A UK mortgage lender be they a bank or building society, will usually make an offer of an advance based on the purchase price of the property, the valuation of the property or the amount of mortgage applied for, whichever is the lower.

Arrangement Fee

An arrangement fee, or booking fee, is sometimes charged by a bank or building society to secure a particular mortgage deal. Arrangement fees are common on most commercial and residential investment mortgages. Occasionally arrangement fees may be refunded on completion.

Base Rate

Base Rate linked mortgages can sometimes confuse borrowers as it is sometimes assumed that the base rate is that of the individual lenders following the guidance given by the Bank of England when formulating monetary policy. The base rate which lenders charge may be either that of the major clearing banks or the variable rate of the individual lender themselves. You should always check that when comparing products that a true like for like comparison is being made.

Buildings Insurance

Buildings insurance is a must when taking out a mortgage. No lender will agree to a mortgage without buildings insurance (unless your property is leasehold). Your property is the lenders' security on the loan, so they will understandably want you to have it insured against damage from fires, subsidence or heavy storms. It's usual for the lenders to either try to arrange buildings insurance for you or to make it a condition of the loan, but it's worth looking elsewhere as their quotes normally cost more than if you shopped around.

Building Survey

This type of survey is more extensive than a valuation report. It covers a much more detailed inspection of the proposed property. It is normally commissioned by the purchaser to highlight any obvious problems or faults in the property.

Buy To Let

Purchasing a property for the sole purpose of renting it out has started to become much more popular over recent years. The lenders are now recognising the growth in this area and have either brought out new mortgage products or relaxed the conditions on existing mortgage deals, to accommodate buy to let properties.

Capped Rate Mortgage

A Capped Rate mortgage has two advantages. Not only is the interest rate fixed for a certain period, but also if during that period the variable mortgage rate should fall below the fixed rate, then it will fall in line with that lower interest rate.

Cashback Mortgage

Some lenders will give you a cashback payment as an incentive to take a particular mortgage product. The amount of cashback paid is normally in proportion to the size of the mortgage taken out. The cashback is usually paid a few months after the completion date of the mortgage.

Completion

This is the term used for the final transfer of ownership of the purchased property.

Contract

The written legal agreement between the buyer and seller regarding the property. Also when contracts, (or in Scotland missives), have been exchanged the transaction is deemed legally binding.

Conveyancing

This is the technical term used to cover the legal aspect in buying a property. For borrowers new to the Commercial and Buy to Let market it is worth noting that the solicitor or conveyancer who may have handled your residential mortgage in a timely manner, may not be sufficiently experienced to handle non-residential transactions and this is often the reason why completion can sometimes take longer than expected. CFA have access to a range of Solicitors who we know can speed up the process, so don't hesitate to ask us for a referral.

Costs

At CFA we pride ourselves in giving everybody an independent, impartial and informed mortgage sourcing service. Like most other commercial mortgage brokers, CFA will charge you a brokerage fee which is based on successfully delivering an offer of advance from the lender. As allowing CFA to arrange your mortgage will often save you money over you approaching a lender directly, primarily due to the higher levels of business we generate for them, our fees are usually covered in a very short time by the savings you will make on the loan repayments.

Disbursements

Disbursements are additional fees charged by the conveyancer over and above their own fees for carrying out your instructions. The main disbursements charged are Stamp Duty, Search fees and Land Registry Fees.

Discount Rate Mortgage

With a Discounted Mortgage the lender lowers its standard variable rate by a fixed percentage. Depending on the particular discounted product, the period can be as short as 6 months right through to the life time of the mortgage.

Fixed Rate Mortgage

Quite simply this is a mortgage which the interest rate is fixed for specific length of time. The fixed period can range from only 6 months right up to 25 years. When the fixed rate period is finished the mortgage rate reverts to the lenders variable interest rate.

Flexible Mortgage

Flexible Mortgages are the 'in' products at the moment. This mortgage can come with an incentive such as a discounted rate or more often the lenders standard variable rate. The benefits of a flexible mortgage is that it allows you to make over payments, either as a lump sum or on a regular basis, without incurring the usual early redemption penalties. Many Flexible products also allow you repayment holidays or make under payments for a short period.

Income Multiplier (Buy to Let Mortgages)

The income multiplier is the calculation a lender will make to work out if you can afford your total mortgage liability (including any domestic mortgages you have). The normal multiples used are 3 to 3.5 times a single annual salary, 2.5 to 3.5 times a joint annual salary or a combination such as 3 to 3.5 times plus 1 times of annual salary. Some lenders may also take into account guaranteed bonuses, commissions and overtime in their calculations. On the down side some lenders may deduct certain regular payments such as maintenance or other loans commitments in calculating your whether can afford the mortgage repayments. Some flexibility is gained when as most lenders do, the rental income from the property is included.

Life or Mortgage Protection Insurance

Mortgage lenders normally demand that their borrowers take out life cover, so the loan can be repaid in the event of their death. If you have a repayment mortgage or an interest-only mortgage backed by an Individual Savings Account (ISA) or a pension, you might need separate life assurance. Borrowers are often advised to take out decreasing-term assurance alongside a repayment mortgage, which pays out the outstanding sum of your loan if you die within a stated period. The ability to add Critical Illness Cover is something that also should be considered by a prudent borrower.

LTV. (Loan to value)

LTV. or Loan To Value is the percentage difference between the value or purchase price of the property to the mortgage offered. Most commercial mortgage products have a maximum loan to value of around 75 percent, however, for commercial and residential investment mortgages the typical maximum LTV is between 60 -75%.

LIBOR (London Interbank Offered Rate)

There are a significant number of lenders in the market who link their interest margins to LIBOR, which is a money market driven rate. There is an element of transparency with using LIBOR, in that the rate is driven by market forces and not the whim of the individual lender. Over the normal terms of a mortgage LIBOR or Bank Base Rate do not differ significantly, but in a rising interest market LIBOR will generally rise ahead of the Bank Base Rate, but fall quicker in a falling market. LIBOR, whilst constantly changing is calculated at a specific point (either monthly or quarterly) by individual lenders.

Redemption Penalties

On some mortgage products, especially fixed, capped or discounted rate deals, a penalty charge can be levied if you choose to pay off the mortgage early. Such penalties are an attempt by lenders to lock you in for a given period, and can amount to thousands of £s. You should always be made fully aware of any potential redemption penalties when you initially take out the mortgage, and bear them in mind if you choose to remortgage your property for any reason. These are often known as early repayment charges or ERC.

Remortgage or re-mortgage

There are two main areas why someone may wish to remortgage their property. First, to switch mortgages in order to get a better mortgage interest rate, and so save on your monthly mortgage payments. Second, to raise capital or cash on the available equity within the property.

Repayment Vehicle

This is simply the term used to describe the means you are going to use to eventually pay off the capital element of your mortgage. Repayment vehicles fall into two distinct categories. First, the basic repayment mortgage, which pays both the capital and interest over an agreed number of years. Second, an interest only mortgage, on which you only pay the interest accrued and agree to pay off the capital using some other means of savings investment, (i.e. an investment policy, personal pension, ISAs or even an expected inheritance).

Self Certification Mortgage

This is a means whereby a borrower can certify their own annual income for mortgage purposes, without the need of accounts or pay slips. It is particularly useful for people who have only been self employed for a short period of time, or those in employment whose income level can be erratic or from different sources. It should be noted that the maximum LTV for such mortgages are lower than sometimes can be achieved, at around 65 percent. Self Certified mortgages are extremely rare nowadays, and lenders accept greater responsibility to ensure their borrowers can meet their commitments.

Stamp Duty Land Tax

This is a tax levied by the Government on the purchase of property. The new stamp duty system from 4th December 2014 means that each rate will only apply to the part of the property price that falls within that band. Under the new rules, no tax will be due on the first £125,000 paid, followed by 2% on the portion up to £250,000, 5% on the portion up to £925,000, 10% up to £1.5m and then 12% on anything above that price. In the past the 'slab rates' meant that the highest rate applied to the whole of the property price which created artificial ceilings on certain properties to avoid jumping up to the next band, this should now disappear.

Autumn statement November 2015 - George Osborne has announced that higher rates of Stamp Duty Land Tax (SDLT) will be charged on purchases of additional residential properties, such as buy-to-let properties and second homes, with effect from 1 April 2016. The higher rates will be three percentage points above the current SDLT rates. These rates will apply to both individual purchasers and (Budget 2016) larger investors too.

Budget March 2016 - Stamp duty rates on commercial properties are now banded on a slicing basis thus: 0% up to £150k, 2% for the next £100k 'slice' and 5% over £250k

Stamp Duty is also levied on new commercial leases (more normally known as Lease Duty) and relates to both the rental and the term of the lease by calculating the Net Present Value of future lease payments throughout the term of the lease and applying a tax charge if this figure is above a specific threshold.

Tracker Mortgage

This type of buy to let mortgage has a discounted interest rate, the margin being fixed below or above a set variable rate. The variable rate is usually the Bank of England base rate, not the lenders own standard variable rate. In the current credit crunch marketplace new tracker products when issued are likely to have a lower interest level collar below which the lender is not obliged to reduce their rates.

Valuation Report

This report is normally commissioned by the lender, or on behalf of the lender, to determine the valuation of the property for mortgage purposes. A valuation report should not be mistaken for a building survey, it may show up certain defects, but it is purely an inspection of the property to assess the present market value for mortgage lending purposes and this may sometimes be less than that which similar properties are currently selling for.

Variable Rate Mortgage

All variable rate mortgages are levied on the lenders own standard or basic interest rate. Not all lenders use the exact same variable rate, some are higher or lower than others. Also, whilst some lender's rates are usually higher than the Bank of England's base lending rate, they will frequently rise and fall in line with it. It is the standard variable rate a mortgage reverts to after any period involving a fixed, capped or discounted rate.

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David & Janette Winter trading as Corporate Finance Associates is an appointed representative of Connect IFA Limited which is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register (http://www.fca.org.uk/register) under reference 441505.