Glossary

Product types

Bridging loan: A short-term loan that helps bridge the gap between the purchase of a new property and the sale of an existing property. It provides temporary funding until a long-term mortgage can be obtained.

Buy to let mortgage: A type of mortgage that allows individuals to borrow money to purchase a property with the intention of renting it out to tenants.

Commercial Mortgage: A loan taken out by businesses or individuals to purchase commercial properties, such as offices, shops, or industrial units.

Development finance: A type of loan specifically designed to finance property development projects, including construction or renovation.

Mortgages and loan terms

Affordability calculation: An affordability calculation is a check mortgage lenders use to ensure a mortgage remains affordable to a borrower, if the monthly payment were to increase due to a change.

The calculation is as follows:

Interest coverage amount (a percentage of the monthly mortgage payment) x Stress rate (may be pay rate or a higher rate) = Amount you can borrow

With a buy to let mortgage, some lenders will allow a borrower to use evidence of excess personal income to top up an affordability calculation. See top-slicing.

Assured Shorthold Tenancy (AST): The most common type of tenancy agreement used in the private rented sector in the UK, providing certain rights and responsibilities to both landlords and tenants.

APRC (Annual Percentage Rate of Charge): APRC represents the total cost of a mortgage, including the interest rate and any additional fees or charges, expressed as an annual percentage. It provides a standardized way to compare mortgage products and understand the overall cost of borrowing.=

AVM (Automated Valuation Model): AVM is a computer-based model used by lenders to estimate the value of a property. It utilizes data such as recent sales prices and property characteristics to generate an automated valuation. AVMs are often used for quick property valuations and mortgage underwriting processes.

Bank of England Base Rate: The Bank of England Base Rate is the interest rate set by the Bank of England, which serves as a benchmark for other interest rates in the UK. Changes in the base rate can impact mortgage interest rates, including variable-rate mortgages. Lenders often adjust their rates in response to changes in the base rate.

Capital repayment mortgage: A capital repayment mortgage is a type of mortgage where the monthly payments consist of both interest and a portion of the loan principal. Over time, the outstanding loan balance decreases as the borrower makes regular payments, eventually fully repaying the loan by the end of the mortgage term.

Cashback: Some lenders offer cashback as an incentive to use their mortgage product, which can help you pay for the legal costs associated with the mortgage. You will typically receive the amount of cash on offer when the mortgage deal completes and is paid out.

Completion date: The date on which the property sale is finalized and ownership is transferred.

Consent to Let: An alternative to a buy to let mortgage, when renting out your former home on a temporary basis. Some mortgage lenders will give you consent to let out your home, using the existing residential mortgage, but they may add an additional change (e.g. increase the interest rate by a given amount). If you rent your former home whilst there is an outstanding residential mortgage and you fail to obtain consent, you may violate the terms of the mortgage which could result in the debt being called in (you have to repay the mortgage in full).

Consumer buy to let: This is where the borrower is not considered a professional landlord. It applies to individuals who accidentally become landlords, such as inheriting a property, or letting out a former residential property due to personal circumstances, rather than actively investing in rental properties as a business. Consumer buy to let mortgages have certain regulatory differences and may require the borrower to meet specific criteria set by the lender or regulatory authorities.

Conveyancing: Conveyancing is the legal process of transferring property ownership. It involves tasks such as preparing documents, conducting searches, and ensuring a smooth and legal transaction. A solicitor or licensed conveyancer is required for this work.

County Court Judgment (CCJ): is a legal ruling issued by a county court in the United Kingdom. It occurs when a person or business fails to repay a debt, and the creditor takes legal action to recover the money owed. A CCJ can negatively impact a person's credit history and make it more challenging to obtain credit (such as a mortgage) in the future. However, some lenders are sympathetic to credit issues, so have an open and honest discussion with your advisor so they know exactly how to help you.

Credit report: is a record of a person's financial history used by lenders to assess creditworthiness. It is a good idea to be familiar with your credit profile, as some lenders do not accept applications if you have had problems paying debts.

Deposit: A sum of money paid by the tenant to the landlord at the start of the tenancy, which is held as security against any damages or unpaid rent.

Desktop valuation: A desktop valuation is a property assessment conducted by a surveyor without physically inspecting the property. It relies on data analysis, AVMs, and other information to determine an estimated property value. Desktop valuations are often used for lower-risk transactions or refinancing purposes.

Discounted rate: A type of variable rate, where a lender offers a mortgage or loan rate that is a percentage reduction on their standard variable rate (SVR). For example, if the SVR was 6.5%, the lender may set a discount of 1.5%, which would make interest rate charged 5%.

Early Repayment Charges (ERCs): Fees charged by the lender if you repay the mortgage or switch to a new mortgage deal before the agreed-upon term ends.

Equity: The difference between the property's market value and the outstanding mortgage balance. It represents the portion of the property owned by the landlord.

Exit strategy: A plan for repaying a bridging loan, such as through the sale of the property or obtaining a long-term mortgage.

Fixed rate: A mortgage or loan with an interest rate that remains fixed for a specific period, usually two, three, five, or ten years. This provides stability and predictable monthly payments.

Freehold: Absolute ownership of a property and the land it stands on, without any time restrictions or ground rent payments.

Ground-up development: The construction of a new building on a plot of land where no existing structure is present. You might use development finance to fund a project like this.

Heads of terms: Related to bridging loans, this document describes the key terms and conditions associated with the loan a lender is prepared to offer, in principle. It is not legally binding, but like a mortgage decision in principle, gives an indication that a lender would be prepared to loan you money based on the details of the case they have been presented with, pre-valuation and underwriting.

HMO (House in Multiple Occupation): A property rented out to three or more tenants from different households, often with shared facilities. HMO mortgages can be used to buy this type of property.

Initial rate period: The initial rate period refers to a specific duration at the beginning of a loan or mortgage, during which the interest rate remains fixed or set at a predetermined level. The interest may be fixed (see "Fixed rate") or variable (see "Variable rate").

Interest: Interest is the amount charged by a lender for borrowing money from them.

Interest coverage ratio (ICR): In a mortgage affordability calculation, the interest coverage ratio is the amount a lender requires the rent to be, as a percentage of the actual monthly mortgage payment. Interest coverage ratios vary from lender to lender and can be anything from 125% to 175% of the monthly mortgage payment (i.e. the rent must be more than the monthly mortgage amount).

In an affordability calculation, a stress rate is also used with the ICR amount. Both elements are used in mortgage affordability calculations, with the aim of making sure a mortgage remains affordable, even if it becomes more expensive.

Interest-only mortgage: An interest-only mortgage is a type of mortgage where the monthly payments cover only the interest charged on the loan. The borrower is responsible for repaying the full loan amount at the end of the mortgage term. This type of mortgage requires a separate repayment vehicle, such as an investment or savings plan, to accumulate funds for the final repayment

Landlord: The person who owns the property and rents it out to tenants in exchange for rental income

Leasehold: A type of property ownership where the buyer has the right to use and occupy the property for a specific period, usually subject to payment of ground rent to the freeholder.

Loan to Value (LTV) ratio: The percentage of the property's value that is borrowed through a mortgage loan.

Mezzanine finance: A type of financing that sits between the senior debt (e.g., a traditional mortgage) and the developer's equity, providing additional funding for a development project.

Mortgage illustration: A mortgage illustration, also known as a Key Facts Illustration (KFI), is a document provided by lenders that outlines the key details and costs of a mortgage offer. It includes information such as the loan amount, interest rate, repayment terms, estimated monthly payments, and any fees or charges associated with the mortgage.

Overpayments: With some buy to let mortgages and commercial mortgages, you can opt to overpay your mortgage each month by up to a given percentage - typically 10%. This is more common with buy to let mortgages than with commercial mortgages. If your payments are interest-only but you do want to be able to pay off some of the capital you owe (without being required to do so by the mortgage terms) this is one of the reasons this might be of interest to you.

Pay rate: The pay rate of a mortgage is a name given to the actual interest rate you are applying for. In a mortgage affordability calculation, some lenders will use the pay rate of the mortgage, rather than imposing a higher rate. This will mean the borrower can achieve a higher loan than a like for like scenario where another lender is applying a higher rate to their affordability checks.

Planning permission: Approval granted by the local authority for a proposed development project, confirming that it complies with relevant regulations and guidelines.

Portability: The ability to transfer a mortgage from one property to another when selling and purchasing a new property. This can be advantageous for landlords who wish to retain their mortgage terms and conditions.

Remortgage: The process of switching from an existing mortgage to a new mortgage, often to secure a better interest rate or more favourable terms.

Rental cover: The minimum rental income required to cover the mortgage payments, often expressed as a percentage. Lenders typically assess rental cover to ensure that the rental income is sufficient to cover the mortgage costs.

Rental income: The money received from tenants as rent for occupying a property.

Retained interest: Related to bridging loans, this is a method of paying back the loan where the interest applicable is deducted at the start of the loan, it is then repaid along with the lump sum borrowed at the end of the term. See also "Serviced interest" and Rolled up interest.

Rolled up interest: Related to bridging loans, this is a method of paying back the loan where the interest applicable is charged to the loan on a monthly basis. At the end of the term, this interest will be repaid along with the lump sum borrowed. See also "Retained interest" and Serviced interest.

Serviced interest: Related to bridging loans, this where the interest chargeable is paid monthly, with the lump sum being paid at the end of the term. See also "Retained interest" and Rolled up interest.

Stamp duty land tax (SDLT): A tax paid in the United Kingdom when purchasing a property or land above a certain value. A higher rate of Stamp Duty Land Tax (SDLT) is applied to the purchase of additional residential properties, including buy to let properties. The rate varies based on the property's value.

Standard Variable Rate (SVR): The default interest rate charged by the lender once any initial fixed or discounted rate period ends. SVRs can vary between lenders and are subject to change.

Stress rate: Mortgage lenders use an affordability calculation, to help them assess if a borrower can easily keep up with payments, before agreeing to lend money. The stress rate used in this calculation is used to check if the product is still affordable if the interest rate being charged were to increase. The rate use is sometimes the lenders Standard Variable Rate, or another rate the lender chooses.

Sometimes the lender does not use a higher rate, and just uses the actual interest rate of the product being applied for (see Pay rate).

Tenant: A person who rents and occupies a property owned by someone else.

Term: the total timeframe over which you want to borrow money for, with a mortgage or loan. Not to be confused with the "Initial rate period".

Top-slicing: Top-slicing is offered by some buy to let mortgage lenders. It means that, if the rent for the property you want to borrow against only just covers the mortgage payment, where typically to demonstrate you could afford the mortgage it would need to exceed it by 25%-75%, the lender will look at any excess income you have, after paying bills, and use that to top-up an affordability calculation.

Tracker rate: A type of variable interest rate, whereby the rate you are charged is calculated based on another rate, often the Bank of England Base Rate. E.g. you would pay the Bank of England Base rate + 2%.

Valuation: An assessment of a property's worth conducted by a professional surveyor to determine its market value.

Variable rate: A mortgage or loan with an interest rate that can change over time, typically influenced by changes in the base rate set by the Bank of England or other external factors.

Yield: The percentage return on investment generated by rental income, calculated by dividing the annual rental income by the property's value.