Building your Tembo Plan
12 baffling mortgage acronyms explained.
If you don’t know your SVRs from your APRs, your BTLs from your RIOs and you think a mortgage DIP sounds like it would be nice with some pitta bread, you're in the right place.
We’ve compiled a jargon-busting list of terms you’re likely to come across when applying for a mortgage.
Loan to value is a calculation used by mortgage lenders to work out how high the level of your mortgage debt is compared to the value of your property, expressed as a percentage.
It’s easy to work out. If you’re applying for a mortgage of £250,000 and the home you’re buying costs £300,000, you divide 250,000 by 300,000 to get a loan to value of 83%. With this loan to value you would be eligible for interest rates in a lender’s 85% range, not 80% range.
The lower your loan to value, the less risk you are to the lender, so the cheaper your interest rate.
Do say: "I reduced my LTV by increasing the size of my deposit, unlocking lower interest rates."
Don't say: "LTV is the name of Elon Musk's first child."
An Agreement in Principle or Decision in Principle is a handy certificate or statement from your mortgage lender. It's valid for between 30 and 90 days and qualifies you as a serious buyer.
This agreement is a quick estimate of the maximum loan amount the lender is prepared to lend after carrying out a credit check and asking you some basic questions like how much you earn. The agreements show up on your credit file, so don’t get multiple DIPs from different lenders, it makes you seem desperate and lenders could be scared off.
An estate agent will often ask to see your Agreement in Principle or a Decision in Principle before letting you make an offer on a property.
Do say: "I'll need a DIP to pass on to my estate agent before making an offer on my first property."
Annual Percentage Rate. This one catches people out because it’s shown as an interest rate but it’s not the interest rate you're charged each month.
So why bother showing us two interest rates, one is more than enough. Right?
Well the Annual Percentage Rate is actually pretty useful. It tells you what the total cost of a mortgage is. On top of the initial interest rate it includes your follow-on rate (we’ll come to that in moment) and fees charged by your lender when you take out the mortgage deal and pay it back.
Do say: "Can you show me where I can see the APR for this mortgage?"
Don't say: "I learnt how to perform APR in the Scouts."
Another acronym for an interest rate is a Standard Variable Rate also known as a follow-on rate.
The Standard Variable Rate is an expensive default interest rate your bank or building society will put you on when your mortgage deal ends. If you don’t remortgage to a new mortgage deal when your current one expires, your monthly payment will jump up.
Do say: "If you're reaching the end of your fixed rate, beware of falling onto the SVR."
An early repayment charge can cost your dearly, so this is an acronym you won’t want to forget.
Remember how we said you must remortgage at the end of your mortgage deal to avoid paying the costly Standard Variable Rate? If you do it too soon you’ll be charged an early repayment charge of between 1% and 3%. So timing is everything. Ask your mortgage broker for help to make sure you don't get caught out here.
These three letters can stand between you and the cheapest interest rates on the market.
A County Court Judgement is a court order registered against you because you have failed to repay a debt you owe.
A County Court Judgement doesn’t come out of the blue. You’ll have missed lots of payments and received a letter from the county court ordering you to pay your debt before a CCJ is registered on your credit file. Unless you pay your debt within 30 days of receiving the County Court Judgement it stays on your credit report for six years raising a red flag to mortgage lenders that you are a financial risk.
Do say: "CCJ's can happen to anyone. Boris Johnson got one last week!"
Not to be confused with a BLT, a Buy to Let is a mortgage used by a landlord to a buy a property they want to let out.
Do say: "Falling buy-to-let rates are making property a tempting investment."
Don't say: "BTL is the only thing I miss since going vegan."
This exotic sounding abbreviation is in fact the name of a new style loan called a Retirement Interest Only mortgage. It’s been designed to help homeowners aged 55 and over unlock some of the equity they have built up. The equity can be used for all sorts of reasons, like funding retirement plans or gifting it to family or friends to get them on the ladder too, as with our deposit boost.
A Tembo deposit boost can help someone close to you who has little or no deposit of their own, begin their homeownership journey with an affordable monthly mortgage payment.
Retirement Interest Only mortgages are only repaid if you die, move into long-term care or sell your home. Borrowers only have to pay the interest on the loan, so the monthly mortgage payment is affordable for them too.
Do say: "RIO mortgages are a popular alternative to equity release."
You’ll only come across Right to Buy if you rent a property from the local authority or council and you want to buy it. Right to Buy was introduced by Margaret Thatcher and entitles social housing tenants to a discount if they want to buy their home. But to have the Right to Buy, you must have lived in the property for at least three years.
Do say: "Margaret Thatcher introduced RTB in the 80s, and by 1995 over 2.1million council homes had been sold."
Critical Illness or Critical Illness Cover is a type of insurance you can buy to pay off your mortgage if you are diagnosed with a critical illness such as cancer.
The principle is the same as life assurance which, if bought, pays out a lump sum on your death to repay the entire mortgage leaving your family financially secured. Critical Illness Cover pays out on diagnosis so you can begin treatment without any financial burden. If you survive the illness, you’ll be mortgage free.
Do say: "In the context of the pandemic, CIC can be more important than ever for homebuyers."
Don't say: "A CIC is a medieval wood carving tool."
Yet another interest rate acronym is BBR, Bank of England Base Rate. This interest rate is set by the UK’s central bank and is currently at an all-time low of 0.1%.
Lots of mortgage deals are linked to the Bank of England Base Rate. These are known as trackers or base rate trackers. If you have a mortgage that tracks the Bank of England Base Rate by 1%, that means you pay whatever the base rate is plus 1%. Currently that would be 1.01%.
Do say: "The BBR remains at a historic low after its Monetary Policy Committee voted unanimously to hold interest rates at 0.1 percent."
Don't say: "Just popping out to get some milk. BBR."
A European Standardised Information Sheet is a long and complicated name for a document designed to be concise and easy to understand.
It replaced the Key Facts Illustration in 2019 and is basically a complete A to Z of the mortgage deal you are applying for. It breaks down everything from your interest rate to early repayment charges and each fee you will pay over the life of the mortgage. You’ll be given one by your mortgage broker at the start of the mortgage process. Think of it as your mortgage Bible.
Do say: "An ESIS gives you all the detail you need on your mortgage, including monthly repayments and any fees you might be charged upfront."
Don't say: "Bless you!"
There we have it. 12 of mortgage-land's most touted acronyms, explained.
Words by Samantha Partington
8 facts you might not know about deposits
From the relationship between interest rates and deposit sizes to the difference between your mortgage and exchange deposit, we’ve compiled a handy list of eight things you might not know about deposits.Read on
Family springboard mortgages explained
A family springboard mortgage allows first-time buyers to purchase a home without any deposit. Your family member or friend either has to offer their savings or a chunk of their property equity as security for your mortgage.Read on