Understanding the terminology used in velocity banking and mortgage strategies
This glossary provides general definitions of financial terms for educational purposes only. Definitions may vary by financial institution or region. The content is not financial advice.
Always consult with qualified financial professionals regarding your specific situation before making any financial decisions.
The process of paying off a debt (like a mortgage) over time through regular payments. An amortization schedule shows how each payment is split between interest and principal reduction, gradually paying down the loan balance to zero.
With traditional mortgages, early payments are heavily weighted toward interest, while later payments contain more principal reduction.
The yearly cost of a loan expressed as a percentage, including interest and certain fees. APR provides a more comprehensive measure of the cost of borrowing than just the interest rate.
In the UK, lenders are required to disclose the APR to help consumers compare different loan offers.
A review conducted by UK lenders to determine if a borrower can afford mortgage repayments, both now and in the future if interest rates rise. This assessment examines income, expenses, and financial commitments.
These assessments became more stringent following the Mortgage Market Review (MMR) in 2014.
The interest rate set by the Bank of England's Monetary Policy Committee, which influences the rates charged by banks and other lenders.
Many tracker mortgages and some variable rate mortgages are directly linked to this rate, meaning your payments may change when the base rate changes.
The net amount of cash moving into and out of a household in a given period. In velocity banking, optimizing cash flow is crucial for effective debt reduction.
Positive cash flow (more money coming in than going out) is essential for implementing a velocity banking strategy successfully.
Interest that's calculated not only on the initial principal but also on accumulated interest. Over time, compound interest can significantly increase the total amount paid on a loan.
By making large principal reductions early, velocity banking aims to reduce the effects of compound interest on a mortgage.
A UK mortgage product that combines your mortgage and current account into one, with interest calculated on the net balance. Any money in your account effectively reduces your mortgage balance temporarily, lowering interest calculations.
This is one potential alternative to HELOCs for implementing velocity banking principles in the UK.
A fee that some UK lenders charge if you repay all or part of your mortgage early. These are particularly common during fixed, tracker or discounted rate periods.
ERCs can be a significant consideration when implementing a velocity banking strategy in the UK, as they may affect the cost-effectiveness of making large lump sum payments.
The portion of your property that you truly "own." It's calculated as the current market value of your home minus the amount you still owe on your mortgage.
Equity increases as you pay down your mortgage and as your property value increases. In velocity banking, growing equity is crucial for increasing HELOC limits and accelerating the strategy.
A mortgage where the interest rate remains unchanged for a specified period (typically 2, 3, 5, or 10 years in the UK). After this period, the rate typically reverts to the lender's standard variable rate.
Fixed rate mortgages provide payment stability but may have stricter early repayment terms that could impact velocity banking strategies.
A UK mortgage product that allows features such as overpayments, underpayments, payment holidays, and sometimes the ability to withdraw overpayments.
Flexible mortgages can be useful for implementing velocity banking principles in the UK, as they allow for strategic principal reductions and sometimes access to equity without refinancing.
A revolving line of credit secured by your home's equity. Unlike a traditional loan, you can borrow, repay, and borrow again up to your credit limit. Interest is typically calculated on the outstanding balance only.
HELOCs are a cornerstone of traditional velocity banking strategies in the US, though they're less common in the UK market. UK alternatives include offset mortgages, flexible mortgages, and revolving credit facilities.
A lump sum loan secured against the equity in your property. Unlike a HELOC, a home equity loan provides a one-time lump sum with fixed repayments over a set term.
While not typically used in velocity banking (which favors revolving credit lines), home equity loans can be used for large principal reductions in some cases.
The cost of borrowing money, expressed as a percentage of the loan amount. For mortgages, interest is typically calculated on the remaining principal balance.
Understanding how and when interest is calculated is crucial to the velocity banking strategy. By reducing principal early, you decrease the base amount on which interest is calculated.
A mortgage where you only pay the interest each month, not reducing the principal. At the end of the term, the original loan amount is still owed and must be repaid.
Interest-only mortgages are not typically ideal for velocity banking strategies, which focus on accelerating principal reduction.
The ratio between your mortgage amount and the value of your property, expressed as a percentage. For example, a £240,000 mortgage on a £300,000 property has an LTV of 80%.
Lower LTV ratios typically qualify for better interest rates and more financial products. In velocity banking, decreasing your LTV can increase access to equity and potentially improve HELOC or offset mortgage terms.
A single large payment made toward the principal of your mortgage, above and beyond your regular monthly payment.
These payments directly reduce your principal balance and can significantly decrease the total interest paid over the life of the loan. Lump sum payments are a key component of velocity banking strategies.
A loan used to purchase property, with the property itself serving as collateral. In the UK, mortgages typically have terms of 25-35 years and can have various interest rate structures (fixed, variable, tracker, etc.).
The length of time over which a mortgage is scheduled to be repaid. Standard UK mortgage terms range from 25 to 35 years, though shorter and longer terms are available.
Velocity banking aims to significantly shorten the effective mortgage term by accelerating principal reduction.
A UK mortgage product that links your mortgage to your savings account(s). The balance in your savings is "offset" against your mortgage balance, and you only pay interest on the difference.
Offset mortgages are one of the most common UK alternatives to HELOCs for implementing velocity banking principles.
Any payment made toward your mortgage that exceeds the required monthly payment. Overpayments directly reduce your principal balance.
Most UK mortgages allow some level of overpayment (typically 10% of the remaining balance per year) without incurring early repayment charges.
The original amount borrowed in a loan, or the remaining balance that you owe (excluding interest). Each mortgage payment reduces your principal by a certain amount, with the rest going toward interest.
Velocity banking focuses on accelerating principal reduction to minimize interest payments and shorten the loan term.
The process of replacing an existing mortgage with a new one, typically to secure better terms (lower interest rate, different term length, access to equity, etc.).
While not specifically part of velocity banking, refinancing can sometimes be used alongside the strategy when market conditions are favorable.
A flexible type of borrowing that allows you to withdraw funds, repay them, and withdraw again up to a set credit limit. In the UK, these can sometimes be secured against property, functioning similarly to a US HELOC.
When available, revolving credit facilities can be used in velocity banking strategies in the UK market.
The default interest rate charged by a lender after an initial fixed, discounted, or tracker period ends. Each lender sets their own SVR, which can change at the lender's discretion.
SVRs are typically higher than the rates offered on new mortgage products, and there are usually no early repayment charges when on an SVR.
A mortgage acceleration strategy that uses a Home Equity Line of Credit (HELOC) or similar financial tool to make large lump sum payments to your mortgage principal, potentially paying off a mortgage faster and reducing the total interest paid.
The term "velocity" refers to the speed at which money moves through this system, accelerating debt payoff through strategic cash flow management.
A mortgage where the interest rate can change over time, usually in relation to a reference rate such as the Bank of England base rate. In the UK, variable rate products include tracker mortgages and discounted variable rates.
Variable rate mortgages sometimes offer more flexibility for overpayments, which can be beneficial for velocity banking strategies.
These terms are particularly important to understand when learning about velocity banking:
These terms are particularly relevant to UK homeowners:
Explore these resources to continue learning about velocity banking: