Here at AWFS (Andy Wilson Financial Services) we always try to ensure that our clients fully understand their mortgage that they are taking out, and therefore we use plain English to explain the commitment they are taking out. However, the finance world is full of jargon and mortgage acronyms, so let us explain ten of the more common ones:
- AIP or DIP. Agreement-in-principle, sometimes called a decision in principle. A document supplied by a mortgage lender that confirms the amount a client can potentially borrow, subject to credit checks and confirmation of their income. Clients can give this to Estate Agents to indicate that they can afford to purchase the property.
- APR – Annual Percentage Rate. This indicates the overall cost of a mortgage and considers the initial interest rate and follow on rates and any fees associated with that mortgage deal over the whole term of the mortgage. It is one way of comparing mortgage deals but can be misleading. A better way for comparisons between schemes is to simply add all of the monthly payments and costs made over the term of a mortgage deal only.
- BTL – Buy-to-Let. This is the name given to a property that will be or is already let out to tenants. Therefore, a Buy-to-Let mortgage may be required to assist with buying a property like this. However, not all lenders offer Buy-to-Let mortgage deals.
- CCJ – County Court Judgement. These are made against individuals for non-payment of debt and could make it harder for applicants to get a mortgage.
- CI. – Critical Illness. A Critical Illness is a potentially life-threatening medical condition which is generally very strictly defined. Clients can take out an insurance policy that would pay out a lump sum benefit sufficient to pay off the mortgage if the policyholder is diagnosed as suffering from one of a number of serious illnesses.
- ERC – Early Repayment Charge – These are penalty charges that a client would have to pay to repay all or part of the mortgage during a specific time-period, often the same time as the mortgage deal lasts. For example, a 5 Year fixed rate mortgage may have an early repayment charge for 5 years on a sliding scale, starting with a 5% charge in the first year after completion and reducing the longer the loan is in place.
- LTV – Loan-to-Value. The loan-to-value is a percentage used by lenders to express the ratio of a loan to the value of an asset purchased. So, for example, if a client purchases a property for £100,000 and needs to borrow £75,000, their loan-to-value would be 75%. Lenders will offer more competitive interest rates the lower the loan-to-value is.
- RIO – Retirement Interest Only. This is the newest of the mortgage acronyms. A RIO mortgage is designed for older borrowers who only pay the interest due on the mortgage each month, but there is no formal end date – the mortgage can run for their entire lifetime. The loan is normally repaid only on the death of the borrowers.
- RTB – Right to Buy. This is a Government scheme that allows tenants living in council and other social housing to buy their homes from the landlord, and often with large discounts. Some lenders will allow the discounted price house to be bought without the tenant paying any deposit at all.
- SVR – Standard Variable Rate. This is the ‘normal’ interest rate that a bank and building society will charge on any mortgage that is not on a fixed, discounted or capped rate. This will be the ‘default’ rate that the mortgage will automatically go onto once any current deal with a lender comes to an end.
You will come across a number of these terms and mortgage acronyms when you buy a house or change an existing mortgage. Always question any term that is not clear or that you don’t understand – your adviser is there to help and guide you through!