Finance - Home Loans

Anyone considering a mortgage needs to understand the home loan jargon. Most terms have reference to a charge or a fee that will be required. Home loans are not limited or restricted to just formal mortgages.

Home loans jargon covers quite a large area of terms and phrases that often relate to financial products which are various ways of borrowing and paying back the money.

Failure to understand the full implications of the homes loan jargon can lead to obligations and commitments on the side of the home owner that they are unable to service that could result in the loss of your home.

Home Loans Jargon.

Additional principal payment

Extra money included in the monthly payment to help reduce the principal and shorten the term of the loan.

Advance

The amount of loan the customer borrows

agent

A person appointed by a principal to act on the latter's behalf in business.

Alienation clause

A provision that requires the borrower to pay the balance of the loan in a lump sum after the property is sold or transferred.

Amortization

Repayments of the capital element of a loan or mortgage separate from the interest. A term that is more commonly used in the US to describe the regular repayment of interest and principal to pay off a debt at maturity.

annual equivalent rate

A figure quoted in loan advertisements to help people make compare one product with another. It indicates what the rate would be if interest was paid just once a year

Where interest on loans is expressed as other than a yearly rate, for example 1.5% per month, APR is the equivalent rate over a year, in this case 19.56%.

The Consumer Credit Act 1974 requires companies that advertise loans or credit cards to state what the APR rate is. This enables would be borrowers to compare rates and to see the true rate of interest repayment they would incur over the full year

Annual Percentage Rate (APR)

Often referred to as APR, it is the measure of true interest payable on a loan measured over one year, reflecting the cost of paying interest on a monthly basis.

Arrears fee

This is charged on a monthly basis to cover additional administrative costs where your loan account is one or more monthly payments in arrears

Assessed valuation

The value of a property may only be assessed where the property has been owned for at least 6 months. Proof of purchase price must be obtained. The value of the property is assessed by multiplying the purchase price (or District Valuers valuation for ex-Council properties) by the factor on the current Assessed Valuation Factor Chart.

ASU

A form of income protection incorporating cover for loss of earnings arising from accident, sickness or unemployment. Is usually paid out in the form of a monthly tax-free income to cover a portion of lost earnings and is usually restricted to two years from the date of the first payment.

back to back loan

A situation where an investment organisation, such as an investment trust, deposits sterling with a UK bank which subsequently arranges with a foreign associate bank to lend the equivalent amount of foreign currency to the investment organisation. The purpose of this transaction is to hedge against currency fluctuations affecting the portfolio.

balloon

The final payment on a loan which is significantly larger than those preceding it.

Balloon loan

A mortgage in which monthly installments are not large enough to repay the loan by the end of the term. As a result, the final payment due is the lump sum of the remaining principal.

Bank Loan

A short-term personal loan from a bank, usually over three or four years, that is amortised by level monthly instalments of capital and interest. Can be secured or unsecured, with an interest rate linked to the bank's own base rate.

Bank of England base rate

The prevailing rate of interest set by the Bank of England which all lenders generally follow.

Basis point

A basis point is one one-hundredth of one percentage point. For example, the difference between a loan at 8.25 percent and a mortgage at 8.37 percent is 12 basis points.

beneficial loan

A loan made by an employer to an employee on which interest is either not charged or is less than the official rate. The difference between the interest charged and the official rate is taxable.

Biweekly loan

A loan that requires payments every two weeks and helps repay the loan over a shorter term.

Bridging Loan

Temporary loan to cover the position which will ultimately be covered by long term finance such as somebody moving house who temporarily owns two houses simultaneously. Such loans can attract a preferential rate of interest and tax relief.

Call option

A clause in a loan agreement that allows a lender to ask for the balance at any time.

cancellation period

In financial services, the period after signing a contract during which customers are entitled to cancel their purchase of some financial products

Cap

A limit on the amount the interest rate or monthly payment can increase in an variable rate loan.

CAT standard

These are a set of standards proposed by the government aimed at ensuring a certain level of standard amongst financial products such as mortgages and ISAs. Whilst they are a sign that a lender or provider is a reputable business and offers products that are of a certain quality, a CAT mark does nott ensure that a product is the most suitable one for you.

collateral

An asset pledged as a guarantee to a lender until a loan is repaid. If the borrower defaults, the lender has a right to sell the collateral asset.

An example of a type of financial collateral that can be offered is a life insurance policy which has acquired a cash surrender value equal or greater in value to the loan amount. This could be pledged as security.

Completion

The time when payment of the advance is made to the customer and the agreement terms commences.

Compound interest

The interest paid on the principal balance in a mortgage and on the accrued and unpaid interest of the loan.

Council of Mortgage Lenders

An institution that sets out code a code of good practice which mortgage lenders volunteer to stick to - they are not regulated by the government.

County Court Judgments (CCJ)

A monetary judgment from Country Court requiring the payment of a sum of money by one party to another.

Credit history

An individual's record of financial transactions held on file by Credit Agencies.

Credit reference agency

A credit reference agency holds files on the borrowing records of nearly every adult in the UK. The information is collated from a variety of sources. The file may hold details:

showing the names of the people listed as living at the same address as you (usually taken from the electoral register)

your credit agreements details of late payments & defaults - this can be held for up to six years

court judgments against you - this can also be held for six years.

Credit scoring

A system used by lenders to calculate the statistical probability that a loan they grant to you will be repaid. Different lenders have slightly different rules for assessing risk. Each lender works out the characteristics of 'good' and 'bad' customers, based on its past experience. Homeowners or borrowers with steady incomes may be considered less likely to default. Each answer you give on your application form will be given a rating. If the total 'score' is above a certain figure, your application is accepted. Because credit scoring is the key to different lenders risk management they do not easily reveal the precise details of how it works.

Credit search & Voters Roll Confirmation

A Credit Search will be undertaken on all addresses covering the past three years. Notwithstanding a valid explanation, applicants must appear on the Electoral Register.

credit union

A mutual association formed by people with a common affiliation such as employees, a union or a religious group in which pooled saving are made. The funds are invested for appreciation and members may borrow at competitive rates.

Daily interest

Interest on the homeloan is calculated and applied on a daily rather than a monthly or yearly basis. Can lead to big savings.

Debt-to-income ratio

A ratio used by lending institutions to determine whether a person is qualified for a mortgage. Debt-to-income is the total amount of debt, including credit cards and other loans, divided by total gross monthly income.

Decision in Principle

A method of collecting your monthly repayment of the loan directly from your bank or building society. An instruction is completed and signed by you and sent to your bank or building society asking them to honour First National's monthly requests for payment from your account.

Default

When one mortgage payment or a series of payments are missed, the borrower is referred to as being in default.

Deferral period

Applies to payment protection policies and is the length of time after you are unable to work or make the claim before you can start to receive insurance payouts. Typically this ranges from 30 to 60 days, though for non-mortgage related products, the deferral period can be as long as 90 or even 120 days.

Delinquent loan

A loan that involves a borrower who is behind on payments. If the borrower cannot bring the payments up to date within a specified number of days, the lender may begin foreclosure proceedings.

Discount period

The time at the beginning of a mortgage life span when you are offered reduced repayments. Can be useful to help you overcome the often significant outlay involved with buying a property.

Early redemption fee or Early Repayment Charge

A fee payable on complete settlement of the loan before completion of the full term, calculated within limits applied under the Consumer Credit Act 1974, and payable instead of the amount of interest and other charges which would have been payable had the loan run to the end of the term.

Early repayment period

A period of time that applies to certain types of loan during which a charge will be made if the loan is repaid in full or in part or its terms are varied at the borrower's request

Effective gross income

Additional income that a lender considers when assessing the loan application of a potential borrower.

Equifax/Experian searches

The Equifax/Experian credit search will show information registered against the name and address searched. This information will refer to adverse entries such as County Court Judgments (CCJs) and past/present credit transactions, including the insight service.

In the case of married couples, the prime wage earner must be credit searched and a Voters Roll check carried out.

Where the applicants' surnames differ, or where they are not married then each party must have a credit search and Voters Roll check carried out.

Where previous addresses have been provided or established these should also be searched, to a maximum of 5 years history.

Note: We must obtain confirmation of residence for a minimum period of three years. For Further Advances it is only necessary to obtain confirmation of residence since the original account was opened if this is less.

Equity

The difference between the value of the property and the amount of the mortgage and any other outstanding loans secured against it.

Equity calculations

The equity is calculated by multiplying the property value by the equity percentage and deducting the amount outstanding on the first mortgage (or projected balance for low start or deferred mortgages*) and outstanding Local Authority Discount (see Property & Valuations). Any retention made by the first mortgagees should also be deducted.

Equity release

Equity release or home income schemes allow you to generate either a lump some or a regular income in return for allowing the lender to take ownership of a portion of your home. These are often used by people in later stages of life who have paid of all or most of their mortgage and who are looking to raise funds without borrowing money

Extended redemption penalty

This is where the redemption penalty continues beyond a fixed or capped rate period, effectively tying you in to the much higher variable rate for a period of time after the fixed or capped period. As a result you get stuck paying an uncompetitive rate that eats into the gains you may have made from having the fixed rate or capped ratein the first place

financial institution

An institution which accepts funds from the public and reinvests in bank deposits, bonds and stocks etc. These include banks and insurance companies. In the UK a building society would be included.

First charge

If your property is collateral for more than one property and the borrower defaults on payments, the lender with a first charge has the option to repossess the home.

Fixed rate

The interest rate applicable will not change for a set period of time. When the fixed rate comes to an end, the interest will automatically become a variable rate.

Forbearance

A course of action a lender may pursue to delay foreclosure or legal action against a delinquent borrower.

Foreclosure

The legal process that occurs when a buyer defaults on a loan. The lending institution takes back the property because of a lack of payments

Forfeiture

The relinquishing of property rights by a delinquent borrower.

Further advances

An additional loan which can be taken on top of the original loan at a later date.

Grace period

A specified amount of time to make a loan payment after its due date without penalty.

Guarantor

The guarantor is responsible for payments if you default. If a lender is concerned about your ability to repay your loan, they may require you to find a guarantor for the loan.

IFA - Independent Financial Advisor

In theory, these intermediaries should look at the entire financial market before making a selection and offer unbiased advice and access to all suitable financial products. they sometimes still have access to special deals not on offer elsewhere because they may subscribe to a mortgage panel along with other advisers and brokers. Together they convince lenders to provide special packages in return for their continued custom. The only trouble is that they have to deliver a certain level of business over a year to remain on the panel, so they may favour some products over others.

Impaired credit

Impaired credit loans are specialist products for customers whose credit problems disqualify them from using the lenders' standard products. Some lenders specialise in loans such as these, which are also known as ‘non-status’ loans

Incidence of interest calculation

The frequency that the outstanding interest and ongoing mortgage repayments are calculated. Charging interest on the outstanding balance of your loan at the end of each day, means you reap immediate benefits of any repayments you make, since you will be charged interest on a smaller debt each day. As long as you are making payments on time, the more often interest is calculated the better for you. This is a common feature of flexible mortgages, but is not restricted solely to them. When interest is calculated annually, repayments are not updated to include the reduction in capital that arises from the payments you make throughout the year.

Income assessment & repayment ability

Establishing that sufficient provable income exists and ensuring that the applicants do not exceed a pre-defined percentage of their combined gross income to support the applicants' current outgoings and intended FN repayment.

Income protection insurance

Insurance designed to protect you if you are unable to continue providing for yourself or others. Income protection will not specifically pay off your mortgage, loans, private medical treatment or special needs that arise through disability. It will provide you with a regular weekly or monthly income if you become unable to work as a result of accident, sickness or disability. The amount of benefit that is paid out it is not linked to your mortgage or other loan payments, but your overall level of income.

Interest

A charge made to the borrower for the loan which is usually calculated as a percentage of the amount outstanding on a day to day basis and applied at the end of each month throughout the life of the loan. If the interest rate is variable, this will be stated clearly in the credit agreement.

intermediary

An agent, broker or financial institution who can give advice and act as a middle person between a company and a client conducting investment business.

Joint liability

The responsibility of two or more people to fulfill the terms of a loan or debt.

Judgement lien

An court-ordered monetary judgment against a current or previous property owner which has not been paid.

Land Registry

A Government organisation that keeps records of properties in England and Wales. Any transfer of ownership has to be registered with HM Land Registry.

Late charge

A fee a lender imposes on a borrower when the borrower does not make a payment on time.

loan account

An account, opened for a customer by a bank, following the granting of a loan. The amount of the loan is credited to the customer's current account and similarly debited to the loan account. An arrangement is subsequently made for the customer to repay the loan, usually over a stated period of time, with interest additionally being paid on the outstanding amount.

loan capital

That part of a company's capital structure which is raised by loans. Such loans (typically debentures) are usually over a stated period of time and pay fixed interest to the person making the loan. At the end of the period the capital is repaid. This contrasts with share capital where shareholders are entitled to a proportion of the company's profits usually by way of dividends

Loan period

Number of years or months over which the loan has been agreed to be paid

loan protection policy

An insurance policy in which the insured pays regular premiums in return for insurance against being unable to repay a loan due to accident, sickness or unemployment. In such an event the policy pays a benefit to assist the insured in making the repayments.

Loan to Value (LTV)

The amount of the loan plus the outstanding mortgage balance in relation to the value of the property usually expressed as a percentage. Local search

Mandatory products

These are supplementary products that some lenders insist you purchase along with the core product that you are buying. This is often loan protection or accident, sickness and unemployment insurance

Mortgage acceleration clause

A clause which allows a lender to demand that the entire balance of a secured loan be repaid in a lump sum under certain circumstances. The acceleration clause is usually triggered if the home is sold, title to the property is changed, the loan is refinanced or the borrower defaults on a scheduled payment.

Mortgage code

The mortgage code is a set of standards defined by the Council of Mortgage Lenders, that lenders voluntarily subscribe to. It sets out codes of conduct on how a lender or intermediary should act when arranging your mortgage, as well as how you should be dealt with once your mortgage is in place. It also tells you how to complain in the event of a lender not keeping to the code and who to complain to.

Mortgage payment protection insurance (MPPI)

An MPPI policy pays your mortgage or other loan repayments for you if you become unable to work for an extended period of time, as a result of redundancy, accident, sickness or disability. It should provide enough income to cover all your monthly mortgage expenses. If you have a repayment mortgage, this should be your capital and interest repayment and if you have an interest-only mortgage, the MPPI should cover your interest payment as well as your normal monthly contribution to the investment vehicle that will repay your loan.

mortgagee

A company or institution such as a bank or building society which makes loans secured by property and the land on which it is built.

mortgagor

A person or company who takes out a loan and offers a property and the land on which it is built as security

Net

After the deduction of tax

Notice of default

A lender's initial action when a mortgage payment is late and attempts to reconcile the issue out of court have failed.

Outgoings

Identified deductible expenses, comprising items such as 1st mortgage commitments, endowment and other credit payments.

Overpayment

The difference between your regular monthly repayment and a higher amount that you choose to pay.

Payment holiday

A short break from regular mortgage repayments, sometimes offered with flexible mortgages. This can sometimes be a useful feature for self-employed people or others with irregular income.

Payment shock

Payment shocks are when the discount period ends and the monthly repayments jump by a large amount to match the Standard Variable Rate. You must be sure that you can budget for this in your monthly expenses.

Prime rate

The best interest rate available to a lender's most qualified customers

Processing

Once a completed application is received, it is then evaluated under underwriting terms to verify or collect additional or missing information during the process. Once all required information has been received, a decision will be made regarding whether and at what rate the applicant qualifies for the loan. The research and evaluation makes up the underwriting process.

Proof of income

Proof of income is required for new secured loans applications. Income should be proved by provision of 3 up to date consecutive payslips or 1 up to date payslip showing gross to date from a minimum of 3 tax periods.

An employer's letter confirming salary is only acceptable when submitted in support of either of the above proof of incomes and must be confirmed with the writer of the letter by telephone.

Whilst fax copies are acceptable for in principle decisions, original documents must be provided to process the application to completion.

Protected Payments Plan (PPP)

An insurance protection cover which ensures monthly repayments are met in the unfortunate event that your customer's are unable to meet your monthly payments due to accident, illness or unemployment.

Redemption

The settlement of the loan in full

Redemption

This is the right of the mortgagor to recover mortgaged property on repayment of the loan and any interest due. This legally means that once you as the borrower have finished repaying the loan you took out, the property is yours and the lender has no further claim on it. If you pay off the loan ahead of schedule you may face a redemption penalty which compensates the lender for loss of interest

Redemption penalties

Charges paid to the lender in compensation for lost interest if you redeem your loan ahead of schedule. Penalties can be a fixed sum of money, though are often proportion of the loan.

Redundancy insurance

A form of income protection that does not cover any form of sickness, injury or disability. The purpose of this type of policy is to replace income lost through a short to medium term period of redundancy. It provides you with a monthly tax-free income to cover a portion of your lost earnings. It is often sold in conjunction with the accident, sickness and disability element of income protection policies, in which case it is known as Accident, Sickness and Unemployment (ASU).

Reinstatement value

The cost of rebuilding your home should it be destroyed.

Repo rate

The Bank of England base rate.

Standard Variable Rate

The Standard Variable Rate is the rate which many mortgages revert to after the introductory offer, fixed rate or discount period is over. They are the simplest and most traditional mortgage product with no upper or lower limit on the rate charged, and the bank can raise or lower the rate at their discretion (though usually this is done broadly in line with the base rate).

Tie-in period

As a condition of a special mortgage deal (discount or fixed rate, for example), you may have to agree to stay with the lender for a period of months or years after the deal has ended. If you move your loan elsewhere during this period, you may have to pay an early redemption charge

Tied agents

Many agents and advisers have access to mortgages that you would not be able to arrange on the high street or via a direct operation. They may be representatives of a particular financial institution or estate agents and only be able to offer products from that particular provider. They can still call themselves financial advisers, so long as they don't use the word 'independent'.

Underwriting

A system used by lenders to decide whether or not to approve applications for credit from customers.

Unemployment insurance

Another form of income protection, but one that does not cover any form of sickness, injury or disability. The purpose of this type of policy is to replace income lost through a short to medium term period of redundancy. It provides you with a monthly tax-free income to cover a portion of your lost earnings. It is often sold in conjunction with the accident, sickness and disability element of income protection policies, in which case it is known as Accident, Sickness and Unemployment (ASU).

Unsecured loan

Any loan that is not backed by collateral

Valuations

To assist in calculating available equity of the property when underwriting.

Variable Rate

A rate which will fluctuate in accordance with the terms shown in the credit agreement.

Verification of deposit

As part of the loan process, a lender will ask a borrower's bank to sign a statement verifying the borrower's account balances and history.

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