Archive for the ‘Definitions’ Category

Originate and Distribute – how did it affect the Mortgage Market?

May 13th, 2010

Originate and distribute was a way that the mortgage market developed in the years before the credit crunch, and it explains a lot of what happened and the current market. Originate and distribute was in some ways a mere technical change, but it had a very important way in which mortgages were offered.  Essentially it was a way in which mortgages were financed.

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What is an investment vehicle?

April 27th, 2010

When people take out an interest only mortgage they can often be asked if they are taking out an investment vehicle that runs with the mortgage.  It is important to have some understanding of what this is.

Investment vehicles are an alternative destination for the capital repayment element of a home loan.  These are usually share based although insurance based products used to be popular, although this is not the case anymore.
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Revolving Mortgage Loan Terms

April 12th, 2010

Revolving loan terms are when a mortgage may have a limited term but it is I effect an endless, although not a permanent loan.  This is due to the fact that when a loan gets to the end of its term then it gets renewed automatically, or rolled over.

The loans are not permanent in that the lender can at some point refuse to roll over the loan and in effect call the loan in.  In many cases the lender has to notify the borrower that there will be less credit or no credit at a given period before the loan comes in.  This means that the loan is not extended for ever.
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Home Loan Deposit Bonds

March 19th, 2010

Deposit bonds are loans that are used to pay for the deposit on a house.   It is an alternative to a cash deposit.

A deposit is often needed at an early stage of the house buying process in order to continue on.  It is a sign of good faith and it may also be important as they have a deposit later along the chain.  The deposit is often held by a third party and released to the seller if there is a breach of the deal or when the term completes. 
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Mortgage Overpayment Penalties

March 1st, 2010

Overpayment penalties are when a mortgage company charges a penalty to a borrower who pays too much back on a mortgage.

This may seem an illogical reaction for what is virtuous behaviour.  However some mortgages have the benefit, for the lender, of being a predictable source of income and capital repayment over a long period of time.  In return for the administrative convenience and the stable income stream the mortgage lender is prepared to allow for a lower interest rate than they would otherwise charge.  This is why the cheaper mortgages, and some of the higher risk mortgages, have overpayment penalties and why the more flexible mortgages tend to be more expensive.

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