Mortgage jargon made simple

MONEY TALK
Andrew Montlake
Partner, Cobalt Capital

Mortgage expert Andrew Montlake cuts through jargon

Like all financial sectors, the mortgage market has its own terminology which can often be a mystery to the man in the street.

Here, we look at some of the terms that are increasingly being bandied around by lenders and mortgage brokers.

One of the areas where new jargon has exploded is the - excuse the jargon - "non-standard" or "non-conforming" mortgage sector.

Very simply, non-conforming mortgages are for borrowers who, for whatever reason, can not take out a conventional, or "conforming" mortgage with their high street building society or bank.

Almost certainly, credit impaired mortgages will charge a slightly higher interest rate as a result of the increased risk you represent

For example, people with a slightly blotted credit history could find a broker putting them forward for a "light adverse" mortgage with a lender that specialises in this area.

Light adverse mortgages are typically for borrowers who have had a few credit problems in the past - although nothing too serious - and who have since got back on track and are able to meet their financial commitments.

However, a visit to a few other brokers could result in the same person being offered a "credit-impaired", "near-prime" or, most common of all, "sub-prime" mortgage, which, despite sounding worlds apart, mean essentially the same thing.

The term "credit impaired" is self-explanatory, but "near-prime" and "sub-prime" mean that rather than get a "prime" mortgage from a mainstream high street lender, you will have to make do with a product one step down from that, often from a specialist lender.

Almost certainly, these mortgages will charge a slightly higher interest rate as a result of the increased risk you represent.

Of course, people who have had more serious credit problems in the past - county court judgements (CCJs), for example - may find that they will only be offered a "medium adverse" or "heavy adverse" mortgage, which will charge an even higher interest rate because of the additional risk the lender believes it is taking.

It is worth pointing out that sub-prime mortgages like these may also have lower loan-to-values, or LTVs.

LTVs, another example of lender lingo, describe the amount of money a bank or building society will lend you as a percentage of a property's value. 95% is a common LTV although with "adverse" mortgage products the LTV can fall as low as 70%.

Self-certification

Another non-standard term that's widely used these days is "self-cert".

Self-certification mortgages are becoming increasingly common as more and more people work for themselves or have less conventional forms of income.

Examples include IT contractors, freelance journalists and dedicated private investors.

Because many of these workers can not supply regular payslips or three years' accounts, they instead declare, or "self-certify", their total disposable income to the lender, who accepts this at face value and then performs a series of checks to assess their credit history and status.

As a rule, the longer people have been working for themselves, the easier arranging a mortgage will be, although the decision ultimately comes down to whether the lender is satisfied the prospective borrower will be able to keep up the monthly repayments on the loan.

New approach

"Affordability" is another relatively new word in the lending lexicon.

Over the last year or two, a growing number of lenders have jettisoned traditional "income multiples" in favour of a new affordability-based approach.

Offset mortgages simply "offset" the credit balances held in current and savings accounts against the mortgage balance,

Whereas income multiples - a simple multiplication of an applicant's gross salary by a set amount, such as 3.5 - are now seen as crude, the affordability approach looks far more closely at an applicant's circumstances.

It determines the applicant's exact disposable income after all essential monthly outgoings such as debt repayments, utility bills and general living costs.

This then gives the lender a better idea of what he or she can realistically afford to spend on monthly repayments.

One final term that people often get confused about, and which is becoming increasingly popular with borrowers, is the "offset" mortgage.

They may seem complex, but offset mortgages simply "offset" the credit balances held in current and savings accounts against the mortgage balance, meaning interest is paid, at the agreed mortgage rate, only on the difference.

This means it is possible to significantly reduce the total interest payable on a mortgage, which shows that some terms are really worth getting to the bottom of.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.