Plain-English Guide to Mortgage &
Islamic Finance Terminology

When you take out a repayment mortgage, each monthly payment does two things: it pays some interest to the lender, and it reduces the amount you owe. At the start, most of each payment goes to interest. By the end, most goes to reducing the balance. Amortisation is the name for this gradual payoff process.

A roadmap of your mortgage. For every single month of your 25-year term, it shows you how much went to the bank as interest, how much reduced your balance, and what you now owe.

The headline rate only tells you the interest cost. The APR includes arrangement fees, booking fees, and compulsory charges spread over the term. A mortgage with a low rate but high fees may have a higher APR than one with a slightly higher rate but no fees.

The "wholesale" cost of money. When the central bank raises the base rate, it becomes more expensive for banks to borrow money, and they pass that cost on to mortgage customers. Most variable-rate and tracker mortgages are directly linked to the base rate.

If you borrow £240,000 to buy a house, the capital is that amount. The interest is what the lender charges for the privilege of borrowing. When the capital reaches zero, the mortgage is paid off.

The standard type. Every payment chips away at the amount you owe. By the end of the term, you own the property outright. This is in contrast to an interest-only mortgage.

Rather than thinking in monthly payments or total interest over 25 years, the daily interest cost tells you what the mortgage costs per day. On a typical loan at 4.51%, that is around £17.59 per day. The most honest single measure of what a mortgage costs.

A larger deposit means a smaller loan, less interest paid overall, and typically lower interest rates because the lender is taking less risk.

Typically 1-5% of the outstanding balance, decreasing each year. Most lenders allow overpayments of up to 10% per year without triggering an ERC.

If your house is worth £300,000 and you owe £180,000, your equity is £120,000. Equity grows as you pay down the mortgage and as the property increases in value.

Your monthly payment stays the same for the fixed period, typically 2, 3, or 5 years. At the end of the fix, the mortgage reverts to the lender's SVR, which is usually much higher. Remortgaging at the end of each fixed period is critical.

Lower monthly payments, but you still owe the full original amount at the end of 25 years. Much harder to obtain for residential purchases since the 2000s endowment failures.

A lower LTV means the lender takes less risk and offers lower rates. Best rates are typically at 60% LTV or below. As you pay down the mortgage, your LTV falls, unlocking better rates at remortgage.

If you owe more than the property is worth, you cannot sell without paying the lender the shortfall from your own savings. Most common among borrowers who bought with a small deposit at a market peak.

Your savings reduce the mortgage amount that interest is charged on, without losing access to the savings. The effective return is the mortgage rate, tax-free.

Each pound of overpayment reduces the balance, which reduces interest the following month, which means more of the standard payment goes to capital. The effect compounds. Most lenders allow 10% overpayment per year without penalty.

When your fixed rate ends, the mortgage reverts to a much higher SVR. Remortgaging locks in a new competitive rate. One of the most important financial decisions a homeowner makes regularly.

Rates are tiered by purchase price. First-time buyers receive relief on properties up to a threshold. Scotland and Wales have equivalent taxes under different names.

Typically 2-5 percentage points above the base rate. Not competitive. Sitting on the SVR is one of the most expensive mistakes a mortgage holder can make.

Transparent pricing but no protection against rate rises. You always know exactly how your rate is calculated.

Most UK residential mortgages are 25 years, though 30-35 year terms are increasingly common. A longer term means lower monthly payments but significantly more total interest.

The concept that a person entrusted with something must handle it with complete honesty and care. A financial product that obscures its true cost violates the principle of Amanah.

The bank buys your chosen property and immediately sells it to you at a higher price. You pay in monthly instalments over the agreed term. The total cost is fixed from the start. Technically a sale, not a loan.

You and the bank jointly own the property. Your deposit buys your initial share, the bank owns the rest. Each month, your payment covers rent on the bank's share and buys a small additional share. Over time, your share grows until you own 100%.

When an Islamic bank wants to offer a new product, it asks its Shariah board to issue a fatwa confirming the product is permissible. A fatwa is not a government regulation. Different scholars may issue different fatwas on the same product. The existence of a fatwa does not guarantee the product is economically different from a conventional alternative.

Transactions where the outcome is excessively uncertain or where one party has significantly more information than the other. A product marketed as "profit-based" when it is economically identical to interest could involve gharar through deception.

A halal product complies with Shariah principles. Being described as halal means a Shariah board has reviewed the structure and issued an opinion that it is permissible. It does not automatically mean the product is cost-competitive or genuinely different in economic substance from a conventional alternative.

In finance, the primary haram elements are riba (interest), gharar (excessive uncertainty), and maysir (gambling). Conventional mortgages are considered haram because they involve riba.

The bank buys the property and becomes the landlord. You pay rent. At the end of the agreed period, ownership transfers to you. The bank retains ownership throughout, theoretically bearing the risk of property damage or loss, though this is typically passed back to the customer through insurance requirements.

Transactions where wealth is transferred based on chance rather than productive activity. Standard mortgages are not considered to involve maysir. More relevant to speculative derivatives and options.

Functionally equivalent to an interest rate. Determines how much you pay each month above capital repayment. The economic outcome is often very similar to conventional interest.

Money itself should not generate money. Wealth should only be created through productive activity, trade, or genuine risk-sharing. A conventional mortgage charges interest, which is riba. Islamic products replace this with profit from a sale, rent from a lease, or shared returns from co-ownership.

The comprehensive legal and ethical framework governing all aspects of a Muslim's life. "Shariah-compliant" means a product has been reviewed by qualified scholars and judged to comply. Different scholars may reach different conclusions about the same product.

Every Islamic finance provider has a Shariah board. Independence varies significantly. A board employed and paid directly by the bank may face conflicts of interest. The most credible institutions have independent boards whose members are not employees.

Instead of lending money (as with bonds), investors purchase a share of ownership in a specific asset. Returns come from rental income or profit-sharing, not interest. Used by governments and corporations to raise capital in a Shariah-compliant manner.

Conventional insurance involves paying a premium to a company that profits from the difference between premiums and claims. Takaful replaces this with a mutual fund model where surplus is returned to participants or donated. The Shariah-compliant alternative to buildings and contents insurance required by mortgage lenders.