JARGON BUSTER

Educating Our Clients

Finance can be confusing. There are so many terms learn and understand. It is not easy if you do not do it every day. That is why we have made a jargon buster for you to use, to make your life easier while navigating the world of insurance and finance.

LOAN TO VALUE

(LTV)

This is the loan expressed against either the value of the property or the purchase price (usually the lower of the two, though they are often the same) as a percentage. This lets a lender know how much you have put in to the property versus the size of the mortgage and basically gives them idea of the potential risks to them if you for example, walked away, faced financial difficulty and became unable to pay, or the property's value dropped. The lower the loan to value, the better your interest rate because the lender has less risk if you were to ever not pay your mortgage or something else happened as it is more likely they can recoup their money.

Loan to Value = (mortgage/value) * 100

 (mortgage divided by value or purchase price) then multiply by 100

FIXED RATE

(Fixed)

This is a mortgage deal which keeps your mortgage payments and interest rate the same for a set period of time. These deals usually range from 2-5 years but there are often deals which last longer. At the end of your fixed rate deal, it is likely your mortgage will go on to a higher, variable rate often referred to as the standard variable rate.

With this type of deal, during the fixed period, whether interest rates go up or down, your interest rate and payment will not change. If interest rates have increased, at the end of your deal your monthly payments may increase considerably.

TRACKER

  

This is a mortgage deal is a variable interest rate mortgage which keeps your mortgage payments and interest rate aligned for set period of time. This means that if interest rates go up, your mortgage will too. These deals usually range from 2-5 years but there are often deals which last longer including the full mortgage term. At the end of your tracker deal, it is likely your mortgage will go on to a higher, variable (potentially a higher tracker) rate often referred to as the standard variable rate.

Most tracker mortgage deals are set against the Bank of England Base Rate which you can see at the tip right of this page. The current rate is 075%. As these tracker mortgages are variable, if the rate increased or decreased, so would your monthly payment in line with this unless there were a cap (known as a capped mortgage as there is an interest rate cap applied which cannot be exceeded) or a collar (a minimum interest rate applied which cannot be surpassed).

MORTGAGE


A mortgage is very simply a debt secured against a property. This means that if the debt is not repaid, those who are owed the money can seize the property to recover their loss.

MORTGAGE TERM


This is the overall length of time which you wish to borrow money while using your property as security. 

It is almost always advisable to minimise the mortgage term as the longer you have a mortgage, the more interest you will pay. It is always worth reviewing your mortgage term when you are looking to remortgage..

DEAL TERM

(or Mortgage Deal Term)

Your mortgage deal term is the length of time your mortgage deal will last before your interest rate increases.

STANDARD VARIABLE RATE

  

This is a lender's standard interest rate for clients not on a deal. This almost always has a significantly higher interest rate than the initial deal rate. It is worth taking professional advice 3 - 6 months before you find yourself on the standard variable rate. This interest rate can change at the will of the lender whereas a tracker or fixed rate mortgage cannot.

DISCOUNT RATE


This deal is a discount against a lender's standard interest rate. At the end of your discount period, your interest rate will jump to the standard variable rate of the lender as you will lose your discount. It is worth taking professional advice 3 - 6 months before you find yourself on the standard variable rate. This interest rate can change at the will of the lender whereas a tracker or fixed rate mortgage cannot.

If the lender increases their standard variable rate then your discount rate mortgage will go up by the same margin. 

LOAN TO COST

(LTC)

This is the loan expressed against the value of the costs as a percentage.

This lets a lender know how much you have put in to the property versus the size of the mortgage and basically gives them idea of the potential risks to them if you for example, walked away, faced financial difficulty and became unable to pay, or the property's value dropped. The lower the loan to cost, the better your interest rate because the lender has less risk if you were to ever not pay your mortgage or something else happened as it is more likely they can recoup their money.

Loan to Cost = (loan/total costs) * 100

 (loan amount divided by total costs) then multiply by 100.

GROSS DEVELOPMENT VALUE

This is the total value of a development when it is completed.

(GDV)

LOAN TO GROSS DEVELOPMENT VALUE

(LTGDV)

This is the mortgage loan expressed against the value of the total value of development as a percentage.

This lets a lender know how much margin you have in your development versus the size of the mortgage loan and basically gives them idea of the potential risks to them if you for example, walked away, faced financial difficulty and became unable to pay, or the property's value dropped. The lower the loan to gross development value, the better your interest rate because the lender has less risk if you were to ever not pay your mortgage or something else happened as it is more likely they can recoup their money.

Loan to Gross Development Value= (loan/gross development value) * 100

 (loan amount divided by total development value) then multiply by 100.

SENIOR LOAN

(or Senior Debt)

A loan which will take priority in repayment over unsecured debts (junior loans or debts) in the event of repossession.

JUNIOR LOAN

A loan which will be repaid after the more senior loans in the event of repossession.

(or Junior Debt)

INTEREST RATE

%

The amount of interest which will be charged annually or monthly expressed as a percentage of the money owed.

ROLLED-UP INTEREST


This is where the interest is added to the amount owed each time the interest is charged. Rolled-up interest works like a snowball rolling up hill without anything stopping it. It can be a good way to maximise cash flow short term, but paying interest on top of interest can get very expensive very fast.

SERVICED INTEREST


This is where you pay the interest as it becomes due. Serviced interest works out less expensive than rolled-up interest but could negatively affect cash flow.

MEZZANINE FINANCE


Development:

This is a loan generally used to cover additional costs of a development project as a second charge (junior loan) or to reduce initial input costs of a developer. Generally, these are available up to 20% Gross Development Value.

Mergers and Acquisitions:

Simply a debt and equity conversion option loan. This means that should the company default, they can convert their debt in to equity in the company. This is a form of junior loan. 

 

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