The mortgage application process often contains a number of keywords that you might not recognise. These words are referred to as ‘technical terms’ in the industry but, in reality, they can come across as a bit jargon-y.
From AVMs to DIPS, and CCJs to SMIs, it’s easy to get caught out by different acronyms. As a result, many applicants can be left confused, wondering about the true meaning of an ICR or LTV.
But, fear not!
As part of our mission to make mortgages easy, we’ve put together a list of key terms and have broken them down into plain English. Now you can go through a mortgage application with complete confidence, with knowledge of MPPIs and APRCs.
This is jargon busters: mortgage terms explained.
AVM: Automated Valuation Model
What is it? An Automated Valuation Model (AVM) uses algorithms and local market data to provide a computer-generated valuation of a property.
When will I see it? You will likely encounter this term during the early stages of the application. Lenders use it to provide an estimate of what they might be able to lend an applicant.
ICR: Interest Coverage Ratio
What is it? An Interest Coverage Ratio (ICR) is the minimum ratio between expected rental income and the ‘stress test’ (the minimum qualifying rate for a mortgage) – usually 125% – though it varies between lenders.
How does it work? Interest Cover Ratios are typically applied to buy-to-let mortgages, and are used as part of the basic affordability calculation.
What is it? Stamp duty tax is a tax levied on properties purchased in the UK. As a term, it is called different things in different parts of the country. These will trigger different rates.
How does it work? When you purchase a property worth more than £125,000 (£40,000 for buy-to-let and second homes), you will need to pay stamp duty tax.
Anything else I need to know? In April 2016, a controversial surcharge was passed on stamp duty, meaning buy-to-let and second-home buyers must pay an extra 3% on any investment property or second home.
Help to Buy
What is it? Help to Buy is a number of different schemes launched by the government that aims to help people buy homes without a large deposit.
What’s included in the Help to Buy schemes? The schemes include equity loans, mortgage guarantees and ISAs, each with the purpose of making home buying more accessible.
ERC: Early Repayment Charge
What is it? The majority of mortgages have initial fixed terms, often between two and five years. If you decide that you want to pay the entirety of your mortgage before the fixed term period is over, it is likely that you will need to pay an Early Repayment Charge (ERC), which is a percentage of the overall mortgage.
This charge would apply even if you wanted to pay off a portion of your mortgage early, not necessarily the whole lump sum.
CCJ: County Court Judgement
What is it? County Court Judgments (CCJ) are made against you for any non-payments of debt and could therefore make it difficult for you to borrow, including borrowing for a mortgage. This may come in the form of not being able to borrow at all, or having to make larger monthly repayments for a smaller amount.
DIP (AIP): Decision in Principle/ Agreement in Principle
What is it? While a Decision In Principle (DIP) might sound like some new dance craze, in reality it is a document from the lender confirming how much you can borrow up to.
Why do I need it? The DIP/AIP (they mean the same thing but can be worded differently) is used as proof to show that you can afford to purchase a property.
MPPI: Mortgage Payment Protection Insurance
What is it? Mortgage Payment Protection Insurance (MPPI) covers the cost of your mortgage payments in the event of any accident, sickness, unemployment or other unforeseen event that stops you working and being able to make your monthly mortgage repayments.
LTV: Loan To Value
What is it? The ‘Loan to Value’ (LTV) is the figure used by lenders to express the percentage ratio of the loan against the value of the property.
For example, if someone borrows £150,000 to purchase a home for £250,000, the Loan To Value will be 60%
(150,000 / 250,000 x 100 = 60%)
How does it work? The Loan to Value is essentially the amount of money that you have borrowed, in relation to how much the property itself is worth. This amount is usually shown as a percentage.
SVR: Standard Variable Rate
What is it? There is a default interest rate that your lender will charge after the initial period of the mortgage deal finishes when you first take out a mortgage. This is known as the Standard Variable Rate (SVR), and it can be either higher or lower than your original rate.
In some instances this rate could also be called the ‘Follow On Rate’ which follows a similar rate pattern, but could in some cases be measured against the Bank of England LIBOR rate instead.
APRC: Annual Percentage Rate Charge
What is it? The annual percentage rate charge (APRC) is the overall cost of a mortgage, and includes the interest and fees.
Anything else I need to know? An APRC assumes that you will have your mortgage for the entire term (rather than the initial agreement). Therefore, it’s not always a useful method of comparing the best deals.
FCA: Financial Conduct Authority
Who are they? All financial services in the UK, including mortgages, are regulated by The Financial Conduct Authority (FCA).
What is their role? The FCAs role is to protect customers, keep the industry steady and establish a way to promote healthy competition between financial service providers.
PRA: Prudential Regulation Authority
Who are they? As part of the Bank of England, Prudential Regulation Authority (PRA) is responsible for the prudential regulation and supervision of banks, building societies, insurers, major investment firms and credit unions.
What is their role? Their role is to set the standard and supervise financial organisations to ensure that customers are treated fairly.
CGT: Capital Gains Tax
What is it? When you make a profit from something you own, you need to pay capital gains tax, which is calculated on the profit you make and not the amount sold for.
Anything else I need to know? All rental profits will also be taken into account if the property is used as a buy-to-let. If the property sold is your main residence, you will not have to pay capital gains tax.
SMI: Support for Mortgage Interest
What is it? Homeowners with certain income-related benefits are entitled to help towards their mortgage interest payments, which is called Support for Mortgage Interest (SMI). An SMI is a loan that you need to repay with interest when you sell or transfer ownership of a property.
ESIS: European Standard Information Sheet
Who are they? The European Standard Information Sheet (ESIS) is a piece of documentation, which is based on European legislation. It was created with the intention of formulating a single market for mortgages. It also acts to protect consumers and holds the mortgage industry to a European-wide standardised set of rules.
The above terms provide you with a good grounding for understanding much of the jargon involved with mortgages. We will also be updating this post regularly so that you can use it as your mortgage encyclopedia and never have to feel confused by a mortgage application again.