Glossary of Missold Mortgage Terms

Mortgage and financial jargon can be complicated. Read our glossary of mis-sold mortgage terms below. 

Cashback mortgage

In a cash back mortgage, once the mortgage is completed, the lender will pay you a percentage of the amount borrowed back as a lump sum. The bigger the cash back sum paid out, the more strings are likely to be attached to the mortgage, such as high redemption penalties over a long period if you redeem the mortgage early, or less competitive interest rates than for other mortgages.

Discounted mortgages

Home lenders provide a variety of offers that promise a discount off the prevailing variable interest rate – that is, the interest rate on offer is set at a margin below the standard variable rate. The discount will last for an agreed period, but the borrower will normally have to agree to stay with the lender for a length of time or face withdrawal penalties.

At the end of the discounted period the borrower will be charged a rate which could be considerably higher that the initial rate. This could lead to something called ‘payment shock’ i.e. the shock of having to pay higher monthly payments. The rate charged at the end of the discounted period could be set as a percentage margin above Bank Base Rate or above London Inter Bank Offered Rate (LIBOR) or against a made-up Standard Variable Rate.

Fixed rate mortgage

A fixed rate mortgage has a monthly repayment amount that is fixed for a specified period irrespective of changes to the Bank of England's base rate or the lenders standard variable rate. It usually last two to five years, although there are longer terms available.

When the fixed rate ends, the interest rate reverts to the lenders standard variable rate. At the end of the fixed period the borrower will be charged a rate which could be considerably higher that the initial rate. This could lead to something called ‘payment shock’ i.e. the shock of having to pay higher monthly payments.

100 per cent mortgage

These mortgages are a loan for the full purchase price of the property, although the lender will charge a higher interest rate than they would for a mortgage covering a lower percentage of the purchase price, and a larger higher lending charge premium than if you put some of your own cash towards the purchase price. It is likely that the higher interest charged at the start of the mortgage could remain for many years.

125 per cent mortgage

This type of mortgage allows you to borrow up to 125 per cent of the property value without having to take a secured loan with another lender at possibly a higher Annual Percentage Rate (APR). They typically consist of a mortgage for 90 or 95% of the value of the property with an unsecured loan for the balance of the borrowing. Both mortgage and loan are available at the same interest rate while they are linked, and are charged at a higher rate of interest than mortgages where you put down a deposit.

This type of borrowing immediately places the borrower into negative equity i.e. the balance owed on the mortgage is greater than the value of the property. As property values fall as has happened since 2007, the negative equity problem increases. Borrowers find it virtually impossible to move home because they cannot repay all their mortgage debt from the proceeds of the house sale.

Pension mortgage

This mortgage allows the self-employed or people with a personal pension to link their mortgage loan to a pension plan. Once the mortgage term is completed, part of the tax-free lump sum of the pension fund is used to repay the capital outstanding. However, it also reduces the amount available for your retirement pension.

Self certified mortgages

This type of mortgage when it was originally made available to borrowers, worked well. It is known in the mortgage industry as, “self-cert” lending. It accommodated borrowers who were self employed and needed to certify their own income as they did not always have accountants or other means of showing projected, or proving their income.

• Read about self certified mortgages

 

Sub-prime mortgage

Sub-prime mortgages are risky types of consumer loans that are normally sold to people who would otherwise not have access to the credit market, have high default rates from bad or excessive debt, or a failure to pay off debts. Lenders normally charge interest on sub-prime mortgages at a rate that is higher than for a conventional mortgage to compensate them for carrying more risk.

Sub-prime mortgages could have been offered to borrowers with only minor adverse credit that may have qualified for cheaper ‘High Street’ type mortgages. Those borrowers with significant credit issues would have had interest rates loaded at the outset. This loading would remain, in most cases, for the duration of the mortgage.

• Read about sub prime lending

 

 

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