Topic 3: Borrowing products

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 to spend

Question 2

Annual exempt amount

Answer 2

The annual tax-free allowance for capital gains tax

Question 3

Bank rate

Answer 3

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

Question 4

Buy-to-let-mortgage

Answer 4

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

Question 5

Capital

Answer 5

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

Question 6

Captital gains tax

Answer 6

A tax payable on the gain (profit) made when you sell or give away an asset, for example property or shares. Each person is allowed to make a certain level of profit before being taxed on it.

Question 7

Consumer credit

Answer 7

This is another term used for borrowing. It is important to understand that ‘taking credit’ or ‘buying on credit’ refers to borrowing. However, a credit into a bank account means paying money in.

Question 8

Consumer durable

Answer 8

A useful product with an expected long life (eg TV or car)

Question 9

Coronavirus

Answer 9

Coronavirus disease, known as Covid-19, is a respiratory illness that causes mild to moderate symptoms in a majority of cases
but proves debilitating or fatal for a significant minority. It caused a global pandemic with wide-ranging economic effects

Question 10

Credit card

Answer 10

A card that allows the holder to make purchases face to face, online or over the phone, and to withdraw cash from an ATM.
Unlike a debit card, where the money is taken from the holder’s own account, transactions are paid by the card provider. The card holder repays the amount owed to the provider either in one payment or in instalments. The provider charges interest on cash withdrawals from the time the withdrawal is made and on purchases after a certain period

Question 11

Creditworthiness

Answer 11

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

Question 12

Default

Answer 12

To fail to repay borrowing when the repayment is due

Question 13

Discount mortage

Answer 13

A variable-rate mortgage that gives the customer a set discount off the provider’s standard variable rate (SVR) for an agreed
period. The rate charged can still rise or fall

Question 14

Endowment policy

Answer 14

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.
Endowment policies are often used as a way of saving over the long term.

Question 15

Equity

Answer 15

This has two meanings: a) when talking about investments, an equity is another name for the shares of a company quoted on the stock exchange; b) when talking about property, it refers to the difference between the value of a property and the amount of money still outstanding on the mortgage

Question 16

Fixed-rate mortgage

Answer 16

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 17

Hire purchase

Answer 17

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

Question 18

Ijara home purchase plan

Answer 18

A form of Islamic home purchase plan. The provider buys the client’s selected property. The provider then sells the property
to the client for the same price under a promise to purchase agreement, with repayment spread over a term of up to 25
years. The provider is the registered owner of the property during the repayment term. The client occupies the property under a lease during the payment term, paying a monthly
amount that combines capital repayment and rent for the lease. The monthly payment is fixed for 12 months at a time and is
then reviewed to allow for adjustments to the rental element as appropriate; these adjustments will usually reflect changes in
external interest rates

Question 19

Inflation

Answer 19

A general rise in prices, which means that the purchasing power of money falls

Question 20

Interest rate

Answer 20

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

Question 21

Interest only mortgage

Answer 21

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

Question 22

Islamic home finance

Answer 22

Methods of buying a home that are compliant with Sharia law, which forbids Muslims from paying or receiving interest. There are two main types: Ijara and Murabaha home purchase plans

Question 23

Loan forbearance

Answer 23

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 24

Loan to income (LTI)

Answer 24

The ratio of the size of the loan to the income of the customer. It means that the lower someone’s income, the less they can
borrow

Question 25

Loan to income (LTV)

Answer 25

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

Question 26

Loyalty mortgage

Answer 26

A mortgage loan with specific discounts or incentives for a provider’s loyal customers, eg those that keep their current account with the provider for an extended period of time.

Question 27

Maintenance loan

Answer 27

A loan granted to a full-time student by the not-for-profit Student Loans Company that covers living expenses incurred
during their course

Question 28

Mis-selling

Answer 28

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

Question 29

Mortgage

Answer 29

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

Question 30

Murabaha home purchase plan

Answer 30

A form of Islamic home purchase plan. The provider buys the property at an agreed price and then sells it immediately to the client at a higher price. The exact price depends on the repayment term, which can be up to 15 years. The higher price charged to the purchaser reflects the profit element for the
provider. A first payment, typically of around 20% of the property value, is usually required and the client will then make monthly fixed payments to the provider during the term. As the property has been transferred to the client, the property isregistered in their name rather than that of the provider

Question 31

Negative equity

Answer 31

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

Question 32

Office of Fair Trading

Answer 32

The government department that monitored how businesses compete with each other. It was abolished in April 2014 and its responsibilities shared between the Financial Conduct Authority and the Competition and Markets Authority

Question 33

Offset mortgage

Answer 33

A mortgage loan whereby the interest that would have been earned on the borrower’s 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 34

Overdraft

Answer 34

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

Question 35

Pandemic

Answer 35

A pandemic is where an infectious disease spreads rapidly to many people across a large region

Question 36

PAYE

Answer 36

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

Question 37

Payment Protection Insurance (PPI)

Answer 37

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

Question 38

Personal loan

Answer 38

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

Question 39

Premium Bond

Answer 39

A 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 purchased, and retain an equal chance of winning until cashed in.

Question 40

Repayment mortgage

Answer 40

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 41

Repossession

Answer 41

A legal process whereby a financial institution (eg a mortgage lender) takes ownership of an asset, often a house, because loan
repayments relating to that asset have not been met. Repossession is the last resort in the process of recovering money owed

Question 42

Stamp Duty

Answer 42

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

Question 43

Standard variable rate (SVR)

Answer 43

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

Question 44

Tracker

Answer 44

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

Question 45

Tuition fee loan

Answer 45

A loan granted to a student by the not-for-profit Student Loans Company to enable them to pay the tuition fees of their course

Question 46

Variable-rate mortgage

Answer 46

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