Demystifying Mortgages and Financial Protection

What’s the first step to getting a mortgage? 

Speaking with a mortgage broker of course! Seriously though, it really is. Brokers can talk you through what you’re potentially able to borrow, obtain a Decision in Principle (which helps when offering on properties, if buying), search multiple lenders’ rates and explain the process. 

How long is a Decision/Agreement in Principle valid?

This varies from 30 to 90 days generally. 

Will getting a Decision in Principle affect my credit file?

Most high street lenders now carry out ‘soft’ credit searches at this stage (they convert to a hard credit search when submitting a full mortgage application) which should not negatively impact your credit file. However, some do conduct a hard credit search at Decision in Principle stage, and multiple hard searches in a short space of time can have a negative impact on your credit file.

I’ve just started a new job, when can I get a mortgage?

This very much depends on the lender. Some will consider income from a new job that you’re due to start imminently (normally within 3 months of a mortgage application). Others may require 1 to 3 months payslips. 

I am due a pay rise, can this higher income be used? 

Many lenders will consider the higher income if the pay rise is confirmed and imminent, though some may require a payslip showing the higher income before they’ll consider it for affordability purposes.

I have two jobs, how do lenders view this? Can I use both incomes?

Some lenders (not all) will consider income from two jobs. However, those that do will have criteria you will need to meet – this may include how many hours you work across both jobs, how long you’ve been in each job, what type of work you do. 

Of the lenders who do accept income from a second job, how much of that income can be used for affordability purposes will vary.

I went self-employed 6 months ago, is this a problem?

If you were employed prior to this, it’s unlikely you’ll be able to obtain a mortgage yet. Most lenders require a minimum 2-3 years Tax Returns/Accounts before they’ll consider your income for a mortgage. 

Some may consider 1 year’s trading figures, depending on the type of work you did previously, and they’ll likely require projections for the next year.

I receive commission/overtime. Can this be used to increase borrowing?

Yes, potentially. Lenders have various ways of looking at commission. All will require a track record of receiving this type of variable income.

Many lenders will look at the last 3 months commission on payslips, average this amount and annualise it. They may then cross-reference with the year-to-date figure and/or with your latest P60 to ensure the last 3 months are an accurate snapshot. 

Lenders will then use a percentage of that commission figure for affordability – typically between 50% and 65%. Few lenders may potentially use a higher percentage if the commission is consistent (doesn’t fluctuate too much). 

Ideally, you’ll receive commission every month, but you’ll need this to show on at least 2 of the last 3 payslips for it to be used for affordability. 

Overtime is treated in much the same way as commission.

If the commission amount exceeds your basic income (most common with sales roles), some lenders do cap the commission at the basic salary amount, others won’t consider using commission in this scenario. Few will still use the commission in the same way set out above. 

Can my bonus be used for affordability? 

Annual bonuses can be considered with most lenders if received for the last 2 years. There are a few lenders who’ll consider using an annual bonus received once. 

Most lenders accept a percentage of the bonus income for affordability calculations. 

Annual bonuses will be evidenced by the relevant payslip(s) and the applicable P60(s). Bonuses received more frequently will need to be evidenced by the bonus payslips covering the last year or two (depending on the lender) and, again, P60(s).

My partner is on Maternity Leave. Does that mean we can’t use their income for a mortgage?

Maternity can normally be ignored with most lenders, as long as the intention is to return to work. A ‘return to work letter’ may be required from the employer confirming the expected return date and confirmation the return will be on the same hours and pay as pre-Maternity Leave. 

Any fluctuating income could not be considered in these circumstances though, just any basic salary and guaranteed allowances.

A payslip pre-Maternity Leave will also be required to evidence the income received.

I receive Maintenance from my ex-partner. Can I use this income?

It may be possible, depending on whether the Maintenance is Court Ordered, how long you've received the Maintenance payments for and, with some lenders, how long you’re due to receive the Maintenance payments for. 

Most lenders require the Maintenance to be Court Ordered, but not all. Many require the Maintenance to be received for the full term of the mortgage but, again, not all.

I pay Maintenance to my ex-partner, will this affect my mortgage borrowing ability?

Yes. The Maintenance is treated as a commitment and will therefore potentially impact (reduce) the borrowing available to you.

I’m going to be gifted some/all of my deposit, is this ok?

Most lenders are happy with gifted deposits if they are being received from immediate family (such as parents, Grandparents). Some will accept gifted deposits from extended family and very few lenders accept gifts from friends.

Those gifting the deposit will need to provide a Gifted Deposit Letter/Declaration confirming the monies are a gift (not repayable) and that the person(s) gifting the monies will not have a financial interest in the property.

Evidence of the monies being gifted will be required (bank or investment statements, for example).

I’m clearing some/all of my debt, so can it be ignored for mortgage affordability?

This will depend on the lender. Many lenders will ignore the debts being repaid (they’ll usually make it a condition of the mortgage that the stipulated debts will be repaid on/before completion) and they then will not impact your borrowing ability.

However, some lenders will still include the debts in their affordability calculations if they exist at mortgage application stage and this may then reduce the borrowing available with that lender.

How much can I borrow?

Borrowing ability is very individual. This is because many factors are involved in calculating borrowing ability such as income, commitments/debts, age (as this will impact the mortgage term), any dependants and sometimes how much of a deposit will be used.

The amount potentially available to borrow can often differ substantially between lenders. Another perfect example of where a mortgage broker will be of extreme value, as they can undertake these checks for you.

What income multiples do lenders use?

It’s not as simple as using an income multiple, due to the various (and many) elements involved in affordability calculations. However, as a very broad and average starting point (emphasis on starting point, which does vary), lenders may potentially consider 4.45 x income – but do keep in mind that (a) lenders may not use 100% of all of your income and (b) any dependants and commitments (including childcare and Maintenance payments, as well as Student/Post Grad Loan deductions) will reduce the borrowing available.

Some lenders may consider a higher lend depending on your income, deposit and/or whether you’re a First Time Buyer.

Does buying a flat/leasehold property affect getting a mortgage, compared to mortgaging a house/freehold property?

Yes, it can. With leasehold properties there is often a Service Charge and/or Ground Rent payable. These costs are factored into affordability calculations – so your maximum borrowing could be reduced if buying a leasehold property versus a freehold property.

Furthermore, the length of the remaining Lease can impact the mortgage. A shorter Lease can hinder obtaining a mortgage. The longer the length of the remaining Lease the better, but once this gets down to around 85 years you’ll start to restrict the number of lenders potentially willing to lend.

Is a Guarantor mortgage possible? 

There are a number of options available, although not normally referred to as ‘guarantor mortgages’ nowadays. Not all lenders offer this type of lending.

There is potentially the option for, normally, a close family member to either put their property or savings as ‘security’ against the mortgage. Often referred to as Family Assist mortgages. 

There’s also a Joint Borrower, Sole Proprietor mortgage. This type of mortgage typically has two borrowers, but only one of the borrowers owns the property.

Income for both borrowers is therefore used for affordability calculations, which effectively ‘boosts’ the borrowing potentially available (although commitments are also factored in for both borrowers too). 

This means a higher borrowing may potentially be possible versus a mortgage in a sole name, using one income.

An example of where this type of mortgage works well is when a parent becomes a party to the mortgage (a joint borrower) to enable their adult child to buy a property. 

On the flip side, an adult child may be a joint borrower to assist a parent buying a property. 

All borrowers are responsible for the mortgage repayments.

Caution – the mortgage term may be based on the oldest borrower with some lenders.

Legal advice is required for this type of mortgage, and this must be evidenced.

How long does it take to get a mortgage?

This varies – it can be extremely quick (we’ve had mortgage Offers issued within 24 hours), or it can take longer if the application is complex and/or the lender has a number of queries. If lenders are in backlog, this can slow down the assessment and issuing of an Offer too.

On average, we tend to work on approximately 2 weeks from submission of a full mortgage application to the issuing of a formal mortgage Offer.

How long is a mortgage Offer valid? 

Normally 6 months approximately.

Can I transfer my mortgage to another property? I’d like to move but have penalties to cancel my mortgage. 

Many mortgages (but not all) can be transferred (known as porting) to another property. Your original mortgage Offer will confirm whether this is possible. If it is not portable, any Early Repayment Charges will be set out in the Offer and will be payable should the mortgage be redeemed.

It’s important to note that it’s actually the rate that is ported. To port a mortgage, the same mortgage application process applies as when applying for a new mortgage (which is effectively what you are doing). So full underwriting is undertaken, affordability and criteria needs to be met and a credit check will be carried out.

We were late with a mortgage payment about 6 months ago, is this going to cause a problem?

The majority of lenders require 2 years without any late mortgage repayments. Some will look at the last year. There are a couple of lenders who may consider a late payment over 3 months ago, but these are not High Street lenders and the rate will therefore likely be higher. Acceptance would be subject to the application as a whole and a credit search.

Can I raise monies to make some home improvements?

Capital raising for home improvements is potentially possible – subject to affordability and criteria. 

If your mortgage rate is due to end, it may be possible to raise the extra monies at the same time as obtaining a new rate with a new lender (known as a re-mortgage).

If your rate isn’t ending, you may be able to apply for a Further Advance with your current lender. The additional monies raised will become a Part 2 to the mortgage – so your mortgage will have two parts, each will have its own rate. You may therefore end up with different rates ending at different times and not everyone is comfortable with this.

I’m a First Time Buyer and would like to purchase a Buy to Let. Is this possible?

It may be possible with some lenders, but you won’t be spoilt for choice. If you are buying the property with someone who has owned, or does own property, you may have a few more options. 

That being said, there are some lenders who will consider this scenario.

Please do factor in that you will lose your First Time Buyer Stamp Duty entitlement if your first purchase is a Buy to Let and you will also have the Stamp Duty surcharge to pay.

Why is my first mortgage repayment higher than my normal monthly repayments?

Often you don’t complete the mortgage on the same date your mortgage repayment is due. You’ll therefore owe the lender for the month ahead plus the pro-rated amount for the first month. 

For example, if you complete on the 15th September, you’ll owe 16 days for September and all of October.

What happens when my current rate ends? 

Ideally, you’ll be looking into options approximately 6 months before your rate ends. If a re-mortgage is the best solution, this can be applied for straightaway. If it is best to remain with your current lender and take a Product Transfer (Rate Switch), at this point, we can advise you when the Product Transfer can be applied for (as this varies from lender to lender).

The new rate (under the re-mortgage or Product Transfer) will then take effect when your current rate ends.

By looking at options 6 months in advance of your rate ending it means, if rates are rising, and a re-mortgage is possible, we can secure you a new rate before they increase further. If rates are reducing (or are unstable), we can lock in a new rate and monitor the rates with that lender with a view to opting for an alternative (better) rate should they improve and should this be available. Not all lenders allow rates to be changed, but most do - particularly the High Street lenders.

How easy is it to re-mortgage? 

It’s pretty much the same as applying for the mortgage when you bought your property. Documentation will be required (income evidence, bank statements, ID etc), credit and affordability checks are undertaken, and full underwriting conducted. 

An element of legal work is also required, as you’ll be altering the title to the property to reflect the new lender/Charge on the property. So you do need to allow time for this to be undertaken.

I can’t re-mortgage, because I’ve lost my job. Is there anything at all I can do? 

Yes, potentially. Many lenders offer a Product Transfer (Rate Switch) if you’re not in arrears. With a Product Transfer, income evidence isn’t typically required, and a credit search not normally carried out. This is a quick and simple process with most lenders.

We’ve had kids since taking our mortgage out. Does this impact re-mortgaging? 

Yes. Children (or dependants) are costly! This therefore impacts on your borrowing potential and will reduce the amount you can potentially borrow. 

However, if a re-mortgage is not an option, because it’s no longer affordable from a lender’s perspective, we may well be able to obtain a Product Transfer for you with your current lender, as affordability is not factored into this process.

Mortgages

Affordability – the way lenders calculate how much they’re potentially willing to lend and whether they believe you can keep up with repayments. To calculate this, they’ll mainly consider your annual income, your outgoings/commitments and any dependants you have. Affordability is also based on higher interest rates to ensure the mortgage repayments are ‘future-proofed’ in the event of any interest rate rises.

Agreement in Principle (AKA Decision or Mortgage in Principle) – an initial indication from a lender as to how much they’re potentially willing to lend based on the information entered and an initial credit search. However, this is not a mortgage offer and is only indicative. The decision to lend is subject to a full mortgage application and underwriting.

Annual Percentage Rate of Charge (APRC) – this is the total cost of the mortgage borrowing, expressed as a percentage. The APRC factors in interest rates and fees and is designed to help you compare different mortgage options.

However, this calculation assumes you’ll have the mortgage for the whole mortgage term and that you’ll revert to the lender’s Standard Variable Rate (SVR) – neither of which is likely.

Bank of England Base Rate – the interest rate set by the Bank of England is to primarily control inflation. The Base Rate influences the interest rates offered by banks and building societies – so, if the Base Rate increases then, often, most mortgage, loans and savings rates also rise. Likewise, if the Base Rate reduces, most mortgage, loan and savings rates also decrease.

Broker  – an expert who acts as an intermediary between you and a mortgage lender. We search various lenders' rates, check criteria and affordability, provide tailored advice and guide you through the mortgage process.

Some brokers do charge fees for their services, so it's recommended you check this before requesting a broker to assist you.

Buy to Let (BTL) – buying (or re-mortgaging) a property in order to let it out to tenants. The rental income is used to pay the mortgage repayments.

Most lenders calculate borrowing based on the expected or actual rental income, although some lenders do still work on affordability (in the same way borrowing ability is calculated with residential mortgages). 

With BTL mortgages you are normally required to have a 20-25% deposit (or equity if re-mortgaging) and the property must be let on an Assured Shorthold Tenancy (AST). Airbnb is not considered by many lenders and Holiday Lets are treated differently to Buy to Lets.

Capital Raising – obtaining additional monies from a lender, perhaps for home improvements. This can be requested when re-mortgaging to another lender when you’re approaching the end of your current rate. Alternatively, you may be able to raise the additional monies as a Further Advance with your existing lender – with this option you can normally request the monies at any time.

Whether raising extra monies as part of a re-mortgage or a Further Advance, affordability and criteria must be met. A credit check will also be conducted.

Cashback – some lenders offer a cashback with some rates. The cashback is payable to you on/following completion and you can spend this on whatever you wish!

Credit check – when applying for a new mortgage (purchase or re-mortgage), the lender will conduct a credit search. This involves checking your credit history over the last 6 years with various credit reference agencies (most commonly Equifax, Experian and TransUnion). They will be looking for any missed or late payments, any Defaults or CCJs and whether you’ve ‘maxed out’ your credit card balance(s). They’ll also be checking if you’re on the Electoral Roll at your current address. 

All of these elements, and more, will be considered when applying for a mortgage.

Criteria around credit history differs vastly between lenders.

Deposit – this is the amount of ‘money’ you provide when taking a mortgage. The deposit could be equity from a current property, savings, a gift or inheritance. 

The size of the deposit required depends on various factors, including the type of mortgage and property, as well as your circumstances. 

Typically, a bigger deposit normally brings better rates (although this does alter in ‘bands’).

Early Repayment Charges (ERC) – this is a charge (or penalty) made by a lender if repaying all (or, sometimes, part) of a mortgage before the date the initial rate ends. Details of the charges are set out in the Illustration at the outset and will vary depending on how early into the rate term you make the repayment.

Equity – this is the ‘profit’ you have in the property. It’s calculated by deducting the mortgage balance from the property value. 

If selling a property you can use the equity within your property as (or towards) your deposit for an onward property purchase and/or for the associated costs such as estate agents and solicitors fees.

Fees – there are various fees which may apply when obtaining a mortgage, such as Product, Arrangement, Application and/or Valuation fees. Some are paid at mortgage application, some can be added to the loan (subject to restrictions – and be aware you’ll be paying interest over the term of the mortgage if adding the fee to the loan, which costs you more). 

Some fees are refundable if the mortgage doesn’t complete, some are not. 

It’s often the case that Product Fees apply when the rate is lower and there’s usually an alternative with the same lender of a higher rate without a Product Fee. 

Some mortgage brokers charge a fee for their services, so do always check this before engaging a broker.

Other fees not directly associated to the mortgage itself may also apply, such as Solicitor's and/or Estate Agents fees.  

Fixed Rate– this means the rate secured for your borrowing remains the same during its fixed term period. This, in turn, means the monthly repayments also remain unchanged for the same period of time. Fixed rates therefore provide security/stability, which enables easier budgeting.

Further Advance – If you have a mortgage already in place and wish to raise additional monies (perhaps for home improvements or to provide a gifted deposit to children, for example), this is known as a Further Advance and is applied for separately to the main mortgage with your current lender. 

A Further Advance can normally be considered at any time. 

Affordability checks will be undertaken when applying for this type of borrowing – so income evidence, bank statements etc will be required. A credit search will also be carried out by the lender.

This additional borrowing will have a different rate to that of the main borrowing, if taking the Further Advance at a different time to your main mortgage. The rate will therefore likely end at a different time to the rate of the main mortgage. It’s worth discussing this with your broker to consider the options and implications.

Gifted deposits – monies provided to you as, or towards, a deposit on a property and which are not repayable. 

Lenders will consider gifted deposits from immediate family but, sometimes, from extended family. A limited number of lenders may even consider gifted deposits from friends – if you’re lucky enough to have such generous friends! 

Those gifting the monies will need to sign a Declaration confirming the gift is not repayable and that they will have no financial interest in the property being mortgaged.

Evidence of the monies (and possibly their accumulation) may be required by the lender and/or the Solicitor/Conveyancer.

Guarantor mortgage – this term is no longer used as such, but instead can be known as family-assisted mortgages. There are a few ways to obtain a mortgage with the help of parents or close family members. 

Some lenders consider a parent (for example) putting some savings into an account with a lender, which can be used should you miss a payment. Likewise, some lenders allow a parent (again, as an example) to put their own property as ‘security’ against the mortgage.

Otherwise, you could perhaps consider a Joint Borrower, Sole Proprietor mortgage (see this section below). 

Illustration or European Standardised Information Sheet (ESIS) – a document which sets out all of the important elements to the mortgage you’re applying for; the borrowing amount, the rate and when it ends, the term, fees, penalties and any conditions.

Initial Rate Period – terminology used to describe the length of time the fixed, tracker, discounted or capped rate is set for.

Not to be confused with the mortgage term.

Interest Only – this mortgage type means your monthly mortgage repayments only pay the interest owed on the amount borrowed. The amount you initially borrowed (the capital) does not reduce. Therefore, at the end of the mortgage term, you must repay the amount outstanding on the mortgage in its entirety.

With residential mortgages, you may sell the property to repay the mortgage, you may have another property which can be sold to repay the mortgage. Or you can use a specific investment product (ISA or a stocks and shares portfolio perhaps). 

These are known as the ‘Repayment Vehicle’.

You will be asked by the lender regularly to confirm (and sometimes evidence) the repayment vehicle being used.

Lenders who consider residential Interest Only lending have strict criteria – mainly with minimum equity and income requirements. There will be Loan to Value restrictions too.

With Buy to Let mortgages, Interest Only is a more common repayment type with little criteria/restrictions attached in this respect. Often with the sale of the property being used as the repayment vehicle. 

Joint Borrower, Sole Proprietor mortgage– this type of mortgage typically has two borrowers, with only one of the borrowers owning the property.

Income for both borrowers is therefore used for affordability calculations, which effectively ‘boosts’ the borrowing potentially available – although commitments are also factored in for both borrowers too. 

A higher borrowing may potentially be possible versus a mortgage in a sole name, using one income.

An example of where this type of mortgage works well is when a parent becomes a party to the mortgage (a joint borrower) to enable their adult child to buy a property. 

On the flip side, an adult child may be a joint borrower to assist a parent buying a property. 

All borrowers are responsible for the mortgage repayments.

Caution – the mortgage term may be based on the oldest borrower with some lenders.

Legal advice is required for this type of mortgage, and this must be evidenced.

Loan to Value (LTV) – the ratio of the loan amount against the value of the property/purchase price, expressed as a percentage.

For example, if you have a 10% deposit, the LTV will be 90%.

There are LTV bandings, typically ranging between 60% and 95%. The lower the LTV, the better the rates available. 

Mortgage Term – the total length of time the mortgage is taken over. This can typically range from 5 years to 40 years.

It’s important to note the difference between the mortgage term and initial rate term; you could have a 35 year mortgage term with a 2 year initial fixed rate term.

Negative equity – this is not what anyone wants! It’s where you owe more to the lender than the property is worth. 

Offset mortgage – a mortgage which is linked to a bank account taken with the same lender. The money held in the account isn’t used to pay off the mortgage but is instead used to reduce the amount of interest charged on the mortgage each month.

The lender deducts the amount of money in your account from the amount owed on the mortgage and then only charges interest on the remaining mortgage amount.

Your savings remain in your account and, although you won’t earn interest on your savings, the offset arrangement means you can either make your monthly mortgage repayments cheaper or reduce the term of your mortgage.

Overpayments – this is where you make an extra/additional payment over and above your normal monthly mortgage repayment amount. It’s usually possible to make overpayments on your mortgage, if you’re able and/or wish to, subject to restrictions.

You can make a regular overpayment or ad hoc payments - again, subject to restrictions.

When making overpayments you can usually choose if the overpayment should reduce the monthly repayment or not. If not wishing to reduce the monthly repayment, your overall mortgage term will reduce accordingly and your mortgage will be repaid slightly earlier as a result of the overpayment(s).

Part and Part – the borrowing is obtained as a mix of two repayment types, one part being repayment (capital and interest) and the other part Interest Only. 

Porting – this basically means transferring. It’s the term used when selling a property and buying another, transferring your current mortgage rate from your current property to the new one.

Not all mortgages are portable – do check your mortgage Illustration and Offer to confirm.

If a mortgage rate is portable, this is still subject to affordability, criteria and credit checks etc.

Product Transfer (AKA Rate Switch) – the name given when taking a new rate with your current lender to take effect when your current rate ends.

The Product Transfer doesn’t normally involve providing any paperwork to the lender, nor any credit or affordability checks. This therefore works particularly well if your circumstances have altered detrimentally since taking the mortgage previously.

Re-mortgage – applying for a new mortgage with a new lender to repay your current mortgage when the existing rate is coming to an end. This is a similar process to obtaining your original mortgage, whereby an application is submitted to the lender with supporting documentation (income evidence, bank statements etc) with credit and affordability checks conducted. 

The new rate with the new lender will become effective when your current rate ends.

There is legal work involved with a re-mortgage, due to the change in lender, which needs to be noted on the title to the property.

A re-mortgage can be with or without capital raising.

Repayment (AKA Capital and Interest) mortgage – this is where you pay both the capital and interest over an agreed period of time (the term). Providing you maintain the monthly repayments, you will be guaranteed to have repaid the mortgage at the end of the mortgage term.

With a repayment mortgage, the monthly repayments will initially be paying a small proportion towards the capital and a large proportion in interest. In the later years, this swaps and the larger proportion will be paying the capital and a smaller proportion paying the interest.

Shared Ownership – this is deemed an affordable housing scheme also known as ‘part buy, part rent’. You buy/own a share of a property and you pay rent on the share you don’t own.

You can normally buy shares initially between 25% and 75% and you have the ability to ‘staircase’ (buy additional shares) to 100%. 

It’s important to know the rent you pay will increase every year (details set out in the Lease). 

There is also likely to be Service Charges payable, which will include Buildings Insurance for the property. 

Rent and Service Charges form part of the affordability calculations with the lender, as they are treated as a commitment.

Shared Ownership is available to flats and houses, new build purchases as well as re-sales.

The deposit you pay is a percentage of the share you buy. This scheme can therefore be useful to those with smaller deposits.

It is imperative to understand the details of this type of purchase.

Standard Variable Rate (SVR) – the standard interest rate offered by a lender. The SVR is the rate your mortgage reverts to when the initial rate comes to an end. It is often much higher than the initial rate taken and, to avoid the SVR, we can consider a Product Transfer (Rate Switch) to another product with your current lender, or a re-mortgage to a new lender to take effect after the date the initial rate ends.

Term – the number of years you take your mortgage over. Most (not all) lenders now allow a mortgage term of up to 40 years, subject to age restrictions. The longer the term, the more interest is payable. The shorter the term, the higher the monthly repayment.

It’s important to remember this term can be reviewed at a later date, when you re-mortgage or move.

Underwriting – the process carried out by the lender where they assess the application as a whole, including the documentation provided (income evidence, bank statements etc), affordability, credit history, property etc. 

Underwriters determine the risk to the lender by lending to you and the final decision to lend lies with them.

Variable Rates – these are interest rates which are not fixed and can therefore change during the rate term (or if on the Standard Variable rate) and can take a number of forms:

Ø Capped – the mortgage interest rate will go up or down in line with the lender’s Standard Variable Rate or by tracking the Bank of England Base Rate. Capped rates have a fixed upper interest rate limit – known as a ceiling, or cap. Regardless how high interest rates rise, the interest rate on your mortgage will not exceed the set limit. You therefore have the peace of mind repayments won’t go beyond a certain level, but you can still benefit from any reductions to monthly repayments should interest rates reduce.

Ø Discounted – interest is set at a certain amount below the lender’s Standard Variable Rate (SVR). It could be for a set period of time, or for the whole mortgage term. The discounted rate will alter in line with any changes made to the lender’s SVR. Your monthly repayments could therefore vary.

Ø Standard Variable Rate – (as above)

Ø Tracker – this follows (tracks) the Bank of England Base Rate, or another specified index, for a specific period of time. The interest rate on the mortgage is a pre-set percentage above the Bank of England Base Rate which means the monthly mortgage repayment may go up or down, in line with any increase or decrease in the Bank of England Base Rate or specified rate.

Protection/Insurance

Benefit Period – the period of time a benefit is paid (Income Protection).

Critical/Serious Illness Cover (CIC/SIC) – pays a tax-free lump sum if you’re diagnosed with a critical/serious illness (which meets the policy definitions) during the term of the policy. 

The conditions covered and their definitions are set out in the policy document at the outset, so you know what is and isn’t covered from the start.

Children’s Critical/Serious Illness Cover is also available and, again, pays a lump sum if your child is diagnosed with a covered condition which meets the Insurer’s definition. Some Insurers include an element of Children's Critical/Serious Illness Cover as standard with their policies, others allow it to be added. A few Insurers allow the cover as a standalone option if taking adult Life Cover. 

Decreasing Term Assurance (DTA) – normally the cheapest form of Life Cover as the sum assured reduces each year, resulting in a zero balance at the end of the pre-set policy term.

This type of cover is designed to protect repayment mortgages, as the cover decreases in line (or thereabouts) with the reducing mortgage balance.

Deferred Period – for Income Protection Cover – the period of time you need to be signed off work before the benefit starts to pay out if you have a claim. There are various deferred periods to choose from and this is selected by you at the outset. 

Depending on your employment status, you can typically choose a deferred period of between 1 day and up to 104 weeks. The longer the deferred period, the lower the premium.

Deferred Period– for Waiver of Premium – the period of time you wait before premiums are waived by the Insurer in the event of illness or injury. 

If taking Income Protection, the deferred period for the Waiver of Premium will normally match the deferred period for your Income Protection. 

If taking Life and/or Critical/Serious Illness Cover, some insurers will allow you to choose a deferred period, others will only provide one option, such as 6 months.

Family Income Benefit (FIB) – this pays out a regular income upon death or diagnosis of a specified critical/serious illness, depending on the type of cover chosen. The benefit amount is paid out for the remainder of the policy term.

If looking for Life or Critical/Serious Illness Cover, it can be a cost-effective option, as it’s usually cheaper than Level Term Assurance and Critical/Serious Illness Cover.

Fracture Cover – this type of benefit pays out if you experience a fracture of a bone set out in the Insurer’s Terms and Conditions. The amount paid out depends on the fracture, confirmed at the outset.

This benefit can be added to certain types of cover.

Income Protection Cover (IP or IPC, AKA Permanent Health Insurance or PHI) – this benefit pays a tax-free amount, usually monthly, to replace an element of your income if you’re unable to work due to illness or injury. 

It will pay out until the earlier of you returning to work recovered, retirement or death, or until the policy ends. 

Some Income Protection policies are ‘short term’ (STIP) and have pre-set limits on how long they pay out for, normally between 1 and 5 years – and these Short Term Income Protection policies are a cheaper alternative to full term benefit periods.

Housepersons Cover is also an option. This protects against illness or injury, to reflect the contribution made to the household by the houseperson and the financial value of the responsibilities they undertake, such as childcare.

Indexation – an option to reduce the impact of inflation on your benefit, maintaining the value of the potential benefits. 

If selecting indexation, the cover/benefit amount increases – this can be in line with an indicator of inflation (Retail Price Index, Consumer Price Index etc) or a set percentage; you choose this at the outset. 

As the cover is increasing, your premium will also increase (even if selecting Guaranteed premiums).

Level Term Assurance (LTA) – this policy type has a set term (selected at the start) and the sum assured remains unchanged (level). So the amount which would be paid to your beneficiaries in the event of your death would be the same no matter when you died, if this was during the term of the policy.

Life Cover – a lump sum tax-free benefit paid in the event of death or, with most policies, diagnosis of a terminal illness, providing this occurs during the term of the policy. If you die after the policy ends, the benefit would not pay out. 

Occupation (relates to Income Protection Cover):

Any Occupation – the plan would pay out should you suffer an illness or injury which prevents you working in any occupation, including those which may not be your usual job and you meet the other terms and conditions of the policy. 

This is the least favoured occupation type.

Own Occupation– the plan would pay out should you suffer an illness or injury preventing you working your own occupation and you meet the other terms and conditions of the policy. 

This is the best/preferred occupation type.

Suited Occupation – the plan would pay out should you suffer an illness or injury preventing you working in an occupation suited to your experience, training and/or qualifications and you meet the other terms and conditions of the policy. 

This is the ‘middle’ option between Own and Any Occupation.

Private Medical Insurance (PMI) – a healthcare policy designed to pay some or all medical bills if treated privately, avoiding NHS waiting lists. You can tailor the policy by selecting various options such as hospital lists, excess level, whether diagnostic tests and out-patient care is covered and, if so, for how much.

This policy type is annually reviewable and premiums can therefore increase as a result of any claims. Although not all claims impact premiums.

Sum assured – also known as the benefit or cover amount. It means the amount you are covered (insured) for and, therefore, normally the amount which is paid out following a successful claim.

Term – the period of time a policy is in force for. The term is chosen at the start of the policy.

Terminal Illness Benefit (TIB)– pays a lump sum if diagnosed with an illness in which you are not expected to survive more than 12 months. Once the TIB has been paid out, the Life Cover ends and will not pay out when you die. Many Life Cover policies include this benefit as standard (but not all).

Total and Permanent Disability (TPD) – this type of cover is normally offered on Critical/Serious Illness policies and pays out a set amount of money if diagnosed with an illness or injury which means you are totally and permanently incapacitated with no chance of recovery.

Trusts – a legal agreement providing the person setting up the trust (known as the ‘Settlor’) to specify what happens with the proceeds of the Life Cover in the event of their death. 

Trustees are appointed, who ensure any monies from the policy are paid to the people/charity you want them to go to. Those who receive the monies are known as Beneficiaries. 

Putting a policy in trust ensures the proceeds will sit outside of your Estate, which means Inheritance Tax shouldn’t be payable on the monies from the policy. It also speeds up the process of the claim being paid as you shouldn’t need to wait for Probate.

There are various types of Trusts (Absolute, Bare and Discretionary etc), so it is vital to take advice in this respect, as each one serves a different purpose. Not all Trusts can be changed, so it really is imperative they are set up correctly.

Whilst it is recommended a policy is put in trust from activation of the policy, it is possible to put a policy in trust at a later date. If you have a Life Cover policy, do check if it’s written in trust.

Waiver of Premium (WOP) – the Insurer will waive your premium should you be incapacitated due to illness or injury, subject to terms and conditions. 

For Income Protection policies, the WOP is typically included at no additional cost. For Life and Critical/Serious Illness policies, you can choose to add this option.

Whole of Life Cover (WOL) – this type of Life Cover will pay out, no matter the age you pass away (providing premiums are paid and are up-to-date); unlike policies with a set term, which will come to an end after a period of time if you have survived. For this reason, WOL policies are a more expensive option than Life Cover taken for a fixed term.