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 Loans Jargon.
Additional principal payment
Extra money included in the monthly payment to help reduce the principal and shorten the term of the loan.
The amount of loan the customer borrows
A person appointed by a principal to act on the latter's behalf in business.
A provision that requires the borrower to pay the balance of the loan in a lump sum after the property is sold
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.
This is charged on a monthly basis to cover additional administrative costs where your loan account is one or
more monthly payments in arrears
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
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
The final payment on a loan which is significantly larger than those preceding it.
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.
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
Bank of England base rate
The prevailing rate of interest set by the Bank of England which all lenders generally follow.
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.
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.
A loan that requires payments every two weeks and helps repay the loan over a shorter term.
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.
A clause in a loan agreement that allows a lender to ask for the balance at any time.
In financial services, the period after signing a contract during which customers are entitled to cancel their
purchase of some financial products
A limit on the amount the interest rate or monthly payment can increase in an variable rate loan.
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.
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.
The time when payment of the advance is made to the customer and the agreement terms commences.
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.
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
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.
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.
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
Interest on the homeloan is calculated and applied on a daily rather than a monthly or yearly basis. Can lead to
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.
When one mortgage payment or a series of payments are missed, the borrower is referred to as being in
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.
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.
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.
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
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
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.
The difference between the value of the property and the amount of the mortgage and any other outstanding loans
secured against it.
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
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
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.
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.
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.
A course of action a lender may pursue to delay foreclosure or legal action against a delinquent borrower.
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
The relinquishing of property rights by a delinquent borrower.
An additional loan which can be taken on top of the original loan at a later date.
A specified amount of time to make a loan payment after its due date without penalty.
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 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’
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
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.
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.
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.
The responsibility of two or more people to fulfill the terms of a loan or debt.
An court-ordered monetary judgment against a current or previous property owner which has not been paid.
A Government organisation that keeps records of properties in England and Wales. Any transfer of ownership has
to be registered with HM Land Registry.
A fee a lender imposes on a borrower when the borrower does not make a payment on time.
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.
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
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
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.
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.
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.
A person or company who takes out a loan and offers a property and the land on which it is built as security
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
Identified deductible expenses, comprising items such as 1st mortgage commitments, endowment and other credit
The difference between your regular monthly repayment and a higher amount that you choose to pay.
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 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.
The best interest rate available to a lender's most qualified customers
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.
The settlement of the loan in full
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
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.
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).
The cost of rebuilding your home should it be destroyed.
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).
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
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'.
A system used by lenders to decide whether or not to approve applications for credit from customers.
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).
Any loan that is not backed by collateral
To assist in calculating available equity of the property when underwriting.
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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