Topic 3

Question 1

Affordability

Answer 1

An important concept in helping people to choose financial products, based on budgeting and forecasting to help individuals decide what they can afford.

Question 2

Bank rate

Answer 2

The interest rate the Bank of England uses when it lends money to other banks. Financial services providers take account of the bank rate when they set the interest rates of their own products

Question 3

Buy to let mortgage

Answer 3

A long term secured loan taken out by a person who is buying a property with the intention of letting it to tenants.

Question 4

Capital

Answer 4

In relation to mortgages, capital refers to the total amount borrowed

Question 5

Capital gains tax

Answer 5

A tax payable on the profit made when you sell or give away an asset, e.g. Property or shares. Each person is allowed a certain amount of profit before being taxed on it.

Question 6

Consumer credit

Answer 6

This is another term used for borrowing. It is important to understand that taking credit means borrowing

Question 7

Consumer durable

Answer 7

A useful product with an expected long life e.g. A tv or a car

Question 8

Credit card

Answer 8

A card that allows the holder to make purchases face to face, over the phone or online. Transactions are paid for by the card provider. Card holder repays the amount in one payment or instalments.

Question 9

Creditworthiness

Answer 9

The extent to which an individual is seen as being likely to pay back any money they borrow.

Question 10

Default

Answer 10

To fail to repay borrowing when the repayment is due

Question 11

Discount mortgage

Answer 11

A variable rate mortgage that gives the customer a set discount off the provider’s standard variable rate for an agreed period

Question 12

Endowment policy

Answer 12

An insurance product that pays out a lump sum after a specified term or if the insured person dies before the end of the term. Used as a way of saving over the long term.

Question 13

Equity

Answer 13

This has two meanings
When talking about investments, another name for the shares of a company on the stock exchange
When talking about property, refers to the difference between the value of the property and the amount of money still outstanding on the mortgage

Question 14

Fixed rate mortgage

Answer 14

A mortgage loan whereby the interest rate is fixed for a stated number of years at the beginning of the mortgage. This benefits the borrower if interest rates rise during the fixed period but not if they fall

Question 15

Hire purchase

Answer 15

A type of secured consumer credit to finance items such as cars and furniture - involves borrower repaying over a number of years. The borrower does not become the legal owner until all repayments have been paid.

Question 16

Ijara home purchase plan

Answer 16

A form of Islamic home purchase plan. The provider buys the property and then sells the property to the client for the same price under a purchase agreement, repayment spread over a term of up to 25 years. Provider is the registered owner of the property during the repayment.

Question 17

Inflation

Answer 17

A rise in prices which means the purchasing power of money falls.

Question 18

Interest rate

Answer 18

The amount, expressed as a percentage, that the financial services provider charges a borrower when it lends money or pays to a saver.

Question 19

Interest only mortgage

Answer 19

A mortgage loan whereby the monthly repayment covers only the interest on the whole amount borrowed for the whole mortgage period. At the end the borrower still owes the full amount borrowed and must repay this capital sum in one payment

Question 20

Islamic home finance

Answer 20

Methods of buying a home that are compliant with sharia law, which prohibits receiving or paying interest

Question 21

Loan forbearance

Answer 21

When a lender does not seek to repossess a property as soon as the borrower misses a few monthly payments, instead allowing the customer to stop paying or make reduced payments for a set period.

Question 22

Loan to income LTI

Answer 22

The radio of the size of the loan to the income of the customer. The lower someone’s income, the less they can borrow.

Question 23

Loan to value

Answer 23

The ratio of the size of the loan to the value of the property.

Question 24

Loyalty mortgage

Answer 24

A mortgage loan with specific discounts or incentives for a providers loyal customers, e.g. Those who keep their current account with a provider for a long time.

Question 25

Maintenance loan

Answer 25

A loan granted to a full time student by the not for profit Student loans company, covers living expenses throughout the course.

Question 26

Mis-selling

Answer 26

When an individual or provider is negligent or reckless in seeking a product to an unsuitable customer, and / of misrepresenting the contract.

Question 27

Mortgage

Answer 27

A loan taken out to pay for a property, usually over a long term e.g. 25 years

Question 28

Negative equity

Answer 28

The situation where a mortgage loan is bigger than the value of the property

Question 29

Office of fair trading

Answer 29

The government department that used to be in charge of monitoring how business compete with each other. Abolished in 2014. Replaced with FCA and competition and markets authority

Question 30

Offset mortgage

Answer 30

A mortgage loan whereby the interest that would have been earned on a borrowers savings and current accounts is set against the interest owing on the mortgage. The borrower either makes a lower monthly repayment or continues to pay the same amount each month but reduces the number of years of the mortgage term.

Question 31

Overdraft

Answer 31

A facility that allows an account holder to withdraw more money than they have in their account

Question 32

PAYE

Answer 32

Pay as you earn - the term describing the deduction of income tax from employees pay by their employer. The deduction is made each time the employee is paid. The employee then pays the tax deducted to HMRC.

Question 33

Payment protection insurance PPI

Answer 33

An insurance product intended to ensure repayment of loans should a borrower face unexpected events that prevent them from repaying the debt.

Question 34

Personal loan

Answer 34

A product that allows someone to borrow a fixed amount at a fixed interest rate over a fixed period of time.

Question 35

Premium bond

Answer 35

Lottery bond issued by NS&I entered into a monthly prize draw with tax free prizes or ‘premiums’. Bonds must be held for a full calendar month after the month in which they were purchases. They all have an equal chance of winning.

Question 36

Repayment mortgage

Answer 36

A mortgage loan whereby the monthly repayments cover both interest and capital so that, by the end of the mortgage period, the loan has been completely repaid.

Question 37

Repossession

Answer 37

A legal process whereby a financial institution takes ownership of an asset such as a house, because loan repayments relating to that asset have not been met.

Question 38

Stamp duty

Answer 38

The term generally used to refer to stamp duty land tax, a tax payable on purchases of land and property above a certain value.

Question 39

Standard variable rate

Answer 39

A producer’s basic mortgage rate which the provider can decide to change at any time - often such changes follow a change in the Bank Rate.

Question 40

Tracker

Answer 40

A common form of variable rate mortgage whereby the interest rate charged tracks changes in some other specific interest rate

Question 41

Tuition fee loan

Answer 41

A loan granted to a student by the not for profit Student loans company to enable them to pay tuition fees of their course.

Question 42

Variable rate mortgage

Answer 42

A mortgage loan whereby the borrower pays whatever the provider’s basic mortgage rate at the time is. Usually known as the standard variable rate SVR