Loan Jargon Buster

The Aftersales Network – Loan Jargon Buster

Additional security – further property being offered to support an application or transaction

Administration Fee – a fee charged either by a lender or broker to process a mortgage or loan

Agreement In principle (AIP) – The initial acceptance from a lender for a loan. This is normally subject to a suitable valuation and the customer adhering to all underwriting criteria. Please note that it is not legally binding!!

Allowances – Any items that can be deducted from gross salary to help reduce the amount of tax you pay is called an ‘Allowance’. These can include your Personal Allowance – the amount you can earn before you pay any income tax – or other legitimate business expenditure that a self-employed person can use to reduce their gross income.

Applicant – an individual applying for a mortgage, loan or credit

Application – the process of applying for a loan or credit. This is normally done with a completed and signed application form but this can be initially started by a phone call, email or via the internet

Application / Commitment Fee – a fee charged by the lender or broker in relation to an application

Arrangement Fee’s – all fees associated with and relating to an application

Assign – To transfer an interest in a property, especially a lease.

Asset Finance – Sometimes known as a leasing agreement, this is a term used in commercial lending for the purchase of equipment (plant and machinery).

Bank Base Rate – the rate of interest set by the Bank of England (BBR)

Break clause –  A clause in a lease that gives the landlord and/or the tenant a right, in specified circumstances, to terminate the lease before its normal expiry date. It usually defines the length of notice to be given and may be subject to contractual or statutory financial provisions

Bridging Loan – short term loan or finance normally secured on a property

Broker – an intermediary or third party

Broker Fee – a fee charged by an intermediary or third party, normally paid by the customer on successful completion of a mortgage or loan

Building Insurance – any mortgage or loan secured on a property will need adequate building insurance in place to protect the property and Lender.

Bullet loan or bullet repayment A loan repayable by a single repayment.

Business Plan – A business plan is a written document that describes a business, its objectives, its strategies, the market it is in and its financial forecasts. It has many functions, from securing external funding to measuring success within your business.

Buy To Let – a property other than a customer’s main residence that is let out and derives a rental income

Charge / Legal Charge – the security the lender relies on when granting finance. The type of legal charge used will vary from lender to lender. Some use a charge for the specific amount they have lent you, whilst others use an ‘all monies’ charge to cover all borrowing you have with them, such as overdrafts and personal loans.

Collateral warranties – Arrangements giving direct contractual remedies to someone who is not a party to the principal contract. For example, a building contract will be between an employer and a contractor. A financier has little or no right of action against the contractor if there is a defect in the building. The collateral warranty gives that right of action. It also gives the financier “step in rights” if assigned.

Commercial Mortgage – a mortgage granted on a commercial property, normally for commercial purposes although a residential property or semi commercial property may also be used

Commission – payment received normally from a bank or lender for recognition in introducing an application to them. This is only payable if a mortgage or loan successfully completes

Commitment Fee – a fee, normally payable by a customer, to a broker or lender, to allow an application to be processed.

Completion – the successful conclusion to a mortgage purchase, remortgage or loan. Sometimes called draw down

Completion Date – an agreed or set date for draw down of funds

Conveyancing (Disbursements ) – the legal process involved in a mortgage or loan often carried out by a qualified solicitor or conveyancer. It is normal practice for a solicitor to act for the customer and a separate solicitor to act for the lender. Normally the customer would pay for the cost of both

County Court Judgment (CCJ) – an amount of debt registered in the county court against an individual or company. The debt does not appear in the credit register if it is paid within 30 days, however if not cleared it can remain on a credit file and have a detrimental impact on a person’s attempt to obtain finance or credit

Credit Check – where an enquiry is made on the credit history of an applicant normally by the credit agency’s Equifax or Experian

Credit History – the history of a borrowers or applicants credit file

Debtor
A person or company that owes money to a creditor.

Debt-To-Income Ratio
A method used by lenders to establish if a person is qualified to receive a mortgage or loan.

Default – Failure to maintain a payment or payments on a mortgage / loan.

Development Finance – money required to build, enhance or develop a piece of land or property

Developer’s fit-out  – Construction of a building (usually offices) to include suspended ceilings and raised floors but no partitioning. This type of construction may be wasteful when a particular tenant occupies and wants something different – hence the popularity of shell and core.

Early Redemption Penalty – sometimes called a Redemption Penalty or Fee and is a charge levied to settle a loan earlier than it’s agreed natural end date.

Environmental risk assessment – A “desk-top” study of the current and historical land uses on and around the site, coupled with an analysis of the “environmental setting” of the site (nature of the underlying geology/hydro-geology, identification of sensitive “receptors” such as water courses, etc.)

Equity
This is the difference between what you owe on your mortgage and what your property is worth on the open market. If the property is worth less than you owe, this is known as ‘Negative Equity’.

Estimated rental value or ERV  – The estimated achievable rent if a rent review or new letting of a property were to take place immediately in the current market conditions.

Exchange / Exchange of contracts
This is one of the key stages of a property buying process, typically about 4 weeks before completion. Exchange normally takes place when you have your mortgage offer in place, you have paid your deposit, when all of the conveyancing is complete and the purchaser and the seller have an agreed date for completion of the deal.

Once you have exchanged contracts, you are legally obliged to buy the property and you could be sued (for up to 10% of the purchase price) if you pull out.

Factoring / Invoice Discounting – Another form of borrowing for companies which is secured against the value of any outstanding invoices, rather than a property.

First Charge – a legal charge used to secure the main mortgage. This charge ranks highest over any other charges on the property

Freehold – land or property that is owned outright by a company or individual(s)

Full repairing and insuring lease or FRI lease – A lease which contains clauses obliging the tenant to keep the leased property in repair and to insure it, or to pay the landlord to do so. Effectively, a FRI lease transfers to the tenant all liabilities for the property for the duration of the lease. Compare with Institutional Lease.

Grade A space – Office space in prime locations, constructed/refurbished since 1985, offering air-conditioning, suspended ceilings and raised floors.

Gross rental income – The total of all rents receivable from a property, excluding sums which, although recoverable as rent, are in fact to reimburse services charges or insurance costs. Compare with net rental income.

Ground rent – Literally a rent payable for land, usually under a lease for 99 years or more which historically imposed on the tenant an obligation to build on that land. Sometimes used to describe that element of a geared rent which is payable to the landowner.

Headline rent – The published rent, rather than the true rent. If a tenant agrees to a ten-year lease at £50 per square foot, with a review at the fifth year and a two-year rent free period, £50 per square foot is the headline rent. The true rent is usually taken as the average up to the first review – in this example, £30 per square foot.

Income and Expenditure – confirmation of an applicant’s incomings and outgoing to help support and application

Interest Only – With an interest only mortgage or loan, the monthly repayment is made up of the interest element only, leaving the original capital outstanding at the end of the mortgage or loan term.

Intermediary Mortgage Lenders Association (IMLA)
This organisation represents mortgage lenders who channel their business through mortgage intermediaries, or brokers. Its membership includes banks, building societies and subsidiaries of overseas banks. IMLA is involved in a range of activities, including communicating its members’ views to the Council of Mortgage Lenders and supporting new product development.
Website: www.imla.org.uk

Institutional covenant – A covenant acceptable to an institutional investor. In practice, this is a subjective test depending on the institution’s own criteria. There is no universally accepted objective standard, although two sets of covenant strength have become quite widely used in relation to leases. One is that a company has pre-tax profits in each of the three immediately preceding years of account which equal or exceed three times the rent. The other is that the company’s net assets, as shown by the most recent balance sheet, equal or exceed five times the rent. Neither test is wholly satisfactory.

Institutional investors – Organisations such as banks, pension funds and insurance companies.

Institutional lease – A lease generally acceptable to an institutional investor. During the 1970s and 1980s it came to mean a 25 year FRI lease with upward only rent reviews every five years, giving the landlord considerable control over the tenant. Its features are now less certain. Terms of 10-15 years are common. Landlords’ controls have been relaxed. The upward only rent review remains, however, in all but a handful of new leases. It is worth noting that institutional investors’ requirements tend to be more stringent when they grant a new lease than when buying investment property already subject to leases.

Institutional quality investment properties – Properties whose physical specifications meet certain quality criteria, which are let on institutional leases to good or first class corporate covenants and are in good locations.

Land Registry – A record of property. Ownership and the mortgage is registered in a central register at HM Land Registry.

Landlord – Someone who lets out a property to others, in return for a regular rental payment. It is the landlord’s responsibility to make sure that the property is well maintained and has all of the necessary safety certificates in place.

Landlord’s Reference – Reference from a previous landlord regarding the general conduct of a tenant and whether their rent has been paid promptly.

Land Registry – a record or property, ownership and the mortgage is registered at HM Land Registry

Lease / Leasing Agreement – A lease or leasing agreement sets out the rental term, specifying exactly how long it will last and when it will end. If you lease a property, you do not own it outright, but merely have temporary possession until the lease expires.

Leasehold – If a property is described as leasehold rather than freehold, then you will not own the property outright, although as a leaseholder you will have the right to live (or if a business trade from there) for a specified time in return for rent and any service charges payable to the landlord.

Lender – the bank or institution that is loaning the money to an individual or company

Lenders Arrangement Fee – the fee that the lender charges for arranging the loan passed on to the customer

Libor – the London Interbank Offer rate is the rate that banks lend to each other and is different from the Bank of England Base Rate. Libor changes every day but for lending purposes is normally set every 3 months whereas the Bank of England Base Rate (BBR) is reviewed by a committee every month.

Life Insurance – This is a policy that pays out a set amount on the death of the policyholder. Life insurance policies linked to mortgages are usually set to run for the same period as the mortgage (e.g. Term Assurance or Decreasing Term Assurance).

Limited recourse – A loan similar to a [non-recourse loan] but where there is some recourse to the assets of the borrower other than those charged, and sometimes limited recourse to other companies in the borrower’s group. The latter may take the form of a limited parent company guarantee.

Loan to Value (LTV) – This is the amount a lender will be prepared to lend on a property, based on a current market valuation. Typically expressed as a % of the value of the property.

Local Authority Search – A search of local authority records to confirm the status of the property. This is normally done by your solicitor and the fees for this are included as part of their disbursements. This search will reveal certain important information about the property you intend to buy and the surrounding area, such as planning permissions and enforcement notices.

Loan – the amount to be borrowed

Mortgage – the name given to credit used to buy property or land

Mortgage Broker – an intermediary or introducer who specialized in helping customers obtain finance for a mortgage or loan

National Association of Estate Agents (NAEA)
This is the UK’s leading professional body for estate agents across the UK. It has a total of 10,000 members, who deal in all aspects of property both in the UK and abroad, including residential and commercial sales and letting, property management, business transfer, auctioneering and land.
Founded in 1962, the NAEA provides assistance, guidance and representation for its members. All agents have to formally qualify to become members of the NAEA and must comply with its code of conduct.
Website: www.naea.co.uk

National Landlords Association (NLA)
An independent national organisation for private residential landlords. It represents over 13,000 fee-paying members throughout the UK, from full-time landlords with large property portfolios to those who own single-bedroom flats. It helps landlords understand the legal and regulatory environment in which they manage their lettings and makes them aware of their statutory rights and responsibilities.
It also counts some of the largest buy-to-let lenders among its members and over 60 local authorities recognise the importance of membership.
Website: www.landlords.org.uk

Net initial yield – The net rental income from a property expressed either as a percentage of the purchase price inclusive of acquisition fees or, where the property has already been purchased, as a percentage of the current price that would be paid by a purchaser in the open market inclusive of acquisition fees.

Net Profit
The income of a company or self-employed business after making full allowance for the expenses of running the business. This should be the amount available to the owners of the business for their own benefit. It is the figure that can be used to calculate their ability to service a mortgage.

Net rental income – Gross rental income less rents which are payable to a superior landlord and any outgoings not recoverable from tenants.

Net reversionary yield – The net rental income that would be receivable if the property were fully let at a rack rent, expressed as a percentage of the purchase price inclusive of acquisition fees. Where the property has already been purchased, it is expressed as a percentage of the current price that would be paid now by a purchaser in the open market inclusive of acquisition fees.

Non-recourse loan – A misnomer for a loan where the lender has no recourse to any party or any assets other than the assets over which the lender has specifically taken security and/or the single purpose vehicle which owns the assets.

Non Status – Loan granted without making enquiries about the borrower’s income or credit history.

Off-balance sheet finance An arrangement under which a loan is made to a company without the debt appearing on the company’s balance sheet and affecting its gearing ratio. Historically the use of off-balance sheet financing techniques was widespread, particularly among property companies. However, it has become difficult to keep assets and liabilities off a company’s balance sheet in view of FRS5, “Reporting the Substance of Transactions”.

Open market rent – This ought to equate to the estimated rental value. In practice, the term is most often encountered in rent review clauses in leases, where it is frequently given an artificial meaning.

Open Market Value – the value or monetary figure given by a professional surveyor on a property or land allowing a reasonable period to sell.

Outgoings – Your existing liabilities, such as utility bills, credit cards, loans and other fixed monthly expenditure.

Out of town Properties located in an out of town site. Buildings are often situated in a landscaped environment or business park.

Over-rented Where the current or passing rent exceeds the estimated rental value.

Passing rent – The rent currently payable under the terms of a lease. It may differ from the estimated rental value of the property.

Payment Schedule – The schedule of monthly payments that you will be legally obliged to make once your loan or mortgage starts.

Pension Mortgage – An interest only mortgage that will use the ‘tax free cash’ element of a personal pension plan to repay the mortgage at the end of the term. Personal pension plans were first introduced in 1986, with very generous tax benefits to encourage people to save for their own retirement rather than relying on the State pension.

Performance bond A financial guarantee, usually from an insurance company, for the performance of an obligation – typically a construction or development obligation. Most developers require a contractor to arrange for a performance bond equal to 10% of the contract value. This is primarily a protection against the costs that would be incurred if the contractor became insolvent.

Practical completion The date at which the architect (or other specified person) certifies that a building contract has for practical purposes been completed. Some minor works may remain to be completed before a certificate of final completion is issued.

Pre-Pack Liquidation

What is a pre-pack liquidation?

  • A pre-pack liquidation is a process whereby a company which is experiencing difficulty in meeting its liabilities is able to legitimately close the loss making entity, so as to protect the directors from accusations of wrongful trading, but also to enable the business and the employees to be transferred to a debt free company.
  • It allows a new company to be formed which then buys the assets of the old failing business. The old business is then closed (or liquidated) and proceeds of the sale of assets distributed to the outstanding creditors.
  • The advantages of the pre pack process can be significant. The assets of the business such as vital employees, equipment and good will are maintained. Usually the liquidator will achieve a better price for the assets (especially good will) and thus a better return for creditors if they are sold as a whole to start a new business. There will be continuity for the viable business as part of the new company, as well as for its suppliers & customers.

What is the process for achieving a successful pre-pack liquidation?

  • The full procedure regarding liquidation can be accessed elsewhere; what follows is of necessity a précis. There are a number of steps that need to be executed in order to achieve a successful pre-pack liquidation – the optimum timing for each step may be advised by an insolvency professional – IP – working with the company, but will probably include the following:
  • The board members review the current business situation with an insolvency professional and agree on a pre-pack liquidation as the best way forward.
  • A new company is formed which will buy the assets of the old business.
  • The insolvency practitioner will instruct a valuer to assess the value of the company’s assets.
  • The Insolvency Practitioner agrees to sell the assets, good will (and name if required) to the new business.
  • If the new business is likely to want to remain in the same premises, the potential new owners must negotiate an agreement with the landlord regarding the transfer of the lease.
  • Employees of the old company are transferred to the new business as required taking into account TUPE (European law regarding the transfer of undertakings and permanent employment).
  • The Insolvency Practitioner calls a creditors meeting to report on the old company’s outcome to its creditors. The insolvency practitioner is appointed by creditors to liquidate the old business. The creditors will receive a share of any available proceeds from the sale of the old company’s assets.
  • In order to improve cash flow for the new company, factoring or invoice discounting may be considered.

It is vital to seek the appropriate legal & financial advice before deciding on a pre-pack liquidation.

Prime properties – The best (and usually most expensive) institutional investment property. The term can also be used in relation to the location of a property, for example “prime pitch” meaning the best retail location in a town. Prime properties are usually located in the best areas and on the best site in that area for that purpose. It need not be a modern building but one that is built to the best design and to the highest standards for its purposes.

Principal – The original amount of the loan – the capital.

Profit – Gross profit of a company before allowing for the legitimate expenses of running the business. Not all of the profits left over will be available for the business owner(s) to use as income so it is not always a reliable measure of total income for lending purposes.

Purchase – the acquisition of a property or land

Quotation / Illustration – This document outlines the details of how much a loan or mortgage will cost you, including the monthly repayments, the total amount that will be repaid over the term of the loan and any charges or fees that apply.

Rack rent – Commonly used today to mean full open market rent under a full repairing and insuring lease.

Redemption – the settlement of a mortgage or loan

Redemption Charge – the charge levied by a bank or lender to settle a loan

Refinancing – arranging finance with a different lender usually to obtain better rates or terms.

Regulated Loan – A loan of under £25,000, which is regulated under the terms of the Consumer Credit Act.

Remortgage – arranging a loan on a property where the customer already resides either with their existing lender or a new lender

Repayment – this is a payment made to cover either the interest or the capital and interest on a loan or mortgage.

Rent reviews – Within a standard medium or long-term lease are provisions by which the passing rent is reviewed. A valuer will pay particular attention to this clause when valuing a property as it will contain the terms by which the review will be conducted. After the review date, the landlord and tenant will make claim and counterclaim in an attempt to negotiate an agreement and in the event of failure to agree approach an arbitrator.
The rent is reviewed to a level which is usually the equivalent of an open market letting of the space on a new lease of similar term and in the condition when originally let. The lease will state what improvements and alterations are to be disregarded. Similarly, the rent review surveyor must consider and take into account factors which means the space is no longer of the same quality relative to the market, i.e. 6 inch raised floors compared to current 10 inch lighting levels etc.
Rent reviews can be settled anything up to 18/24 months after the review date. Once the new rent is settled, the tenant is liable for the increased rent from the review date and interest at the rate prescribed in the lease on the increases from the date they became due until payment, i.e. the increase is due on each quarter day

Repayment Mortgage (Capital & Interest) – With a repayment mortgage, part of each monthly repayment goes towards repaying the loan itself, whilst the rest is made up of the interest due on the outstanding amount. If you make all of the repayments due, you are guaranteed to repay the mortgage at the end of the term.

Royal Institute Of Chartered Surveyors (RICS) – The professional body for surveyors which sets a code of practice for its members

Sanction – a formal written agreement from the bank with confirms terms and conditions to proceed

Second Charge – a charge that is a legal charge on a property or land that ranks behind a first charge but ahead of any subsequent charges, possibly to secure a second mortgage or loan

Secured Loan / Second Mortgage – a loan secured on a property normally in addition to a mortgage that is already in place

Security Address – This is the address of the property that is being offered as security against a mortgage or secured loan.

Security Fee – is the lenders legal fees, payable by the customer either at offer stage or completion

Self-Assessment – Each year, self-employed people (and those subject to the highest rates of income tax) are required to complete their own tax return – a process known as Self-Assessment. This covers income that falls outside of the ‘Pay As You Earn’ (PAYE) system, which Self Employed people are not subject to. Once the return has been made to the Inland Revenue, the amount of tax due can be calculated and is normally paid in three instalments throughout the year

Self Certification – a customer, self certifying the income or money they earn, through a declaration, or affordability statement. A customer accountant can also make the same statement, without the need to formally provide accounts or proof on income

Self Employed – a customer who is not paid through PAYE and cannot provide pay slips or an employer’s reference. Normally most lenders would class an individual with more than a 25% shareholding in a company as self employed

Secondary properties – Properties which are likely to be of interest to some institutional purchasers but which nevertheless lack the characteristics of prime institutional quality investment properties – for instance because of a less good location, a poorer specification or non-standard lease terms. For shops, this is defined as a block of shops of up to 10 premises where the position is relative to the centre as a whole. Offices located in a small centre or outside a main centre. Industrials where the property is 30-40 years old with the same character as a prime property at that time.

Section 106 Agreements – This is an obligation restricting the use of land or providing a benefit of some description to the local planning authority e.g. obligations to pay for traffic management schemes such as traffic lights, roundabouts, etc.

Semi Commercial – a property with both commercial and residential use

Single Purpose Vehicle or SPV – A company established for a particular project or to hold a particular asset. An SPV is often used to contain insolvency risk or to make it easier to give a lender the floating charge it will normally seek.

Step in rights – A right for a financier of a development to step in and take over the development in order to complete it.

Stamp Duty – a tax paid on the purchase of residential or commercial property and is on a sliding scale depending on the value of the property.

Tenant – Someone who rents a property from a person or company (a landlord).

Tenancy Agreement – This is an important document which sets out the terms of a tenancy, including rights of both the tenant and the landlord in respect of the property and the period of the lease. The most common form of Tenancy Agreement is an ‘Assured Shorthold Tenancy’ (AST), which allows a landlord to reclaim possession of the property at the end of the tenancy period.

Tertiary properties -The least attractive (and usually the cheapest) institutional investment property. They lack the characteristics of prime/secondary institutional quality investment properties, e.g. poor location, sub-standard specification, onerous/non-standard lease terms

Typical APR – This is an example rate of interest, designed to give borrowers a better idea of the total cost of borrowing for any given mortgage product.

Underwriting – This is the process a lender goes through to assess a mortgage application, taking into account the information given to them by the borrower and the credit reference they obtain.

Unencumbered – A property that is owned without borrowing or other legal charge over it.

Unsecured Loan – A personal loan that is not secured against a property. The lender will simply take into account the employment and credit status of the individual when assessing their suitability for a loan.

Valuation / Survey – This is an inspection of a property, carried out on behalf of a lender. It is designed merely to confirm the current market value of the property in its current state of repair and make sure that the property is good security for the mortgage or loan

Business valuations can vary considerably depending upon the nature of the business and its current performance.

Valuation Fee – This is the fee payable to a lender to arrange for a valuation of the property. This is normally paid when you send in your application and, once the valuation has been carried out, this fee is not refundable, even if you do not go ahead with the loan / mortgage.

Variable Rate – This is a rate of interest that will vary according to market conditions and the general cost of borrowing.

Void(s) – Has two meanings in common usage:

– Space which cannot be used, for example “roof void” or common entrance/lifts or space which could be let but is vacant. Rents are calculated on net lettable space. Net lettable space excludes void areas but includes vacant space.

– Can be used to describe a situation where no rent is received such as a building after a tenant has vacated or in development situations, in the appraisal to cover the rent free period for fitting out (usually 3 month) after practical completion. In these latter cases, it is used to calculate the carrying cost of land plus building cost for this period to arrive at a figure for total costs to calculate the return on costs which is usually the developers benchmark.

Years’ purchase or YP – A description of capital value based on actual or potential income. If someone buys a property as an investment, they pay a capital sum in return for the right to receive a rental income. For example, a property purchased for £1m which brings in £40k a year in rent, is bought at 25 years YP, i.e. the value of the rents received over a 25 year period will equal the original capital outlay of £1m. In this assessment no account is taken of potential rental growth or of the net present value of future income. YP is the inverse of yield.

Yield – The income of a property expressed as a percentage of its cost. The yield is the inverse of years’ purchase. If the number of years purchase is 25, the yield is 4%. The yield on a property depends on several factors including location, the standard of the building, the calibre of other premises in the area and the quality of the tenant. Knowing the yield on a property lets an investor compare the investment potential of different types of property and competing assets (e.g. gilts, shares). Yield is a measure of an investor’s opinion about the prospects and risks attached to an investment. The better the prospects and risks, the lower the expected yield and thus the greater the capital value. Yield is therefore identified very much as a measure of market expectations.

 

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