Glossary
The words, explained
Lending has a vocabulary that nobody defines for you, and being unsure what a term means is a bad position to negotiate from. Here they are in plain English.
- Arrangement fee
- What the lender charges for setting the facility up, usually a percentage of the loan and often added to it rather than paid up front. On short-term borrowing it is frequently larger than several months of interest, which is why comparing rates alone is misleading. Read more on this.
- Bridging loan
- Short-term borrowing secured on property, repaid in months rather than years from a defined event such as a sale or a refinance. Priced on the exit and the security rather than on income. Read more on this.
- Debt service coverage ratio
- How many times over the income from a property or business covers the loan payments. A lender wanting 1.25x is asking for a quarter more income than the payment, as a buffer.
- Exit
- How a short-term facility gets repaid. Sale, refinance, or a defined receipt. The most important thing on a bridging application and the usual reason cases fail. Read more on this.
- First charge
- The lender first in line against the property if it were sold to clear debts. A second charge sits behind it, is riskier for that lender, and is priced accordingly.
- Gross and net loan
- The gross loan is the facility on paper. The net advance is what actually reaches you after retained interest and fees are deducted. If you need a specific sum to complete, work backwards from the net. Read more on this.
- Hire purchase
- Asset finance where the payments cover the cost of the equipment and ownership transfers to you at the end. A lease does not transfer ownership, which is the main practical difference.
- Loan to value (LTV)
- The loan as a percentage of the property's value. The single largest driver of price on secured lending, because it sets the lender's margin for error.
- Personal guarantee
- A promise from a director to meet the company's borrowing personally if the company does not. Common on commercial lending, and worth taking advice on before signing — it survives the company.
- Retained interest
- The lender holds the interest back from the advance at the outset, so there is nothing to pay monthly. Simple, but it reduces what you receive, so the facility has to be larger. Read more on this.
- Rolled-up interest
- Interest accrues and is settled with the capital at the end. Nothing to pay monthly, but you pay interest on the accrued interest.
- Term
- How long the facility runs. On a mortgage, years. On a bridge, months — and the end date is a hard one, which is why the exit has to be real.
Still unclear on something?
Ask us. We would rather explain it now than have you agree to something you did not follow.
