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Mortgage guide
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Do you know your APRs from your standard variable rates? What's the difference between a fixed and capped-rate mortgage?
Here Tiscali brings you an idiots guide to mortgage speak.
APR: this oft-used acronym stands for annual per centage rate. This is the true per centage of interest you will pay on your mortgage over a year. It takes into account the timings of your payments - which can affect the real amount you pay.
Base rate: On 1st June 1998, the Government gave the Bank of England responsibility for setting interest rates (the Chancellor of the Exchequer had previously done this). A Monetary Policy Committee (MPC) was set up to determine interest rates in accordance with Government objectives. The base rate is the interest rate set each month by the MPC to influence the country's economy and control inflation. It is an important factor in determining the rate at which financial institutions can borrow money and is therefore a benchmark for the interest rates they charge consumers. The committee has to set rates to support the Government's economic policy and deliver price stability - the Government announces a target for inflation in each budget statement and the MPC sets interest rates to meet this.
CAT standards The CAT (Charges, Access and Terms) standard acts as a benchmark for mortgages providing simple and comparable information for the benefit of borrowers. The CAT standards for a variable rate of interest dictate that the rate has to track the base rate by no more than two per cent above it. And if the base rate is cut then the variable rate must follow suit within a month. Therefore tracker mortgages automatically fulfil one of the criteria for a CAT mark. However, mortgage products do not have to conform to CAT standards. In fact a CAT standard is not a Government endorsement and it must be stressed that some products without CAT marks could still be the most suitable.
Discounted rate: this is a discount offered by lenders off their standard variable rate to encourage you to take their mortgage. The discount usually runs a period of years after which you pay the lender's standard variable rate.
Endowment: this is a type of life insurance policy linked to interest-only mortgages. You pay interest to the lender and a fixed amount per month into the endowment. At the end of your mortgage term the endowment should have grown sufficiently to pay off the capital you borrowed in the first place.
Fixed rate: a fixed-rate mortgage is one where the interest rate you pay is fixed for a certain period of time. At the end of the fixed-rate period your interest rates will usually return to the lender's standard variable rate. Interest-only mortgage: this is a mortgage where you pay only the interest every month, and you do not repay the capital. Usually an interest-only mortgage is linked to an endowment Pep, or pension to pay off the capital at the end of the loan period - usually 25 years.
MIRAS: mortgage interest relief at source. This is a tax relief of 10 per cent on the interest you pay on the first £30,000 of your mortgage.
Mortgage Code of Practice: a voluntary code adhered to by most lenders, which is designed to bring protection to consumers.
Pension mortgage: a Pension mortgage is a mortgage where you pay only the interest on the loan to the lender and invest in a pension that both pays off your mortgage at the end of the term and gives you a retirement income.
Pep mortgage: a Pep mortgage is a mortgage where you pay only the interest on the loan to the lender and invest in a personal equity plan that grows to pay off the capital at the end of the term.
Mortgage: a mortgage is a loan provided to you by a lender to buy property. The homebuyer gives a "mortgage" over the property to the lender.
Standard variable rate: this is the standard interest rate charged by lenders. It moves up and down in line with economic conditions.
Related Links
- Mortgage guide
- Personal loans jargon buster - Tiscali
- Who does PPI really protect?
- Mortgage Questions and Answers
- Capped mortgages: best of both worlds?
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