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Real Estate Terms 101: A Beginner’s Guide to UK Property Investment terminology

September 11, 2024 • Author: Elliot Rowe

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Navigating the UK property market can be daunting, especially for new investors. The jargon and terms can often feel like a different language. As dedicated agents with 20 years of experience advising our worldwide client base to build high-performing property portfolios, we’ve come across all the terms in the book. And so we've compiled a comprehensive guide to essential UK real estate terms every property investor should know, to help you on your way to confidently make your first UK investment property purchase.

From your ROI to your CGT: These are the real estate terms you need to know

We break down eligibility, interest rates, and the documents required for a smooth property purchase in this explainer of how the mortgage process work for overseas investors.

Freehold

A freehold property means you own the building and the land it stands on outright. This type of ownership offers the most control and stability, as there are no lease agreements or ground rents to worry about.

Commonhold

Commonhold is an alternative to leasehold for flats and apartments. It allows individual ownership of a unit within a building, while jointly owning and managing common areas like stairwells and gardens through a commonhold association.

Buy-to-Let (BTL)

Buy-to-let refers to purchasing a property specifically to rent it out. This investment strategy aims to generate rental income and potentially benefit from property appreciation. Mortgage options for buy-to-let properties typically require a larger deposit and higher interest rates.

Stamp Duty Land Tax (SDLT)

SDLT is a tax paid on property purchases above a certain price threshold. The rates vary based on the property price and type, whether it’s residential or non-residential, and whether the buyer is a first-time buyer, an additional property owner, or a foreign investor.

Capital Gains Tax (CGT)

A tax on the profit made when you sell an investment property that has increased in value. For property, the current rates are higher than for other assets, and there are various allowances and exemptions to consider.

EQUITY

Equity is the difference between the market value of your property and the outstanding mortgage balance. As you pay down your mortgage or if your property’s value increases, your equity grows.

yield

Yield measures the annual return on an investment property. It's calculated by dividing the annual rental income by the property’s purchase price (or current market value). A high yield indicates a good return on investment, but it must be balanced against the risks and costs of property ownership.

Conveyancing

Conveyancing is the legal process of transferring property ownership from seller to buyer. It involves various checks, searches, and the preparation of legal documents, typically carried out by a solicitor or licensed conveyancer.

Exchange of Contracts

This is a critical stage in the property purchase process where both buyer and seller sign and exchange legally binding contracts. At this point, the buyer typically pays a deposit, and the sale becomes legally binding.

Off-Plan

Buying off-plan means purchasing a property before it’s built, based on the developer’s plans. This can often be cheaper than buying an already built property.

Completion

Completion is the final step in the property purchase process, where the remaining balance of the purchase price is transferred to the seller, and ownership of the property officially changes hands.

Snagging

Snagging takes place before the property is handed over to you. An agent inspects the property and makes a list of all the ‘snags’ that need attention from the property developer before the property is handed over to the buyer in perfect condition.

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Leasehold

In contrast to freehold, leasehold ownership means you own the property for a fixed period, as outlined in the lease. The land it sits on is owned by a freeholder (landlord), to whom you might pay ground rent. Lease terms can range from a few years to several centuries, but typically, longer leases (over 80 years) are more desirable and valuable.

Help to Buy

Help to Buy is a government scheme designed to help first-time buyers and home movers purchase a property with a smaller deposit. Various initiatives under this scheme include equity loans, shared ownership, and ISAs.

SURVEY

A survey is an inspection of a property’s condition, conducted by a qualified surveyor. There are different levels of surveys, ranging from basic condition reports to detailed building surveys, each providing varying degrees of information about the property’s condition and potential issues.

Section 21 Notice

A Section 21 notice, under the Housing Act 1988, allows landlords to evict tenants without providing a reason, once the fixed term of the tenancy has ended or during a periodic tenancy. Recent legislative changes are phasing out the use of Section 21 in favor of more tenant-friendly regulations.

gazumping

Gazumping occurs when a seller accepts a higher offer from another buyer after already accepting an offer. This can happen anytime before the exchange of contracts, causing frustration and potential financial loss for the initial buyer.

Bridging Loan

A bridging loan is a short-term finance option used to ‘bridge’ the gap between buying a new property and selling an existing one. These loans typically have higher interest rates and are used for quick property purchases or renovations.

Refurbishment

Refurbishment involves updating or modernizing a property, which can range from minor repairs and redecorating to major structural renovations. It’s often done to increase the property’s value or appeal to tenants.

Planning Permission

Planning permission is the consent from the local authority to carry out certain types of building works or changes to a property. This is essential for new builds, major alterations, or changes of use, ensuring compliance with local regulations and development plans.

Gross Development Value (GDV)

GDV is an estimate of the total market value of a property development once all work is completed. It’s a crucial figure for developers and investors when assessing the potential profitability of a project.

HMO (House in Multiple Occupation)

An HMO is a property rented out by at least three people who aren’t from one household (a single family), but share facilities like the bathroom and kitchen. HMOs can offer higher rental yields but come with stricter regulatory requirements and management complexities.

EPC (Energy Performance Certificate)

An EPC rates a property’s energy efficiency on a scale from A (most efficient) to G (least efficient). It is a legal requirement when selling or renting out a property, helping potential buyers or tenants understand the energy costs.

Key UK mortgage terms

  • The principal is the original loan amount you borrow from a lender to purchase a property. This amount doesn’t include any interest or fees that will be added over the loan term.

  • The interest rate is the percentage charged on the loan amount by the lender. It can be fixed, meaning it stays the same for a specified period, or variable, meaning it can change based on the lender’s rate or an external benchmark.

  • A fixed-rate mortgage has an interest rate that remains constant for a set period, usually 2, 3, 5, or 10 years. This provides predictable monthly payments, which can help with budgeting.

  • A variable-rate mortgage has an interest rate that can change over time. Common types include tracker mortgages, which follow the Bank of England’s base rate, and standard variable rate (SVR) mortgages, which can change at the lender’s discretion.

  • A repayment mortgage requires monthly payments that cover both the interest and a portion of the principal. By the end of the term, the entire loan amount and interest are fully paid off.

  • With an interest-only mortgage, your monthly payments only cover the interest. The principal remains unchanged, and you must pay it off in full at the end of the term. This type of mortgage requires a solid repayment plan for the principal.

  • LTV is a ratio that compares the amount of the mortgage to the property’s value. For example, a £150,000 mortgage on a £200,000 property has an LTV of 75%. Lower LTV ratios typically mean better interest rates and less risk for the lender.

  • The deposit is the initial amount you pay upfront towards the property purchase. It’s usually expressed as a percentage of the property’s value. Higher deposits generally result in better mortgage deals.

  • Equity is the difference between your property’s market value and the outstanding mortgage balance. As you repay your mortgage and/or if your property’s value increases, your equity grows.

  • This is a fee charged by the lender for setting up the mortgage. It can be paid upfront or added to the loan amount. It’s essential to consider this fee when comparing mortgage deals.

  • An ERC is a penalty fee for paying off your mortgage early or making overpayments beyond the agreed limit. This fee is more common with fixed-rate and some tracker mortgages.

  • A Mortgage in Principle (MIP) is a certificate from a lender indicating how much they might be willing to lend you based on your financial situation. It’s not a guarantee but can help show sellers you’re a serious buyer.

  • Remortgaging involves switching your existing mortgage to a new deal, either with your current lender or a different one. This can help reduce monthly payments, release equity, or secure a better interest rate.

  • An offset mortgage links your savings and mortgage accounts, allowing your savings to reduce the amount of interest you pay on your mortgage. For example, if you have a £200,000 mortgage and £20,000 in savings, you’d only pay interest on £180,000.

  • This refers to the standard repayment method where your monthly payments cover both the interest and a portion of the principal loan amount. By the end of the term, the entire loan is repaid.

  • The mortgage term is the length of time over which you agree to repay the loan. Common terms range from 20 to 35 years. Longer terms result in lower monthly payments but higher total interest payments over the life of the loan.

  • The SVR is the default interest rate that a lender applies once an initial mortgage deal ends. This rate can change at the lender’s discretion and is usually higher than introductory rates.

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Are you an investor looking for a UK buy-to-let mortgage?

RPA work with specialist lenders who deal exclusively with overseas property investors looking to invest in the UK. Contact us and we can refer you for a mortgage appraisal. We’ve secured the most competitive finance for hundreds of our clients.

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About the author

Elliot has 16 years of experience in the UK Real Estate Industry working in the UK and the Middle East. He’s been advising clients in how to develop leading portfolios to achieve their goals and personal targets.

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