Buy to let mortgages

Need some help understanding mortgage jargon terms?

This A to Z of mortgage terms will help you to understand the jargon used within the mortgage industry. Where relevant, we have provided further information on specific buy to let mortgage jargon.

Adverse Credit: 
This is the expression used to describe a poor/bad credit history. For example it may be used to describe someone with a history of late payments, CCJs or bankruptcy.

AIP: An Agreement in Principle is confirmation that a lender is prepared to advance a loan to a potential borrower subject to being satisfied with the security offered - i.e. a positive Decision in Principle.

APR: The Annual Percentage Rate provides an indication of the overall cost of a loan including all set up costs (spread over the life of the loan) and interest charged on the loan. You can compare APR rates between different loans to provide a rough indication of which is more expensive, regardless of loan term. The lender is obliged to tell you the APR before you sign a loan agreement.

Arrangement Fee: This is the amount charged by a lender to set up the mortgage for you. It is usually due when the loan application is completed and may be added to the loan.

Arrears: Someone is in arrears if they have missed payments that they should have made towards their mortgage or other debt.

Authorised Firm: A firm that has the necessary permissions from the FCA (or its successor bodies) to carry out regulated activities - e.g. arranging residential mortgages or insurance.

BBR: The Bank of England Bank Rate is reviewed every month and is the interest rate set by the Bank of England. Your mortgage interest rate may be linked to BBR depending on your mortgage type.

Broker Fee: This is the fee charged by a mortgage broker for sourcing and processing the most appropriate mortgage for you. This may be due either up front or on completion.

BTL Mortgage: Buy to Let Mortgage is a specific loan provided for the express purpose of purchasing a residential property that will be rented out to tenants.

Capital and Interest Mortgage: Also known as a Repayment Mortgage. Monthly payments on this type of mortgage will cover the interest on the mortgage, plus a specified amount of the actual mortgage loan, thus reducing the loan amount each month.

Capped Rate Mortgage: This type of mortgage can go up and down with the interest rate; however, it will have a fixed maximum interest rate (capped rate) that it will not exceed.

Cashback: This is a lump sum cash amount you may receive when you complete a mortgage. It only applies to certain mortgages and may be a fixed amount or a percentage of the mortgage.

CCJ: County Court Judgement is a ruling of bad debt issued by the Courts. It will show up on your credit history as adverse credit. There are specialist mortgages that cater for people with CCJs on their credit records.

Completion: This is the expression used to describe the final stage of purchasing a property or of remortgaging a loan on a property.

Conveyancing: This is the legal process involved when buying/selling a property.

Credit Check: This is the check that is undertaken into your financial history when you apply for a mortgage. It will show your credit behaviour, borrowing and any adverse credit.

Credit Score: This is a scoring method used by some lenders to grade the quality of your credit history as a result of carrying out a credit check.

Debt Consolidation: A procedure whereby a number of different loans from different lenders may be repaid out of the proceeds of a single new loan.

Decision in Principle: The decision as to whether or not a lender is prepared to advance a loan to a potential borrower subject to being satisfied with the security offered.

Debenture: When borrowing through a limited company, lenders sometimes require a debenture. This places a charge on property/assets owned by the company as collateral for the mortgage being arranged.

Default: A failure to keep up with repayments due under any credit agreement.

DIP: This is the term applied to the process leading to the lender giving its Decision in Principle.

Discounted Rate Mortgage: This is a guaranteed reduction in the rate of your mortgage against BBR, SVR or LIBOR. This discount usually lasts for a fixed period, typically two, three or five years.

ERC: The Early Repayment Charge (also known as Early Redemption Charge) is a charge that may be implemented under the terms of your mortgage if you repay early or before a set date. The charge usually ceases once the mortgage is out of its fixed or discounted rate term.

Equity: This is the difference between the loan amount and the value of the property.

Fee Free Remortgage: This means that the lender will pay for the valuation and legal fees on your behalf when you remortgage.

First Charge: The first (or main) mortgage on a property.

Fixed Rate Mortgage: This is a common mortgage type, and is when the lender fixes the rate that you will pay for a set period. For example, the lender may set the rate at 5.75% for the first three years. After this fixed rate period the rate you pay will change to a rate linked to BBR, LIBOR or SVR.

Freehold: A situation where the owner owns both the property and the land that it is on.

HMO: A property is a House in Multiple Occupation if you let (or plan to let) to at least three tenants who form more than one household and who share (or will share) toilet, bathroom or kitchen facilities. Many HMOs require a licence to operate from the local council.

Interest Only Mortgage: With an interest only mortgage your monthly payments are simply the interest on the mortgage loan. This means that your monthly payments do NOT reduce the actual loan amount. It is therefore important to have some other investment plan in place in order that you can pay off the mortgage at the end of the loan period.

Leasehold: This is common with flats in the UK. It is the expression used when you own/purchase the property but not the land it is built on. After a set number of years the lease will need to be re-purchased/extended otherwise the property will eventually revert to the freeholder.

Lender: This is the entity that is lending the money for the mortgage, for example, a bank or building society.

Legal Fees: These fees covers the aspects associated with the conveyance of your mortgage. The amount can vary greatly depending on the complexity of the application.

LTV: The Loan to Value is the size of the loan calculated as a percentage of the property value. For example, if a property is valued at £100,000 and the mortgage you take is for £65,000 then the LTV is 65%.

LIBOR: The London InterBank Offered Rate is the interest rate at which lenders borrow and lend money to each other. Each bank sets its own LIBOR dependent on its own cost of borrowing. This rate may be the rate on which your mortgage is based (instead of the BBR or SVR).

Mortgage: This is a loan used to buy a property. The property is used as the security against you paying back the loan. Therefore if you default on the loan your property may be repossessed. Mortgages can be taken out on a variety of properties including flats, houses, shops, offices, and hotels.

Mortgage Broker: This is a company or individual that sources and brokers mortgages. They are experienced professionals and work for you, not the lender. The advantage of using a mortgage broker is that they can save you time and money because of their extensive market knowledge, experience and relationships with lenders.

Negative Equity: This occurs when the value of the property is worth less than the outstanding value of the mortgage.

Personal Guarantees: A personal guarantee is an undertaking by an individual, usually a director or shareholder of a company, to accept liability for a debt should the company become unable to keep up repayments. Most buy to let lenders insist upon personal guarantees when lending to corporate vehicles (SPVs, trading limited companies, LLPs, etc.)

Personal/Residential Mortgage: This is a mortgage taken out on a property that you will be living in, for example when you buy your own home. This is also known as a Home-owner Mortgage or a Home-buyer Mortgage and is the most common type of mortgage.

Portable: This is a mortgage that will allow you to transfer your mortgage to a different property without any penalty, even if there are repayment charges.

Remortgage: This is a common process for mortgage holders and occurs when a new mortgage is taken out without selling the property. Remortgaging happens for a variety of reasons including; to release equity from a property, to consolidate debts, or to take advantage of a more favourable mortgage rate.

RTI: The Rent to Interest cover is the ratio of rent receivable on the property to interest cost of the related loan. This is used by lenders to assess the ability of the borrower to be able to afford the proposed loan. The interest cost applied in this calculation may have a pre-determined rate of interest so that the cover is not unduly affected by current rates of interest.

Repayment Mortgage: A mortgage that requires you to pay off the loan and the interest at the same time throughout the term of the mortgage.

Repossession: The process in which a lender enforces its right to take over and sell a property if the borrower fails to make mortgage payments when due.

Retention: This occurs if the lender holds back part of an agreed loan until certain conditions (e.g. repairs to the property) are met.

Reversion Rate: This is the rate to which your mortgage will revert at the end of any incentive or fixed rate period. For example, you may have a three-year fixed rate mortgage of 5.75%. At the end of the three years the mortgage rate may change to 6.4%; therefore the reversion rate would be 6.4%.

Second Charge: A second charge is a mortgage that takes secondary priority behind the main mortgage (first charge).

Searches: These are the checks carried out by your solicitor when you are purchasing a new property. They will look out for anything that may affect your property. For example; if any planning applications have been made at that property or in the area; or if the area is prone to flooding; or if there is a history of subsidence.

Self-Certification: This is also referred to as self-cert and self-certified and relate to mortgages that are available to applicants who may have difficulty providing evidence of their personal income. These mortgages are no longer generally available in the UK mortgage market.

SPV: A Special Purpose Vehicle is a non-trading company that exists solely for buying, selling and letting of property. Buy to let finance for SPVs is available although rates are higher.

Stamp Duty: More properly called Stamp Duty Land Tax, this is a tax levied on property purchases. It is only payable on properties worth £125,000 and over and is calculated as a percentage of the property price. Stamp duty is payable by the buyer of the property upon completion.

Structural Survey: This is an extensive survey carried out on the actual physical structure of the property. It goes beyond the usual requirements of the lender and will entail additional costs for the borrower.

Stretch loan: A loan that is greater than the lendable assets of the borrower.

Sub-Prime: This is the expression used to describe a poor/bad credit history. For example it may be used to describe someone with a CCJ. People who fall in to the sub-prime category are often perceived as a higher risk to lenders and as a result may experience higher rates. There will also be fewer lenders/products available and a higher lending charge may be compulsory in some cases.

SVR: Many lenders set their own Standard Variable Rate as a basis level for their range of loan products. It is not linked directly to either BBR or LIBOR but it is likely to move in the same direction as changes in other interest rates.

Term: The maximum period of time for which the mortgage will last. Interest Only Mortgages may still have their entire loan amount outstanding at the end of the term whereas Repayment Mortgages will be fully repaid at this time (if all payments due have been made).

Title Deeds: This is the legal document that shows the details of the legal owner of the property.

Tracker Mortgage: This is a mortgage that tracks another rate. Most track BBR, however they can also track either the lender’s SVR or LIBOR. The actual tracker rate can be set at a percentage above or below the rate it is tracking. For example, if BBR is 3% and the lender offers a tracker rate of 1.5% above BBR the interest rate charges on the mortgage would be 4.5%. Like a discounted rate, tracker mortgages mean that the actual monthly mortgage repayment you make may vary.

Trading Limited Company: A limited company is an entity in which the members’ liability is limited, by shares or guarantee, to what they have invested or guaranteed to the company. As the “trading” suggests, these companies are active trading vehicles. Buy to let finance for trading limited companies is limited to a few specialist lenders. Rates are more expensive because the underwriting process is more complicated, requiring a greater degree of understanding by the individual underwriter.

Unencumbered Property: A property that is owned outright and has no mortgages or loans secured on it.

Variable Rate: This expression shows that the interest rate varies and is not fixed. It is the interest rate the lender charges you. It may go up or down and with that your payments will do too.

Valuation: This report is prepared by a lender’s appointed valuer to ensure that a property is appropriate security for the mortgage and to find out how much the property is worth and its expected rental income.

Valuation Fee: The fee charged to cover the cost of the lender's valuation - usually paid by the borrower.