Glossary

Definition of Terms

Accident, sickness and unemployment insurance

The policy pays a percentage of the usual monthly mortgage payment including any insurance (occasionally an element of extra cover is allowed for household bills) if the borrower cannot work because of accident/sickness or unemployment/redundancy. Payments are made for limited periods of time – 6, 12 or 24 months or until the borrower returns to work. N.B. The following would preclude the payment of benefit: voluntary redundancy, summary dismissal for misconduct (the sack), self injury and injury arising from the misuse of alcohol or drugs.

Added to loan

This phrase relates to the costs borrowers face when arranging a mortgage. Often these costs are added to the mortgage amount being borrowed hence the term. The costs may include items such as mortgage indemnity fees and/or arrangement fees and/or administration fees as examples.

Additional security fee

This is required when the mortgage exceeds a certain percentage of the value of the property (usually 75%). The form of additional security used is normally a Mortgage Indemnity Guarantee. Occasionally the lender may require a parent to be a guarantor or for other security such as shares or insurance policies to be pledged.

Administration fee

Some lenders charge this fee to cover their costs of administration and sourcing funds. This fee is not refundable if the mortgage application does not proceed. The administration fee may form part of the valuation fee and this part will not be refunded by the lender if the valuation does not proceed.

Adverse credit

This is a term used to describe credit problems the borrower may have suffered in the past. Such problems will encompass County Court Judgements and arrears on loans.

Annual percentage rate (APR)

This is a legal definition which is used to show what the cost of borrowing actually is. As it is a standard definition it enables a potential borrower to compare the costs of various types of mortgage. Every mortgage quotation must show an APR figure.

Annuity mortgage

A term used in other countries to describe a Capital and Interest repayment mortgage.

Applicant

Someone who applies for a mortgage.

APR

see annual percentage rate.

Arrangement fee

Whilst some lenders charge an administration fee, others may charge arrangement fee. This fee is charged to cover administration and primarily reserving the funds for fixed rate and/or discounted rate mortgages. It may be paid separately, added to the mortgage or, in rarer cases, deducted from the mortgage loan the lender is prepared to advance.

Arrears

When mortgage payments have not been paid on time and/or are not made at the correct level. Borrowers with a history of mortgage arrears will find it harder to effect a further mortgage with their current lender or a new lender in the future. However, there are some lenders who will consider lending to credit impaired individuals.

AER – Annual Equivalent Rate

This illustrates what the interest rate would be if the interest was paid into the account and compounded each year. As every advert for savings products will contain an AER the consumer will be able to compare more easily the expected return from differing products.

Advisory Funds

Funds placed with a bank or financial institution which may be invested at the bank or institution's discretion on the client's behalf.

Amortisation

The settlement of a debt through the periodic repayment of principal and interest payments.

ATM – Automated Teller Machines

Commonly referred to as cash dispensers or hole in the wall machines. Enables the user to access their account for withdrawals (typically up to 250), get a balance, order statements or cheque books and sometimes pay bills or pay money in, 24 hours a day. There may be a charge if you use an ATM not supported by your own bank or user group.
B
Basic earned income

Usually this is an individual?s basic salary. This is the guaranteed element and does not include bonuses, overtime and shift allowance.

Booking fee

Another term to describe a fee which is payable upfront to either source or reserve funds for a mortgage. Usually applicable for fixed or capped rate mortgages.

Broker fee

A fee charged by an adviser to a borrower for locating the most appropriate mortgage for the borrower.

Buildings insurance

All lenders require a property to be insured. It should be insured for the full rebuilding cost including professional fees and such insurance cover is normally a condition of the mortgage. N.B. The full rebuilding cost will normally differ from (and be substantially lower than) the mortgage valuation of the property.

Building society

Building Societies are mutual organisations regulated by the Building Societies Act. This means that their members (those with an account or a mortgage which confers membership rights) actually own the organisation.

Buy to let

This term describes where a property is purchased for the purpose of letting it out to tenants, which will generate an income for the purchaser.

Bank of England

UK's central bank responsible for the regulation of the banking industry, issuing of money and more recently the control of inflation, with the formation of the Monetary Policy Committee under the new Labour government.

Bankruptcy

Anyone can go bankrupt, including individual members of a partnership. There are different procedures for dealing with companies and for partnerships themselves. When a bankruptcy order has been made you must:
• provide the Official Receiver with a full list of your assets and details of what you owe and to whom;
• look after and then hand over your assets to the Official Receiver together with all your books, records, bank statements, insurance policies and other papers relating to your property and financial affairs
• tell your trustee about assets and increases in income you obtain during your bankruptcy. (Note: you are legally obliged to inform your trustee of any property which becomes yours during the bankruptcy. Such property includes lump sum cash payments that you may receive, for example redundancy payments or money left in a will);
• stop using your bank, building society, credit card and similar accounts straightaway
• not obtain credit of ?250 or more from any person without first disclosing the fact that you are bankrupt.
• not make payments direct to your creditors. You may also have to go to court and explain why you are in debt. If you do not co-operate, you could be arrested.

Base Rate

The minimum rate at which banks are prepared to lend money, altered by the central bank's dealing rates with the discount houses. It forms the benchmark for all other interest rates.

Basic Rate of Tax

The basic rate of income tax is set in the annual budget.

Basis Point

Unit of measure (usually one hundredth of a percentage point) used to express movements in interest rates, foreign rates or bond yields.

Beneficiary

The recipient of the assets subject to a Will or Trust. Essentially the nominated receiver of the benefit from the proceeds of a Will/Trust usually specified in the documentation.

Bonus

Additional payment of interest if defined conditions are met, typically if an investment is held for a certain term or if withdrawals are kept under a certain limit.

BSA

Building Societies Association. The Trade Association representing interests of member societies, the number of which are reducing as societies convert to banks.

BSC – Building Societies Commission

Watchdog or regulatory organisation, answerable to the Treasury, that ensures Building Societies comply with the Building Society Act.

Bank of England

UK's central bank responsible for the regulation of the banking industry, issuing of money and more recently the control of inflation, with the formation of the Monetary Policy Committee under the new Labour government.
C
Capital and interest mortgage

This is one of the most usual types of mortgage. The monthly repayment made by the borrower includes a repayment of capital borrowed and an amount for the interest charged. At the beginning of the mortgage most of the payment is used to cover the interest and only a small amount is paid towards reducing the mortgage. Over the term of the mortgage more and more of the monthly payment is comprised of paying back the capital borrowed. As long as the monthly payments are always made on time the mortgage is guaranteed to be paid off at the end of the term.

Comparable

A process to measure the true value of a property.

Capital raising

This refers to a remortgage which is used to allow a borrower to release equity (capital) from the property. As a result the new mortgage is for a larger sum

Capped

A capped rate mortgage is a cross between a fixed rate and a variable rate mortgage. The interest rate will never rise above a certain rate within what is known as the capped rate period. If the usual variable mortgage rate is less than the capped rate then the borrower is charged that variable rate. Such a mortgage is attractive as the borrower may benefit from falling interest rates but will not have to pay more than the capped rate.
Along with the term capped rate the phrase cap and collar mortgages may be encountered. The ?collar? is the minimum interest rate, whilst the maximum interest rate payable is known as the ?cap?. As these mortgages involve the lender having to source funds it is usual for early redemption penalties to be imposed if the mortgage is redeemed within a capped rate period.

Cash back

With these schemes once a mortgage is completed a lender will pay a percentage of the mortgage as a lump sum to the borrower. The higher the percentage of cash paid the greater the amount of strings attached. These may be reflected in higher redemption penalties if the mortgage is redeemed in the early years and/or reflected in a less favourable rate of interest on the mortgage. It should be noted that if the cash back is large then this could result in a capital gains tax liability for the borrower.

Charge or legal charge

When an individual takes out a mortgage the bank take a charge or a legal charge over the property. This means that they are registering the interest in the property.

Completion

This is the last stage in the purchase of a property. The legal documentation is finalised and the lender has sent the mortgage funds to the purchaser?s solicitor. Once the purchaser?s solicitor forwards the funds to the seller?s solicitor the property is now owned by the Purchaser.

Compulsory insurance?s

see Conditional insurance?s

Conditional insurance?s

This is where a lender insists that certain insurance products be taken out before a mortgage is granted. The lender will insist on buildings insurance and, in rarer cases, may require accident, sickness and unemployment cover as well.

Contents insurance

This is insurance which should be considered by all householders whether or not they have a mortgage. It covers items such as furniture; carpets, curtains; electrical goods and many policies also cover personal possessions, which may be removed from the home. This is separate to buildings insurance.

Contract work

With the labour force becoming more flexible and employers having to meet different business needs, many workers are now employed on fixed term contracts. Fixed term contracts means that the individual is not employed directly by the company and is often not included in company benefit schemes, such as pensions and life assurance. As the company does not employ the individual they are not included in any redundancy schemes. Contract working has become popular as some individuals are paid a higher salary than those who are directly employed by companies to make up for the lack of company benefits. In some cases contract work is also suitable for those also who do not wish to be tied to one employer. Mortgage lenders will wish to see a consistent pattern of employment before they will lend.

Converted flat

This is a flat, which has been created out of a larger house or property.

Conveyancing fee

This is the fee charged by a solicitor or licensed conveyer after the legal paperwork for transferring a property has been completed. It should be remembered that as well as this fee, stamp duty, land registry fees and legal disbursement fees also require to be paid.

County court judgment (CCJ)

This is a judgment for debt lodged in a County Court. Such judgments are recorded and will be shown when a credit check is run. An individual with CCJ?s will not easily be able to get a mortgage. Lenders will normally insist that such CCJ?s are satisfied or have been satisfied for some time before a mortgage will be granted.

Credit check

This is where the mortgage lender evaluates the credit history of an applicant by referring to one of the major credit agencies.

Credit scoring

Assessing the ability of borrowers to be able to meet the mortgage payments from answers entered on a mortgage application form.

Criteria (mortgage)

These are the standard terms and conditions of a lender.

Current standard variable rate

This is the usual mortgage rate charged by a lender. This rate moves up and down in line with interest rates and the general movement in mortgage rates.

Capped Rate

A capped rate is a mixture between a fixed rate and a variable rate. The interest rate is guaranteed not to rise above a set level within the capped rate period but if the normal variable mortgage rate is below the capped rate then the variable rate is charged. This gives the ‘best of both worlds' as the interest rate can fall but will not rise above the capped rate. However, the level at which the cap is fixed is usually higher than for a fixed rate mortgage for a comparable period of time. The lender will normally impose early redemption penalties if the mortgage is redeemed within the first few years (see Redemption Penalties ).

CAR – Compounded Annual Rate

The annual rate of interest that will be earned if interest is credited to an account monthly, quarterly or bi-annually and allowed to remain on the account for that year. The rate will therefore be higher then the quoted standard rate and will enable comparisons with other accounts quoting annual rates.

Cash Card

Plastic cards used for withdrawing cash from ATMs, or hole in the wall machines, with a personal identification number (PIN) to confirm validity of the user. These cards are commonly combined with credit or debit cards

Centralised Lender

This refers to the group of lenders, other than high street banks and building societies, who operate without a branch network, normally from one location.

Charge Card

Enables purchases and spending similar to a credit card but the debt has to be settled in full each month.

Clearing Bank

Member bank of a national cheque clearing system.

Collateral

Property or securities pledged to secure a loan, sometimes referred to as the ‘security' for a loan.

Commission

Remuneration for work done as an agent or broker, paid by the product provider.

Conditional Insurance

This refers to insurance products which some lenders will impose as a condition of their mortgage offer. This could mean that the lender insists that accident, sickness and unemployment cover is taken out or that combined buildings and contents insurance is taken. If looking for a fixed or discounted product then these conditions should especially be watched for.

Consumer Price Index

Monthly index that measures the changes in a cost of a basket of consumer essentials and acts as a major indicator of a nation's inflation rate.

Credit Reference Agency

Collates information from a variety of sources on the borrowing habits of adults in the UK. This information, such as details of credit agreements, payment records, court judgements etc is supplied to lenders who use it in their credit scoring or underwriting systems. Details of personal records can be obtained by writing to the agency and enclosing a fee, normally of ?2-?3.

Credit Rating

Overall credit worthiness of a borrower. For companies there are rating agencies that give ratings described in terms of ‘AAA' or ‘triple A'.

Current Account

Another name for an instant access account offering banking facilities such as cheque book, cash card, guarantee card and automated payments (standing orders, direct debits etc).

 

D
Density

The ratio of total build area in proportion to plot size.

Due diligence

The research and contract checking necessary before making investment decisions.

Debt consolidation

Borrowers with a number of different loans, which are unsecured – (not secured on the property), may find that they can replace these loans with a single loan secured on the property. This can often reduce the borrower?s monthly outgoings by paying only one loan which is secured on the property sometimes over a longer term. As the loan is secured, the interest rate may be considerably lower.

Deeds release fee

This is the fee charged by a lender when it has released its charge over the property deeds and returned them to the solicitor. It covers the administration carried out.

Deferred interest mortgage

This is a mortgage where not all of the interest due is paid in the early years. The interest not paid is added to the mortgage. As a result a borrower will end up owing more than the initial mortgage amount and the interest payments will be higher over the rest of the mortgage term. This type of mortgage is usually marketed to professionals whose salaries are expected to increase rapidly in order that they can meet the later interest payments over the rest of the mortgage term.

Deposit

This is another term for the equity put into a property by borrowers. The phrase may also refer to the amount paid upon exchange of contracts.

Disbursements

These are costs related to the conveyancing of a property. These costs usually encompass photocopying, postage, couriers and legal documentation.

Discharge fee

Lenders charge this fee when releasing the charge over a property after a mortgage has been repaid.

Draw down facility

This refers to mortgages, which have a facility allowing additional funds to be borrowed later on during the mortgage term. A borrower then knows that they have got the facility to access future funds without having to go through all the normal paperwork.

Debt transfer

Moving an outstanding debt, or amount owing, from one credit institution to another.

Deflation

Usually a depressive slowdown in the rise or fall in prices and accompanied by a decline in economic output and a rise in unemployment.

Discounted Rate

The lender agrees to give a fixed discount off the normal variable rate for a guaranteed period of time. The discounted rate will move up and down with the normal variable rate but the payment rate will retain the agreed differential below the variable rate for the agreed period of time. If a discounted rate is taken the lender will normally impose early redemption penalties if the mortgage is repaid within the first few years (see Redemption Penalties ).
E
Equity

The value of a property after deducting payment and other costs.

Escrow

Money held in acount by an independent third party to be released when pre-agreed obligations are fulfilled.

Early redemption fees

This refers to any redemption fees that a lender will charge if a mortgage is redeemed before the end of the term.

Exchange of contracts (England & Wales only)

At this stage of property purchase legally binding contracts are exchanged between the buyer and the seller. After contracts have been exchanged the vendor must sell and the purchaser must buy on the terms agreed.

Existing liabilities

This phrase simply refers to all the other financial commitments apart from the existing or proposed mortgage. Liabilities will include credit cards, bank loans, maintenance payments to ex-spouse and school fees, etc. Lenders will take these items into account when evaluating the mortgage amount they are prepared to lend.

Endowment Mortgage

An interest only mortgage supported by an endowment policy. During the term of the mortgage only interest on the mortgage is paid to the lender. At the same time premiums are paid into an endowment policy which is designed to mature at the end of the mortgage term. The proceeds of the endowment policy are designed to repay the mortgage debt, although with a low cost endowment policy it is not guaranteed that the proceeds will be sufficient to repay the debt. In addition to providing the investment to repay the mortgage debt the endowment policy will also include life assurance which will repay the mortgage debt in the event of the death of the policyholder within the policy term.

Escalating

Interest rate that increases during the term of the account, on defined dates and by agreed amounts.
Finder

A person or company who is paid to locate and select property according to your brief.

Fee

A lender, mortgage broker or adviser may charge this for arranging a property purchase.

Feuhold

This is found in Scotland and is similar to freehold.

First charge

A lender will always use this to secure the main mortgage therefore a lender who has a first legal charge over a property will have the first call on any funds raised from the property sale.

First time buyers (FTB)

The lending market is very competitive for first time buyers. Mortgage lenders want to be the first to lend to such borrowers in order to keep them as customers for subsequent mortgages. Generally this phrase is used for those borrowers who are buying a property for the first time. Some lenders will also consider someone who has owned a property before but maybe currently renting. First time buyers may be able to access particularly attractive mortgage packages such as fixed rates and discounted rates.

Fixed rate mortgage

These are mortgages where the interest rates are set for a number of months or years. After the fixed rate period the interest rate will revert to the normal variable mortgage rate. If the mortgage is redeemed during the fixed rate period there are usually redemption penalties.

Flexible drawdown/repayment features

This refers to mortgages which permit additional funds to be borrowed later on during the mortgage term and/or flexible repayments to be made. Flexible repayment mortgages may allow payment holidays and/or the amount of monthly payments to be varied.

Foreign currency mortgage

These are mortgages where the loan has been drawn down in another currency which is not Sterling. Such loans require careful consideration as they can be beneficial however the opposite also applies and in some cases borrowers have found the mortgage debt has increased, because of currency movements. Financial advice should be sought if considering such a mortgage.

Freehold (England & Wales only)

This refers to land or property which is owned indefinitely. Leasehold property only gives the owner a right to hold for a limited period of time.

Full status

This refers to a mortgage where full credit checks and information has been sourced on the borrower.

Further advance

This describes when a further loan has been granted by the current mortgage lender. This loan is also secured by the first charge on the property. Further advances are generally used for debt consolidation or home improvements.

Flexible Schemes

This is a term that describes a number of new mortgage schemes and is based on the fact that some of these lenders calculate the interest on the mortgage on a daily – rather than annual basis. This offers the lenders the opportunity to be more flexible with the managing of an account than would be the case otherwise. That said, there is a wide range of lenders advertising that they are flexible in outlook. It will range from the top of the scale to lenders who offer bank accounts, credit cards and full management of the finances via one account which includes the mortgage loan, or lenders that allow payment holidays, or an ability to overpay each month to either build up a fund to draw on at a later stage or to help redeem the mortgage early. At the lower end of the scale lenders will allow a partial redemption of a fixed rate – say 10% each year – without penalty.

Further Advance

This is an additional loan made by the existing mortgage lender and secured by the first charge on the property. The Further Advance can be used for a variety of purposes (subject to the lenders approval) such as home improvement, purchase of freehold or personal purposes, such as debt consolidation.
G
General conditions

These are the standard conditions applicable to a mortgage. These will be found in the paperwork given to a borrower.

Geographical restrictions

These are areas where mortgage lenders wish to lend or operate in. This may simply be because they have no branches in this area or a lower awareness of the area. This is usually applicable to smaller lenders.

Guarantor

This is a person who will guarantee that the mortgage repayments are made in the event of default by the borrower. Usually this will be a parent or relative of a borrower. It should be remembered that a guarantor would be fully liable for repayment of the mortgage amount if a borrower defaults. The guarantor should therefore be confident that the borrower will meet all the necessary monthly payments.

Gazumping

When a vendor accepts a higher offer after a previous offer has already been accepted (but contracts have not been exchanged). The person who made the previous offer is said to have been gazumped.

Gross Interest

The contractual rate of interest without or before the deduction of any income tax liability. If interest is received gross the investor takes the responsibility for discharging any tax liability due to the Inland Revenue. However the interest will generally be paid net unless a registration form is completed to comply with Inland Revenue regulations.

Gross Monthly Payment

This is the monthly mortgage payment before allowance is made for MIRAS tax relief (see MIRAS ). This figure will be shown on the mortgage offer, but providing the borrower is eligible for MIRAS tax relief then the lower net payment will represent the actual payment to be made.

Guarantee Card

A card used in conjunction with a cheque book that guarantees the payment to the payee, up to the amount of the card (usually ?50, ?100 or ?250).

 

H
Hotspot

A location where demand os high and supply is restricted.

Higher early redemption fee

This phrase will usually be found in conjunction with fixed rate, capped and discounted mortgages. As the lender has given the borrower an attractive mortgage package they will impose a penalty over and above the normal redemption fees if the mortgage is paid off within the period of the special terms.

Home Buyers Report

A type of survey report which is more detailed than a Mortgage Valuation but not as in depth as a Full Structural Survey. A Home Buyers Report is often carried out by the proposed lenders surveyor and the report can then be used for the lender to replace the Mortgage Valuation in addition to acting as a detailed report for the borrower. A Home Buyers report may not be suitable for certain types of property where a Structural Survey may be more relevant. If in doubt talk to the surveyor you propose to use.
I
Incentive rate

A rate of interest charged for an initial period to attract business to the provider. Typically this might be a lower APR on credit cards for the first six months if existing balances are transferred to them. After the incentive period the rates will revert to the normal rates prevailing at that time.

Incentive rate

A rate of interest charged for an initial period to attract business to the provider. Typically this might be a lower APR on credit cards for the first six months if existing balances are transferred to them. After the incentive period the rates will revert to the normal rates prevailing at that time.

Illustration

This is a quotation given to a potential borrower to show the monthly cost of a mortgage and any other expenses incurred with the loan.

Impaired credit

This refers to the credit rating of an individual who may have CCJs or maybe behind with payments to personal loans or a mortgage. This phrase is also applicable to someone who has been declared bankrupt.

Income multiplier

Lenders use income multipliers in calculating how much they can lend on a mortgage. Usually a single income has a multiplier of three times and a joint income has a multiplier of two and a half times. Some lenders will give higher multiplies of income if a borrower is a professional.

Indemnity premium

See Mortgage Indemnity Guarantee

Initial fees

This figure includes an assumption of expenses which included, once the solicitor?s fees, valuation fees and any arrangement, reservation, booking and application fees applicable. This is only an estimate and the costs are likely to differ dependent on the type of survey carried out and property purchased.

Initial interest

This often catches borrowers unaware. Initial interest is a payment which covers the period between completion and the normal date when the mortgage payment is due, e.g. a mortgage maybe completed on the 15th October and the first payment due is on the 28th. A borrower will have to pay interest for the period between the 15th and the 28th, 13 days interest. This is an extra cost not always pointed out to borrowers until they have completed.

Initial rate

This is the interest rate that is paid from the beginning of the mortgage to the end of the initial rate period. This usually relates to fixed and discount mortgages which may have an initial rate of interest lower than the normal variable rate. At the end of the initial period the normal variable rate will be payable.

Insurance guarantee premium

See Mortgage Indemnity Guarantee.

Interest calculated

This is a figure for guidance purposes only and shows the interest only which is payable on a typical mortgage. You should be aware that to get an exact costing an illustration will be required from a lender. This is particularly the case if your circumstances do not meet standard mortgage lending criteria.

Interest only mortgage

This is a mortgage where only the interest is paid to the lender. A borrower should be aware that any capital repayment is an extra amount which will be over and above the interest paid. The capital will be repaid from an endowment policy, pension plan or PEP/ISA. It is the responsibility of the borrower to ensure that the repayment vehicle will pay off the mortgage at the end of the term.

Introducer

A mortgage broker or adviser who introduces a borrower to a potential lender.

ISA mortgage

A mortgage which will be repaid from the proceeds of an ISA.

Income Multiplier

Income Multipliers are used by lenders as one calculation in determining how much they are prepared to lend on mortgage. The most common multiplier used is 3 times a single income or 2.5 times joint incomes, whichever gives the higher figure. More generous multipliers are available from some lenders and lenders will be more flexible if the Loan to Value is relatively low.

Income Protection Insurance

(IPI) is insurance which – depending on the type of cover requested – provides you with a monthly income in the event of you losing your job or becoming incapable of working due to sickness or accident. You do not need to be a mortgage payer to take out this type of cover.

Income Tax

The tax payable on any income whether from employment or investment. If employed this is deducted from your wages under PAYE, if self employed it is paid bi-annually in arrears under Schedule D arrangements.

Index Linking

Linking something, usually the interest rate, to the rate of inflation. For example index linked National Savings Certificates promise a rate of inflation (measured by the Retail Price Index) + up to 3.20%, so investors are certain their capital will more than keep pace with rising prices.

Independent Financial Adviser (IFA)

A person or company that is able to give financial advice on all areas from unit trusts to insurance, from all the products available on the market (as opposed to a Tied Agent who can only advise on his own company's products). They may work on a fee basis, charging for their time, or on a commission basis which is paid to them by the product provider.

Individual Savings Account (ISA)

Details were announced in the budget on 17/03/1998 and the main details are as follows: The new account will start on April 6th, 1999 and will replace PEP's and TESSA's from that date. It will be guaranteed to run for at least 10 years. There will be a review after seven years and changes may be made to the terms after the initial ten year period has expired.

There will be a maximum investment allowed of 5000 per annum, of which 1000 can be put into life assurance and 1000 into cash (including National Savings).This annual limit will be raised to ?7000 for the first year only – and up to 3000 will be allowed to be held in cash. The plans will be offered by Banks, Building Societies, Insurance Companies and Supermarkets and the Post Office. Savers will have the option of having one manager look after the three components of the ISA or having three separate managers looking after the cash, life assurance and stocks and shares. The fixed maximums per component will ensure that savers do not invest too much and break the rules.

The plan will be exempt from both income and capital-gains-tax. In addition a 10% tax-credit will be paid for the first five years of the scheme (until 5th April, 2004) on dividends received from UK equities. This also applies to UK equities that back the life assurance element. There are no statutory tie-in periods so access will depend on the plan rules that an investor chooses

Inflation

The rate of increase in the cost of living, as measured by the Retail Price Index, that also has the effect of reducing the purchasing power of your money i.e. ?1000 today would buy less than a 1000 two years ago. This has to be considered when investing money. If an account offers a 4% return after tax but inflation is 4%, the net effect is a zero return on the value of your money. To protect against this effect some accounts offer index linking where the return is guaranteed to be a certain amount above inflation (i.e. National Savings certificates).

Interest Only Mortgage

Interest only mortgages have become increasingly popular in recent years. Interest only mortgages can be supported by an endowment policy, pension plan or Pep in which case they are normally referred to as an endowment, pension or Pep mortgage. An interest only mortgage may, however, be arranged without the support of any particular repayment vehicle. Many lenders will now accept payment of interest only on the basis that the borrower makes their own arrangements to repay the capital at or before the end of the mortgage term. This could be done in a number of ways such as inheritance, sale of the property or from the realisation of other assets.

Interest Rate

The amount paid on the money deposited or the price paid for borrowing money. The way it is debited or credited will vary but the rate will usually be linked directly or indirectly to base rates.

Inland Revenue

Government department responsible for assessment and collection of direct taxation on items such as income, capital gains, stamp duties, inheritance etc.

Instant Access

An account that allows withdrawals to be made at anytime without having to give any prior warning or notice and without incurring any charge or interest penalty.

Investment limit

The maximum amount that can be credited to an individual account. Usually if the limit is shown as 250,000 for example, this would be per person so that a joint account could attract up to 500,000.However this may not be the case for limited issue accounts.

ISA – Individual Saving Account

Came into effect on 6th April 1999 and will run for at least 10 years offering some certainty for those seeking long term savings. The main features are that up to 7000 pa can be invested of which 3000 can go into cash, 1000 into life assurance and ?1000 into Stocks and Shares. If desired the whole balance can be put into shares, unit trusts or investment trusts. The plan is completely free of tax with no lock in or minimum subscription term and no lifetime limit to the total balance that can be built up. This account replaces the
J
Joint tenants

This is the owning of land or property by two or more people who are co-owners or ?joint tenants?.
Each has rights in the whole of the property and is entitled to a share of any money raised from selling it. The other key point about a joint tenancy is that when one of the joint tenants dies, the ownership of the property automatically passes to the survivor(s), in contrast to property held by ?tenants in common?.
K
KPI

Key Performance Indicator
L
LTV

Loan to value in reference to a mortgage or other borrowings.

Title deed

A deed or document proving a legal right to land or property.

Land registry fee

This is the fee paid to the Land Registry to record a change in the records following a transaction involving land registered with them. The change is usually notified to them by the borrower?s solicitor.

Leasehold (England only)

If a property has a tenure which is Leasehold then the land is not owned by the property purchaser, and is only leased to them for a certain fixed period.

Lender

The organisation offering the mortgage loan.

Loan consolidation

See Debt Consolidation.

Local authority search

This is carried out by the purchaser’s solicitor to check the status of the property. This search reveals whether any proposed changes in the area are taking place, details of planning permission for the property and whether enforcement notices have been served by the Local Authority on the property.

Local authority search fee

This is the fee payable to the Local Authority for the search.

Low cost endowment

This is the most usual form of endowment used to repay a mortgage. It provides life cover which would pay off the mortgage if the policy holder dies. As long as the investment assumptions are met the endowment should provide a lump sum sufficient to repay the mortgage at the end of the term. If the assumptions are not met then there will be a shortfall as many policy holders have discovered after the bear market in the early years of the new millennium.

Low start low cost endowment

Also known as Low Start. This is a low cost endowment where the premiums are lower to start with and build up gradually, usually over the first five years. As the premiums are initially lower the total paid over the term is greater than a low cost endowment to make up for the loss of growth.

Legal Completion

This refers to the time at which the legal ownership of the property changes hands. This date will usually be agreed upon at exchange of contracts. This will also be the date at which the mortgage becomes effective (sometimes the mortgage completion date may be a couple of days before this to ensure that the solicitor has funds on the due day).

Libor

London Inter – Bank Offered Rate, the rate of interest offered on deposits with commercial banks operating in the London market.

LIBOR Linked Rate

LIBOR is the London Inter- Bank Offered Rate and is the rate at which banks lend money to each other. LIBOR changes daily and a LIBOR linked mortgage will normally be adjusted every three months. LIBOR linked rates are usually quoted as X% above LIBOR.
M
Main residence

Sometimes referred to as the principal private residence. This is the normal home where someone lives.

Mortgage deed

This is the legal document which establishes the loan on a property.

Mortgage indemnity guarantee (MIG)

This is an insurance policy designed to protect the lender (the mortgagee) against loss in the event of you defaulting and ceasing to repay your mortgage. The policy may be insisted on by the lender at the start of the loan, but it’s usually the borrower (the mortgagor) who pays the premium!

Mortgage term

The length of time the borrower has a mortgage.

Mortgage valuation

This is the cheapest and most basic type of property survey. It is the minimum required survey by lenders in order that they can evaluate the suitability of the property for mortgage purposes. The borrower normally receives a copy of this report. However, it is not a comprehensive report on the condition of the property. The borrower should consider a home buyer?s report or structural survey if they require more detailed information before deciding to purchase.

Multiplier (Income)

See Income Multiplier.

Maturity date

Date on which the fixed interest or special conditions on an account end, after which the account normally reverts to an ordinary instant access account.

Minimum balance

This indicates the minimum initial investment acceptable to the account. Some accounts may allow the balance to fall below this once it is operational but you may find the interest rate is appreciably lower.

MIRAS

Stands for Mortgage Interest Relief at Source. This is the way in which tax relief was allowed on mortgage payments. The withdrawal of Miras was announced in the budget, 9th March 1999, by the Chancellor and took effect from April 2000.

Mortgage Payment Protection Insurance

(MPPI) is insurance which – depending on the type of cover requested – provides you with a means of continuing to pay your mortgage in the event of you losing your job or becoming incapable of working due to sickness or accident. This, like Income Protection Insurance, can give you peace of mind, particularly with current limited social security (DSS) support for distressed mortgage payers.

Mortgage Term

This is the number of years over which the mortgage is arranged. If a capital and interest mortgage is being considered then it is worth looking at shorter terms than the traditional 25 year mortgage as considerable interest savings can be made by reducing the mortgage term by even a couple of years.

Mortgage Valuation

This is the most basic form of survey and is the minimum required by lenders in order to ascertain the suitability of the property as security for their loan. Although the borrower will normally receive a copy of this report it should not be relied upon as a comprehensive report on the condition of the property. A more detailed report (either a Home Buyers Report or Structural Survey) should be commissioned when considering the purchase of a property.

Mutual Society

An organisation owned by its members and run for their benefit e.g. building societies, friendly societies and some life insurance companies.
N
Negative equity

This occurs when the property value has fallen below the amount of mortgage still owing, i.e. your property is worth less than the amount you owe for it.

Non-status mortgage

Mortgages offered by lenders without any proof of previous mortgage history, proof of income.
O
Obligatory insurance

Referred to as compulsory insurances or conditional insurances. See Conditional Insurances.

Open market value

The normal value of a property assuming usual market conditions.

Other income

Income over and above the basic salary.

Outgoings

See Existing Liabilities.

Ombudsmen

The person responsible for settling any dispute or complaint that is referred to them or escalates to them because the companies own internal procedures have not resolved the problem. There are numerous ombudsmen covering the various institutions: The Financial Ombudsman Service (incorporating the Building Society Ombudsman and the Banking Ombudsman) 0845 0801800 The Pensions Ombudsman 020 7834 9144 (for occupational pension schemes), the Parlimentary Ombudsman 020 7217 4163 (for complaints regarding National Savings).

On-maturity

Where interest earned is credited to an account only on the maturity date e.g. on the second anniversary of a two year bond, and not in between.

 

P
Portfolio

Your collective property investments.

Part capital and interest mortgage

This refers to a mortgage which is partly repaid on a capital and interest basis and also repaid by another method, hence the term ?part capital and interest mortgage?. Sometimes a mortgage may be part capital and interest and also repaid from the proceeds of an endowment.

Part endowment mortgage

This refers to a mortgage which is partly repaid on a part endowment basis and also repaid by another method, hence the term ?part endowment mortgage?. Sometimes a mortgage may be part endowment and also part capital and interest.

Part ISA mortgage

This refers to a mortgage which will be repaid from the fund built up through an ISA and also from repayments made to perhaps a capital and interest mortgage.

Part PEP mortgage

This refers to a mortgage which will be repaid from the fund built up through PEP and also from repayments made to perhaps a capital and interest mortgage.

Payment method

This is the way in which the mortgage is repaid at the end of the term. The repayment may be from an ISA, endowment or from a tax free cash sum from a personal pension.

Payment protection insurance

see Accident, Sickness and Unemployment Insurance.

Pension mortgage

This is an interest only mortgage and it is paid off from the proceeds of the tax free cash sum at maturity.

PEP mortgage

This is an interest only mortgage and it is paid off from the proceeds of the PEP at the end of the mortgage term.

Portable

This is an important area for borrowers to be aware of. It describes the facility to move a particular type of mortgage from one property to another if a property move is required. This would be important if a capped, cash back, discounted or fixed product has been used by a borrower and early redemption fees would be incurred if the mortgage was not portable.

Previous lender?s reference

Often a new mortgage lender will ask for a reference from a previous lender to check that the borrower did make all due payments.

Professional

This is a person who is a recognised professional. An accountant, actuary, doctor, solicitor, vet, etc., are all recognised as being members of a profession. In recent years the term has widened and takes in some senior managerial positions. Not all lenders go as far as this. Therefore, some high earners will be able to borrow more from certain lenders than others.

Personal Pension Plan

Personal Pension Plans are designed to cater for pension planning for the self – employed or employed in non-pensionable employment. Contributions made to a personal pension plan are exempt from tax at the persons highest rate of tax and the retirement age may be selected at any time from age 50 to age 75. Up to 25% of the pension fund on retirement may be taken as a tax free cash sum and it is this tax free sum which is used to repay the mortgage debt in the case of a Pension Mortgage.

Portable

This describes the ability to move a particular mortgage product from one property to another in the event of a property move. This is particularly important if a fixed, capped, cash back or discounted product is taken where early redemption penalties are charged. If the product is not ‘portable' then a house move would involve the payment of early redemption penalties even if another mortgage was taken with the same lender.
A portable mortgage means that the same scheme is transferred to the new mortgage for the remainder of the original term e.g. a 5 year fixed rate is taken which has redemption penalties within the first five years. If the borrower decides to move after two years then the same five year rate will apply to the new mortgage for the balance of the remaining three years. If the original product was not portable, however, then redemption penalties would be paid on redemption of the existing mortgage and a new product would have to be taken for the new mortgage.

Postal Account

An account where any withdrawals or investments are made via the post. The bank or building society normally supply pre-paid envelopes for this and some may offer additional facilities to enable instructions to be given via the telephone or fax.

Proxy

Authorisation of a person or legal entity to represent or if necessary act and vote on behalf of another.

 

Q
R
Redemption

This refers to repaying the mortgage when moving to another property or at the end of the mortgage term.

Redemption Charges

See also Early Redemption Fees and Higher Early Redemption Fee.
This is a charge made by a lender if the mortgage is repaid within a set time period, normally in the early years of a mortgage these are now quite usual as many borrowers are opting for fixed rate and discounted rate mortgages. The penalties are usually in the form of a set number of months interest within the agreed early redemption period. As an example, if a borrower repays a mortgage within three years they may have to pay four months interest. When taking out a mortgage, borrowers should be aware of these penalties.

Regional Lenders

These are usually smaller local building societies who only lend within the regional location. There are also lenders who will not lend in Scotland or Northern Ireland because they do not have a branch presence in these countries.

Remortgage

When a borrower moves a mortgage from one lender to another, this is known as a remortgage. The new mortgage will pay off the existing lender and sometimes the borrower may raise additional funds over and above the old mortgage amount. With a competitive mortgage market, remortgaging has greatly increased in popularity and many borrowers usually re-mortgage to secure a competitive interest rate. It should be noted that remortgages carry costs and the borrower should also be wary of any redemption charges when considering a re-mortgage.

Repayment Mortgage

See Capital and Interest Mortgage.

Retention

In some cases lenders will hold back monies until certain conditions of the mortgage have been met. Normally these are essential repairs or improvements which require to be made.

Right to Buy

Sitting council tenants have an option to purchase the property in which they live in. Usually the property can be purchased at a discount based on the length of time they have been a tenant.

Repayment Mortgage

Also called an Annuity mortgage or Capital and Interest mortgage. With this type of mortgage the monthly repayment includes an element of the capital sum borrowed in addition to the interest charged. In the early years of the mortgage the majority of the monthly repayment consists of interest with only a small part repaying the capital. However, as the debt gradually reduces the element of capital increases and the interest element reduces, so although the monthly repayment stays the same (assuming interest rate remain unaltered) the debt starts to reduce more quickly as the term of the mortgage progresses. On a 25 year term mortgage it would not be unusual to still owe over 50% of the original debt after the first 15 years. Providing the correct monthly repayments are made on their due dates this mortgage will guarantee to repay the total mortgage debt at the end of the mortgage term.

Retail Price Index

Measurement of the rate at which prices are rising i.e. inflation, calculated monthly by taking a sample of typical household goods and services.

Retention

This relates to monies withheld by lenders until certain mortgage conditions are met. This will normally relate to repairs or improvements to the property that the lender is insisting on.

 

S
Sealing fee

see Discharge fee.

Second charge

This is a legal charge which is used usually to secure a second mortgage or other borrowings. It will always rank behind a first charge.

Self build

Property which has been constructed by the borrower. Mortgage loans on self build properties will usually only be paid in stages and are subject to lower loan to value limits. The lender will insist on a qualified architect drawing up plans and often for the builder to give an NHBC guarantee.

Self-certification

With this mortgage the borrower provides a statement of his or her income and the lender may or may not check the accuracy of the information provided.

Self-employed

An individual who works for himself/herself. This will include partners in businesses and professional practices such as lawyers.

Shared equity

This allows a borrower to purchase a new property in partnership with the builder. Often the builder will allow the borrower to purchase say 90 or 95% of the property now and pay the balance off say in 5 years time. The builder will register a second charge on the property until this balance has been paid. The 5 or 10% owing maybe interest free or interest may be allowed to roll up and added to the debt. Obviously this can benefit some borrowers but the consequences of not being able to take on the additional debt in the future are serious. Financial advice must be undertaken before proceeding with this type of mortgage.

Shared ownership

A housing association tenant may have the opportunity to purchase a property. The scheme works by allowing the borrower to purchase part of the property and rent the other part from the housing association. This subsidises home ownership for people who would otherwise not be able to become home owners.

Sitting tenant

This is someone who has the right to occupy a property. This right remains even if the property changes hands. Properties with sitting tenants are much less marketable than those with vacant possession.

Sole occupancy

This is a property occupied by the borrower and his or her family only. It contains no tenants.

Special conditions

These are special terms or specific terms outlined on the mortgage offer letter. These maybe where the lender requires the borrower?s solicitor to confirm that special conditions have been met or that areas of concern have been resolved.

Stamp duty

This is a Government tax which is levied when a property is purchased. The tax is paid by a property purchaser and is currently charged at the following rates:
• 1% – 60,000 – 250,000
• 3% – 250,001 – 500,000
• 4% – 500,001 and above
It should be noted that the rate is paid on the whole purchase price and not just on the slice, e.g. 500,001 requires stamp duty of 15,000 to be paid. This is 3% of 500,001.

Standard construction

This refers to houses which are also known as traditionally built. These are constructed of brick with a tile or slate roof. Lenders will give lower loan to value mortgages on non-standard constructed properties.

Structural survey

This is the most expensive and detailed type of survey report carried out by a chartered surveyor. If the borrower requests a structural survey the lender will still need to have a mortgage valuation carried out. The borrower will then have to cover the costs of both. If the property has movement or is of unusual construction a lender may ask for a structural engineer's report. Such a survey is undertaken by a chartered building engineer and is a further step on from a structural survey. This survey will only be asked for on more rare occasions.

Self Assessment

Tax system introduced in April 1996 where certain individuals are responsible for working out their own tax liability and reporting to the Inland Revenue. Those affected are typically the self-employed, partners, pensioners and company directors.

 

T
Timber framed

A method of building where no inner cavity wall is constructed. In the past timber framed properties suffered from damp and accordingly some lenders did not view them as secure as other types of property to lend on. More recent building techniques have eradicated such concerns and most lenders find such properties as acceptable for lending purposes.

Typical APR

Mortgage quotations and advertisements will usually show a typical APR figure in order to comply with the Consumer Credit Act.

Tax-free

Interest earned or credited without any income tax liability and not dependant on the investors tax status.

Tax Return

Annual return supplied by the individual to the Inland Revenue detailing all incomes, from employment, investments, benefits and perks, in addition to allowable expenses. The tax return forms the basis on which the individual's tax liability is calculated.

Tessa

Tax Exempt Special Savings Account. TESSAs were replaced on 5th April 1999 by the new Individual Savings Account (ISA). Existing Tessa’s can be held for the remainder of their original term.

Term

Length of time for which an account has to be held or for which attracts an agreed amount of interest.

Term Assurance

This is life assurance which pays out the insured sum on the death of the policy holder providing it occurs within the policy term. This is a common method to protect the mortgage in the event of death and to ensure that the mortgage debt is repaid. The most common types of this insurance are Mortgage Protection or Level Term Assurance. Mortgage protection is normally used in connection with a capital and interest mortgage and the level of the insured cover reduces in line with the reduction in the mortgage debt. Level Term assurance is more likely to be used in connection with an interest only mortgage as the level of cover remains constant as does the mortgage debt. With Term Assurance cover there is no pay-out if the policyholder survives the policy term and the policy simply lapses with no value. This factor makes this type of cover relatively inexpensive.

Tied Agent

A company sales person (or direct sales person) who promotes the products of his employer only, the company he or she is ‘tied' to. They cannot search the whole market for the best product as an Independent Adviser can. Under the rules of the Financial Services Act they must make their status clear to the interviewee or applicant at the earliest opportunity.

Transfer

Movement of account from one provider to another or from one account to another with the same institution.

Trustee

Person responsible for administering the assets for the benefit of the beneficiaries.
U
Unencumbered

This is a property without any loans or borrowings secured on it.

Under market value

The percentage that the property is priced less than the verifiable average of comparable properties.

Unsecured

A loan where no collateral or security is given or charged to the lender. Unsecured lending is viewed as higher risk than secured lending and interest rates are generally higher to reflect this.
V
Variable rate

Many mortgages are still arranged in this manner. Such mortgages have interest rates which fluctuate up and down often in tandem with bank base rates. In more recent years many variable rate mortgages are marketed with an initial discounted rate or fixed rate period…
W
With profit policy

At one time such endowment policies were the most popular method of repaying mortgages, particularly low cost versions.

A conventional With Profit Policy is designed to smooth the returns from different investments. Under such a policy the insurance company will declare annual bonuses usually known as reversionary bonuses.

Once declared, these bonuses are guaranteed. At the end of the policy term if the insurance company has managed investments well and market conditions allow, a final or terminal bonus would be paid. Under a unitised With Profit Policy the annual bonuses are declared by a method more akin to interest payments. The units grow at a predetermined rate during the year and if the Actuary is comfortable with the performance of the investments the rate may be increased or maintained.

Terminal bonus maybe paid as a lump sum at the end of the policy term or as further increases in the rate of bonus on units after a period of time, e.g. five years.
Actuaries prefer Unitised With Profits to conventional With Profits Plans as the Insurance Company does not have to set aside as much in the way of reserves to cover their liability.
X
Z
Zoning

Areas designated for certain purposes e.g. agricultural, commercial, residential.