Decoding Mortgage Language
With property values soaring and interest rates still reasonable, it is no surprise that there is a boom in the UK mortgage industry. Building societies, credit unions, and banks fund the backbone of this lending industry. U. S. buyers who are considering this market may require a British to English mortgage terms translation guide.
|British||U. S. English|
|Base rate||Prime rate|
|Exit penalty||Prepayment penalty|
Types of UK Mortgages
Within the competitive United Kingdom mortgage industry, there are many interesting repayment options. Here are a few of the most popular:
At the beginning of the loan, the borrower purchases an endowment policy. It is a combination of life insurance and long-term investments. Borrowers pay interest to the lender and a monthly sum to the carrier of the endowment policy. The endowment payments are split. A portion is applied to a life insurance policy which is in place to repay the loan if the borrower dies. The remainder is applied to the investment account. With these mortgages, the lender monitors the account.
If the funds are not growing at the expected rate, the borrower is advised to increase the payment. At the end of the contract, the investment fund is redeemed and the capital balance repaid. If any funds remain, they are returned to the borrower. A similar type of UK mortgage is referred to as investment backed.
Many UK mortgages are designed to discourage additional payments on the capital. A flexible mortgage is different. It permits borrowers to pay additional amounts, lesser amounts, and offers occasional payment breaks without penalty.
Borrowers pay only the interest on the loan each month. Similar to "Balloon Mortgages" in the U. S., the entire amount borrowed is due at the end of the contract.
The UK mortgage borrower offers their pension as additional collateral for the loan's capital. Monthly interest payments are made until retirement. The customer opts to receive their entire pension in one lump sum. Those funds are used to pay off the mortgage balance.
Not quite fixed, not exactly a variable, the capped method of computing the interest is a cross between the two. The mortgage lender determines a rate range. A "cap" is set at the top, determining the highest rate of interest the borrower will pay. When a minimum rate is also established, the bottom number is referred to as a "collar." The borrower's mortgage rate fluctuates within that spectrum.
A discount interest rate calculation is a spin-off of a variable interest rate loan. The lender agrees to decrease the variable rate they are currently offering. However, the discount only applies for a set period. For example, a UK mortgage lender might agree to a one percent discount off the standard variable rate for the first two years of the loan.
When the interest rate on mortgages stays the same for a set period, it is called a fixed rate. Most lenders prefer to limit the term of fixed rate mortgages, to guarantee future profits.
For example, Mr. Jones obtains a 25-year loan at the fixed interest rate of five percent. Ten years later, interest rates have skyrocketed. His lender is paying a higher amount for the money borrowed to lend to others. Lucky Mr. Smith can continue to pay five percent interest on his loan. His imprudent lender must honor that unprofitable rate for many more years.
With a variable rate, the amount of interest the borrower must pay may change throughout the term of the loan. A capped rate with a "collar" (see above) is a typical offering.If the borrower and lender agree to a variable rate without limits, the changes are unpredictable. This plan is more beneficial for the UK mortgage lender. The loan's interest rate is modified at the lender's discretion. These are similar to adjustable rate mortgages in the U. S.
Summary of UK Mortgages
A borrower should carefully examine his mortgage rate quotes and the way the interest is computed. In addition, the type of loan chosen should be carefully matched to the customer's financial situation.