Page last updated at 09:55 GMT, Tuesday, 14 April 2009 10:55 UK

Guide to mortgage jargon

By Kevin Peachey
Personal finance reporter, BBC News

Monopoly pieces
The credit crunch means there are fewer mortgages on the market

The credit crunch has had a huge impact on the cost and availability of mortgages.

News of the mortgage squeeze means that homeowners can't get away from talk of Libor or loan-to-value ratios.

But what does all this jargon mean?

Here is a quick guide to some of the more common phrases thrown around by analysts in recent weeks that might have mystified householders:

SVR

The SVR - or standard variable rate - is the normal interest rate at which lenders offer a home loan, without any discounts or deals.

The SVR has become one of the more attractive mortgage deals on offer after a series of cuts in the Bank rate has meant many SVRs have fallen in response.

There has been some criticism that banks and building societies have not always "passed on" these cuts by reducing the SVR each time the Bank rate falls. They argue that some funds are needed to pay interest to savers whose deposits are used to fund new mortgage lending.

People coming to the end of a fixed-rate tend to revert to the SVR, which is now often a lower level of interest than their previous deal.

Fixed, discounted, tracker...

Other common types of mortgages include fixed-rate deals, when the interest rate does not move for a fixed period of time. An estimated 56% of new customers take out a fixed-rate deal, according to the Council of Mortgage Lenders.

Trackers - about 31% of new mortgages - are linked to a rate not set by the lender, such as the Bank of England's Bank rate or the Libor (see below). Discounted mortgages have a cheaper rate of interest for a set period of time, after which the interest rate increases.

Libor

This is the London Interbank Offered Rate. It is the day-to-day interest rate at which banks lend to each other.

A high Libor rate would restrict lending between banks and, in turn, restrict banks' lending to individuals.

The big issue with Libor in 2008 especially was that it has remained considerably higher than the Bank rate set by the Bank of England, although it did start to drop at the end of the year.

Loan-to-value (LTV)

The loan-to-value ratio represents the level of equity in a property. For example, if a house is worth £200,000 and it has a mortgage of £100,000 on it, then its loan-to-value ratio is 50%.

Home loans with a 100% LTV (for example, a £200,000 loan for a £200,000 property) have all but disappeared and the number of 90% LTV mortgages has shrunk considerably, meaning first-time buyers need to find a larger lump sum to get on the property ladder.

Mortgage-backed assets

These are the mortgage loans made by banks and building societies and which make up the bulk of their assets.

The banks bundled up these loans when the mortgage market was booming and sold them to investors in order to raise money for further lending, on top of the money put into the banks by savers.

Investors are so scared of what happened to sub-prime mortgages in the US that they have turned away from these mortgage-based assets.

Gazundering

This happens at a time when house prices are falling, as seen in recent UK house price surveys.

It is when a buyer offers a certain sum to buy a house or flat and then - just when the deal is about to go through - lowers the offer.

This means the seller either has to take less money than expected or cancel the sale and start all over again, losing the transaction costs incurred in the process.

It is the exact opposite of gazumping, which happens in a rising market where the seller asks for a higher price than originally agreed, causing problems for the buyer.

Rate tarts

A rather pejorative expression for people who keep a close eye on interest rates offered by banks and building societies, particularly for new products and accounts.

The term was used widely when people moved from one interest-free credit card deal to another.

With many short-term fixed-rate mortgage deals coming to an end, some people are becoming "mortgage tarts" by searching for the best new deal.

Equity release

This is when people who have already paid off a chunk of their mortgage take out a new one based on the increased value of their property.

They then invest the money or use it for personal expenditure of one kind or another.

Typically, the people who release equity in this way are elderly or retired people on pensions who have had time to pay off their mortgage.

They may be living in a property larger than they need and which is worth a great deal more than they bought it for some 30 or more years before.

As pensioners, they will typically be on lower incomes and the equity released can be used to supplement their pension.



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