Mortgage Glossary

A plain-language glossary of the mortgage and home-loan terms you are most likely to meet when buying, refinancing, or remortgaging a property. Search by any word to jump to a term.

Adjustable-Rate Mortgage (ARM)

A home loan whose interest rate changes over time based on a benchmark index, so the monthly payment can rise or fall after an initial fixed period. Common in the US; called a variable-rate mortgage elsewhere.

Amortization

The process of paying off a loan through regular installments that cover both interest and principal. An amortization schedule shows how each payment is split and how the balance shrinks over the term.

Appraisal (Valuation)

An independent professional estimate of a property's market value, ordered by the lender to confirm the home is worth the amount being borrowed. Known as a valuation in the UK and Australia.

APR (Annual Percentage Rate)

The yearly cost of a loan expressed as a percentage, including the interest rate plus most lender fees. It lets borrowers compare offers on a like-for-like basis more fairly than the interest rate alone.

APRC (Annual Percentage Rate of Charge)

The UK and EU equivalent of APR, showing the total yearly cost of a mortgage including interest and mandatory fees over the full term. It assumes you keep the mortgage for its entire length.

Arrears

Mortgage payments that are overdue because one or more scheduled installments were missed. Being in arrears can damage a borrower's credit and, if unresolved, may lead to repossession.

Balloon Payment

A single large payment due at the end of certain loans, after a period of smaller installments that did not fully repay the balance. It requires the borrower to refinance, sell, or pay the lump sum.

Closing Costs

The fees and charges paid to finalize a mortgage, such as origination fees, appraisal, title insurance, and taxes. They are typically due at settlement and are separate from the down payment.

Conveyancing

The legal process of transferring property ownership from seller to buyer, handled by a solicitor or conveyancer. It includes searches, contracts, and registering the new owner with the land registry.

Debt-to-Income Ratio (DTI)

The share of a borrower's gross monthly income that goes toward debt payments, including the proposed mortgage. Lenders use it to judge whether a borrower can afford the loan; lower ratios are viewed more favorably.

Down Payment

The upfront portion of a property's price the buyer pays from their own funds, with the rest covered by the mortgage. A larger down payment lowers the loan amount and can secure better rates. Called a deposit in the UK and Australia.

Equity

The portion of a property the owner truly owns, calculated as the current market value minus the outstanding mortgage balance. Equity grows as the loan is paid down and as the property appreciates.

Escrow

An account held by the lender or a third party to collect and pay property taxes and insurance on the borrower's behalf, funded through the monthly mortgage payment. Common in the US.

Fixed-Rate Mortgage

A home loan whose interest rate stays the same for a set period or the entire term, keeping the principal-and-interest payment predictable. It protects the borrower from rising rates but not from falling ones.

Interest

The cost of borrowing money, charged by the lender as a percentage of the outstanding balance. On a mortgage, early payments are mostly interest, with more going to principal over time.

LMI (Lenders Mortgage Insurance)

Insurance that protects the lender (not the borrower) when a borrower puts down a small deposit, common in Australia for deposits under 20 percent. The borrower pays the premium, often added to the loan.

LTV (Loan-to-Value Ratio)

The size of the loan compared with the property's value, shown as a percentage. A lower LTV means more equity and usually access to better interest rates; a high LTV often triggers mortgage insurance.

Offset

An account linked to a mortgage where the balance is subtracted from the loan amount before interest is calculated, reducing interest paid while keeping the savings accessible. Common in the UK and Australia.

PMI (Private Mortgage Insurance)

Insurance a US lender requires when the down payment is less than 20 percent, protecting the lender if the borrower defaults. It can usually be cancelled once enough equity is built.

Points

Optional upfront fees paid to the lender to lower the interest rate, where one point equals one percent of the loan amount. Also called discount points; paying them can reduce the long-term cost if the borrower keeps the loan long enough.

Pre-Approval

A lender's conditional commitment to lend a specific amount, based on a review of the borrower's finances before a property is chosen. It signals to sellers that the buyer is serious and can move quickly.

Principal

The amount of money originally borrowed, or the portion of the balance still owed, excluding interest. Each mortgage payment reduces the principal a little more as the loan matures.

Redraw

A mortgage feature that lets a borrower withdraw extra repayments they made above the required amount. It offers flexibility to access surplus funds while still reducing interest in the meantime. Common in Australia.

Refinancing

Replacing an existing mortgage with a new one, often to obtain a lower rate, change the term, or access equity. It can reduce payments but may involve closing costs or exit fees.

Remortgage

The UK term for switching an existing mortgage to a new deal, either with the current lender or a new one, typically to save on interest or release equity. It is the local equivalent of refinancing.

Stamp Duty

A government tax on property purchases in the UK and Australia, usually calculated as a percentage of the price and paid by the buyer at completion. Rates and exemptions vary by region and buyer type.

Underwriting

The lender's assessment of a loan application, verifying income, credit, assets, and the property to decide whether to approve the mortgage and on what terms. It is the final review before formal approval.

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Educational reference only. Definitions describe common usage across the US, UK, Australia, and Canada; exact meanings, rules, and taxes vary by country, lender, and product. This is not financial or legal advice.