Have you ever noticed with most contracts, the writing becomes smaller as you read through it and the jargon becomes indecipherable? Financial institutions in particular have nurtured their reputations through the years for being as obtuse, confusing and ambiguous as possible in their use of the English language. All you have to do is look at a loan offer and you will see what I mean. Caveat emptor and all that BUT the caveats, while I am sure there are valid and necessary reasons for their inclusions, are never fully explained. Therefore, it is hugely important in the first instance, to know what some of these words and phrases mean… in plain English. In this section, I explain many of these financial terms.
If you would like to see your specific jargon that is not covered in this compilation, please write to me at firstname.lastname@example.org
An insurance policy which pays out a lump sum if you suffer an injury. For instance, you might receive €20,000 for the loss of a limb, or €50,000 euros for the loss of your sight.
ADDITIONAL VOLUNTARY CONTRIBUTIONS (AVCs)
These are extra payments you make in addition to the normal pension contributions ( or premiums) you or your employer make if you are a member of an employer pension plan. AVCs help boost the value of your pension fund or can be used top contribute to a tax-free lump sum on retirement. You can claim tax relief on AVCs up to certain limits, as long as you earn an income.
A fee paid to a financial services provider for a service or product.
The percentage of your money used to buy units in a pension or investment fund. For example, if you invest €100 and €2 goes towards charges and set-up costs then your allocation rate is 98%.
ANNUAL EQUIVALENT RATE (AER)
This shows what the interest on a savings account would be if the interest were compounded and paid out on an annual basis. This can be used as a basis of comparison for savings plans that may be of less than or greater than 12 months duration. See also COMPOUND ANNUAL RETURN.
A fixed amount of money paid to you as an income for a particular length of time. The length of time may be the rest of your life (life-time annuity) or for a set period (temporary annuity). You buy an annuity using a lump sum of money. Once you’ve purchased it you cannot get your original capital back, and you are locked in to the income agreed at the outset.
Compares the size of an annuity (in other words how much it will pay you each year) with the size of the lump sum required to buy it.
APPROVED MINIMUM RETIREMENT FUND (AMRF)
A type of personal pension fund in which the capital may not be reduced below a fixed limit before age 75.
APPROVED RETIREMENT FUND(ARF)
A personal retirement fund – after you make provision for an AMRF if necessary – where you keep your pension invested as a lump sum after retirement. Compulsory withdrawals of 5% per annum ( 6% if the fund is over € 2m ) from this fund are taxable.
APR or ANNUAL PERCENTAGE RATE
The way in which lenders express the rate of interest and charges they’re making. You should always compare annual percentage rates before taking out any loan, and you should bear in mind that there are different ways of calculating the cost of any debt.
These are physical items such as land, or intangible items such as goodwill, that are owned by a company or a person. Asset Finance is a loan secured by that asset whether it is a car, boat, helicopter etc
This refers to a condition included in some home insurance policies that limits what you can claim if you are under-insured. E.g. if the contents of your home are worth € 50,000, but you insure them for € 25,000 you are under-insured by 50%. If your contents are damaged, destroyed or stolen, the most you will receive from your insurance company is 50% of the claim on your loss.
A reference to one large final payment due at the end of a loan agreement –includes car finance or other short term loans. It is used to keep monthly payments lower but must be paid to complete the agreement and so allow you to become the owner of the goods at that point.
The term used to describe a falling stock market.
A statement giving details of your pension plan that your pension provider must supply you with annually.
BID – OFFER SPREAD
Refers to an investment charge and to the difference between the buying and selling price of a unit in an investment or pension fund on any given day. A typical bid-spread offer would be 5%. This means that if invest € 1000 in a pension or investment fund, its value would be € 950 ( € 1000 less 5% ) if you withdrew the funds immediately. Buying and selling price of these units in a fund depend on the value of the assets in the fund, sometimes referred to as the underlying assets.
In financial circles, this is the name given to unauthorised and unscrupulous investment companies that use high-pressure sales tactics to sell worthless or high-risk shares, foreign currency or other “investments” to unsuspecting investors. Once bought, these shares are impossible to offload or sell.
A certificate of debt raised by individuals, companies or governments. In other words, a way for them to borrow money. It can have a fixed date of repayment or a variable one. The dividend (i.e. the payment or return you receive for investing in the bond) is known as the coupon.
The opposite of a bear market. This is when a prolonged rise in the stock market occurs.
BUY OUT BOND
This is a fund into which you can transfer your employer pension fund if you leave or move jobs.
Capital is, in essence, the total resources you have, or the amount you have available to invest, or the amount you originally invested.
CAPITAL GAINS TAX
A tax on the increase in value of assets during your period of ownership. Once an asset is purchased, if the value increases from day one, it is said to have made a Capital Gain. Governments the world over tax this Gain so that they can share in your good fortune.
Contracts For Differences – the Futures & Options market is a mechanism for buying a small percentage of a commodity or share ownership now, with a maturity date upon which you must then pay the full price. Essentially you are betting that the price will be lower or higher on that date. CFDs do not have a maturity date BUT if the contract goes below 80% of the original price at the time of purchase, the difference is called in at that point.
A plastic card enabling a purchase to be charged to a current account or store account. It is subject to a credit limit and must be regularly cleared in full – every month if there is an outstanding balance. No interest charges are applied.
This is something that a lender will accept as security for a loan – usually an asset such as property or investments which can be easily converted to cash in the event of the loan not being repaid.
A payment to a sales person or adviser, usually based on the value of the sale from the supplier of the product.
COMPOUND ANNUAL RETURN (CAR)
This is a measure of the rate of return on a deposit or investment and it enables you to make a direct comparison between various savings schemes.
The process by which interest-bearing savings mount up. If for example you invest € 10,000 in a deposit account attracting 5%, at the end of the year, you will have a balance of € 10,500.
A legal term for the process of transferring ownership of a property from seller to buyer and carried out by a solicitor.
A fixed-interest bond raised by a company. See ‘Bond’ above.
COST OF CREDIT
The full cost of borrowing money and shows the difference between the amount you borrow and what you will have repaid at the end of the loan period plus any other “extras” e.g. valuation fees etc
A plastic card from a credit card company that gives you an availability of funds to an agreed limit. The monthly bill – you can receive over 30 days free credit – must be paid within a certain time, or be subject to an interest charge if only the minimum is pay. This amount is less than 5% of the total bill but because of some credit card company interest rates, can take you over 11 years to repay this debt if you are only repaying the minimum balance each month.
Your repayment history on all loans with the front-line credit institutions – 42 members – in Ireland is tracked by the Irish Credit Bureau based in Newstead, Clonskeagh, Dublin 14. Lenders will use this information to assess your credit worthiness. Missed payments stay on record for 5 years while a judgment ( you are successfully sued in court by a creditor who is owed money ) is there for life. Guard your good name !
Sometimes called payment protection insurance. This insurance will cover the monthly cost of a debt for a limited period (usually a year) if you can’t work because of illness or unemployment. For instance, you might take out credit insurance to cover your mortgage payments.
CREST is the electronic settlement system used to buy and sell shares on the London and Irish stock market exchanges. CREST also offers investors the opportunity to hold their shares in electronic form in their own name through personal membership.
CRITICAL ILLNESS INSURANCE
This insurance will pay out a lump sum if you’re diagnosed with or suffer from any of a list of life-threatening conditions. For instance, if you have a heart attack or cancer you would receive a pre-agreed amount of money. This is also referred to as SERIOUS ILLNESS INSURANCE.
CURRENT ACCOUNT MORTGAGE
Also known as a flexible mortgage. A mortgage – linked to your bank current account – that allows you to vary your monthly payments. By over-paying each month you can save yourself a substantial amount of interest and shorten the length of your mortgage by many years. On a daily basis the balances of your mortgage and current accounts are aggregated and interest is calculated on the net balance.
Putting all your short, medium and long term loans into one single loan – or a mix of some into one loan to reduce your monthly outlay and help cash flow. Consolidating once can be a good idea especially if you can then hive some of the saving into a deposit or investment account. You should only ever consolidate once.
A term used to describe a situation when you fail to pay some of or all of your due instalments on a mortgage or loan.
DEFINED BENEFIT PENSION PLAN
A type of pension plan where your income on retirement is related to your final salary and the number of years you have worked for your employer. An example would be an annual pension of 66% of your final salary on retirement after 40 years service. Most DB plans were dropped by the bigger employments during the early part of this new century.
DEFINED CONTRIBUTION PENSION PLAN
With this type of pension plan, your income on retirement is not related to your final salary but depends on the value of the pension fund accumulated during your working life. If you and your employer’s contributions are invested in a pension fund that has not performed, that is your tough luck.
DEPOSIT INTEREST RETENTION TAX (DIRT)
This is a tax on interest earned on deposits with the Irish Financial institutions. The current rate is 20% and it is deducted directly from the gross interest and passed on to the Revenue Commissioners.
A loss in value of certain assets such as a car or a machine over time.
Financial contracts that gamble on the future prices of assets. They are secondary assets, such as options and futures, which derive their value from primary assets such as currency, commodities, stocks and bonds. The current price of an asset is determined by the market demand for and supply of the asset; however, the future price of an asset typically remains unknown. A week or a month in the future, the price may increase, decrease, or remain the same. Buyers and sellers often like to hedge their bets against this uncertainty about future price by making a contract for future trading at a specified price. This contract—a financial instrument – is called a derivative.
DISCOUNT RATE MORTGAGE
A mortgage whose interest rate is kept at a set percentage below the standard variable mortgage rate for an agreed period. You need to make sure that the difference between the normal and discounted rates of interest is not being added to your outstanding loan, which could dramatically increase the overall cost of your mortgage.
The distribution of part of a company’s profits to shareholders. It is the money you earn for investing in shares and can be paid in cash or shares.
Money you set aside in some reasonably accessible form (such as a bank or building society account) which can be drawn upon in the event of some unforeseen need for funds.
This is a mortgage where your monthly payments consist entirely of the interest on the amount you’ve borrowed, whilst the loan itself gets paid off using the proceeds of an endowment insurance policy.
In the 1980s and 1990s thousands of endowment mortgages were sold with endowment policies that didn’t grow in value sufficiently to repay the lump sum borrowed. In other words, borrowers found themselves unable to pay all their mortgage off. This crisis continues as borrowers who took out endowment mortgages come to the end of their mortgage term.
An investment-type insurance policy which pays out a single amount on a fixed date in the future – usually to repay a mortgage or when the policy holder dies – whichever comes first.
This means the net value of your property after allowing for the balance of any remaining mortgage. The value of the property less the mortgage amount.
A scheme whereby you make use of some of the equity (the difference between the value of a property and the loan borrowed against it) in your home, by way of remortgage or top-up for refurbishment or other investment purposes.
The assets of a person who has died.
An automatic and regular increase in pension over successive years, either at a fixed rate or linked to inflation.
Euro Interbank Offered Rate – the interest rate at which eurozone banks will lend to each other. There is a separate rate for each lending period ( a lending period can be from one week up to 12 months ) Euribor rates may have an effect on the interest rate your bank offers you. These rates change every day, depending on quotes from a representative panel of banks. It is not the same as the ECB rate, which is set by the European Central Bank, hence the standard variable mortgage interest rate can be decidedly different to an ECB tracker rate – talk to your financial adviser.
EUROPEAN CENTRAL BANK (ECB)
This is the Central Bank for the Eurozone countries. Its main purposes are to maintain the value of the euro by means of keeping prices stable and controlling inflation in the member states. It sets the interest rates for the zone which in turn influence domestic interest rates.
EXCHANGE TRADED FUNDS (EFTs)
An investment fund that tracks the shares of a particular stock market index, such as the top 20 shares quoted in the Irish Stock Exchange. The fund itself is also quoted and traded on the stock market. Entry and exit to EFTs can also be cheaper and better administratively ( as you do not have to buy 20 separate share holdings for example )
Also referred to as an exit charge or early encashment charge and is a penalty applied by financial institutions for cashing in an investment before the specified maturity date.
A tax on the profit made on an investment. On the maturity of that investment or when you have decided to cash it in, you are taxed 23% ( the standard rate of tax, currently 20%, plus 3% government levy ) on the profit of that investment.
A person or firm offering advice about investments, insurance, mortgages and other financial products. See the note on the Financial Regulator below.
The Financial Regulator (formerly Irish Financial Services Regulatory Authority) is charged with policing the Irish financial services industry – that is all banks, building societies, credit unions, insurance companies, stockbrokers, financial advisers and intermediaries.
FIXED RATE MORTGAGE
A mortgage whose interest rate is set at a particular level and does not vary during an initial set period. At the end of the period, the rate reverts, usually to the normal variable rate for that lender.
FIXED TERM DEPOSITS
A deposit account into which you put your money for a fixed time and at a fixed interest rate. Any withdrawals before the fixed period expires will usually attract a penalty
FUTURES AND OPTIONS
A future or forward contract is formed when both the buyer and the seller are committed and legally obliged to exchange the underlying asset when the contract matures. An option, on the other hand, is a contract that gives its owner the right, but not the obligation, to buy or sell the underlying asset on or before a given date at the agreed-upon price. Both these contracts are time bound.
HOME INCOME PLAN
A scheme usually set up by an insurance company which offers income to the elderly by releasing some of the value tied up in their homes.
HOME REVERSION SCHEME
A scheme to provide extra capital or income once you’re retired. You sell part of your home but retain the right to live in it until you die (or both you and your husband / wife have died if it’s a joint scheme). The amount raised can either be kept as a lump sum or used to buy an annuity which would give a monthly income.
HOSPITAL CASH PLAN
This policy will pay out a lump sum in specified circumstances – for instance if you have to go into hospital, if you become pregnant, and so forth.
INCREASING TERM INSURANCE
Life insurance where the amount of cover – and the cost – automatically increase during the term either by a set percentage each year or in line with inflation. One of the benefits is that the extra you pay assumes that your state of health is still the same as it was when you originally took out the policy even if – in fact – it has deteriorated.
A type of insurance policy that in the event of your home being repossessed by your lender as a result of failure to repay the mortgage, this policy insures the lender against the risk of taking a loss usually over 80% of the original value of the property on its subsequent sale. Some lenders will charge you for the costs of this Indemnity Bond.
A method whereby the benefits on your investment, life assurance or house insurance policies are increased annually to keep pace with inflation. Your premiums will also increase proportionately each year.
The word used to describe how rising prices cause the purchasing power of your money to decrease. At one point we suffered very high levels of inflation in Ireland – prices increased by as much as one-sixth a year. In recent years, inflation has been pretty much under control but, worryingly, has been on the rise again in the last 2 years. Note that when inflation rises, so do interest rates – hence the steady rate increases of the last 24 months.
Interest is the money charged by a lender to a borrower. It’s also the amount of money an investor earns from his or her investments. Here are two short examples: if you borrow €100 and you have to pay an annual interest rate of 20%, it means you have to pay the lender €20 a year. If, on the other hand, you invest €100 and receive interest of 5%, this means that the amount you will receive is €5 a year.
INTEREST ONLY MORTGAGE
Similar to an endowment mortgage. Basically, you only pay interest during the term of the loan. Normally, the amount that would go to repaying capital is instead transferred to a savings scheme which should – on maturity – have grown sufficiently to repay the loan. In this case, there is no investment planned but the loan reverts at a future point to a Capital and Interest loan (called the Repayment or Annuity Loan ) or if you have negotiated a 40 year interest only loan, the amount borrowed is repayment, by whatever means, at the end of the term.
INVESTOR COMPENSATION SCHEME
Introduced in 1997, this is a guarantee from the government to protect eligible consumers and investor savings up to € 20,000 per person/entity in any Irish bank, deposit-taker or authorised investment firm should that credit institution or firm fail or collapse. The government’s Deposit Protection Scheme guaranteeing € 100,000 per person in every Irish financial institution has replaced the ICS.
IRISH CREDIT BUREAU
A credit reference agency that maintains information about individual borrowers’ credit history. With 95 credit institution members, one missed payment stays on record for 5 years, while a judgment (a formal decision by a court of law that you owe money ) remains forever. Any loan application will always result in an ICB ( Newstead Clonskeagh Dublin 6 ) enquiry. You can check your own credit for € 6 by writing to them. Guard your good name !
JOINT LIFE INSURANCE
This is life insurance which covers two people’s lives – usually husband and wife – paying out a lump sum when either one or both has died. A ‘first death policy’ will pay out when one of the people covered has died, whereas a ‘last survivor policy’ pays out only when both of the people covered have died. This type of life insurance is useful as a way of paying off a mortgage or meeting some other liability. The ‘first death’ policy is the cheaper while the most expensive is a DUAL LIFE POLICY which pays out on both lives irrespective of who dies first.
A high yield corporate bond issue with a below-investment rating ( BB or lower ) that became a growing source of corporate funding in the 1980s. They are the lowest quality bonds and since they are speculative and riskier, they potentially have a greater yield or return and are generally issued by corporations of questionable financial strength or without proven track records.
LETTER OF OFFER
Usually a letter from your mortgage lender setting out the amount or loan offer they are willing to lend you and listing the requirements and conditions attaching to the loan before the funds can be released.
An insurance policy which pays out a lump sum on the death of the insured. The policyholder is not necessarily the insured e.g. a wife could make her children the beneficiaries of an insurance policy on her husband’s life.
In simple terms this refers to the availability of cash – as opposed to assets tied up in long-term investments- to meet any sudden demands.
A charge added to an insurance premium because of some specific risk factor such as the health of an individual looking for life cover insurance.
LOAN TO VALUE (LTV)
Shows the relationship between the value of your home and the amount of your mortgage, expressed as a percentage. Thus, if your home is worth €500,000 and you owe €250,000 the LTV ( Loan To Value ) is 50%.
MARKET VALUE REDUCTION (MVR)
A reduction in the value of your investment that your Life Insurance Company may apply when you withdraw some or all of your investment except at certain times.
This is a loan secured against the value of your home or property. A legal term in French meaning “dead pledge” – a mortgage is essentially a contract between a lender and a borrower. It obligates the lender to make money available to the borrower, and obligates the borrower to repay the loan over a specified period of time.
MORTGAGE PROTECTION ASSURANCE
A form of life assurance tailored to provide enough cover to pay off your mortgage in the event of your death. The policy will be set up to run for the same term of years as your mortgage but the level of cover will decrease in line with the reducing balance of your mortgage, so the more you repay on the original amount borrowed, the less you have to ‘cover’ on the balance. The premiums are fixed for the full term of the policy.
MORTGAGE REPAYMENT PROTECTION INSURANCE
A special policy designed to cover your mortgage payments for a limited period – usually not more than two years – if you can’t work due to an accident, illness or unemployment.
NATIONAL TREASURY MANAGEMENT AGENCY (NTMA)
The government agency that manages the national debt and administers the national pension fund. It also administers a fund where unclaimed money from dormant bank accounts is transferred.
N D I
Net Disposable Income – one of the two methods used by lenders to determine how much money can be borrowed by an applicant. Your monthly take home pay amount ( that is after tax and deductions ) is used to allow up to c. 35% in financial commitments ( mortgage, car loan, personal loan etc ) This leaves the other 65% disposable income to feed, clothe and cover living and luxury expenses. Under certain circumstances, this could be as high as 50%. The other method of calculating your borrowing eligibility is called the Salary Multiplier. Again, as a rule of thumb, your income is multiplied by 4.5 times for a single applicant or twice 4.5 times for joint applicants. If there are no loans outstanding or other financial commitments, the NDI system may give you a greater borrowing eligibility.
Unfortunately these words are now being used in Ireland since the 2008 summer. When an asset – especially a home – falls below the value of the loan (or loans) taken out to buy it, this is referred to as “negative equity’. In other words, suppose you have a house worth €200,000 and your mortgage is for €220,000. Your negative equity would be €20,000.
This is what someone is really worth financially. You calculate it by adding up the value of all your assets and then deducting the total of all your debts. Suppose you have a house, car, and other possessions worth €150,000 and mortgages and loans to the value of €100,000, your net worth would then be €50,000. (€150,000 less €100,000).
NO CLAIMS BONUS
The reduction you receive on your home or motor insurance, based on the number of years you have been claim-free.
When more money is paid out of your current account than you have paid in, your account is said to be in overdraft or you have overdrawn your account. Your bank must normally approve such overdrafts in advance and when they do, it is generally up to an agreed limit. If you do not have advance permission, your account may still be allowed to overdraw but you will be penalised – a surcharge on top of the already excessive overdraft interest rate, plus referral fees and possibly unpaid charges will apply.
PAY-RELATED SOCIAL INSURANCE (PRSI)
A contribution toward the cost of social welfare and pension benefits, payable by employers, employees and the self-employed. It is calculated as a percentage of your earnings and only up to a certain limit.
Introduced in 2002, a Personal Retirement Savings Account is a pension plan to give a regular income on retirement plus a lump sum tax-free amount and available through banks and assurance companies. It is regarded as more flexible and cheaper to maintain than the traditional personal pension plan.
RATE OF RETURN
The amount of money you make from an investment, and it’s worked out by adding together any capital appreciation and any income you have received. It’s expressed as a percentage. When people refer to the ‘real’ rate of return, they mean the figure after it has been adjusted for inflation.
RENEWABLE TERM INSURANCE
This is life insurance which includes a guarantee that you can take out a second term insurance policy at the end of the original term. Your rights will not be affected by any change in your health.
The process of repaying one loan with the proceeds from an existing property by taking out a new consolidated loan with a different lender using the same property as security. Generally, an additional amount of borrowing would be added to the existing debt in a remortgage situation.
A mortgage that has monthly payments to repay both the capital and the interest on the loan over a stated term.
A loan that is supported by an asset that guarantees repayment of a loan. Mortgages are normally secured by the property being offered as security.
Assets such as title deeds of a property, life policies or share certificates used as support for a loan. The lender has the right to sell the security if the loan is not repaid according to the terms of the mortgage agreement.
SERIOUS or SPECIFIED ILLNESS INSURANCE
See under Critical Illness Insurance. This is a form of assurance which pays out if you are diagnosed with one of a number of serious illnesses that are specified in the policy schedule.
Shares represent, literally, a share in the ownership of a business. Different types of shares will carry different types of benefits. For instance some may allow you to vote, others may allow you a share of the company’s profits in the form of something referred to as ‘dividends’.
The selling of a stock ( equities or shares in a company, commodities ) that a person does not own in the hope of profiting from buying the stock back at a lower price. This is also called SHORTING. This was banned virtually worldwide in September 2008.
STAMP DUTY (PROPERTY)
Basically a tax you pay to the government when buying a property. The tax is applied on a sliding scale depending on the property value and there are a number of exemptions including first time buyers. With shares, the stamp duty is 1% while there is also stamp duty on credit cards ( € 30 up to 2008 ) and cash cards or laser cards ( € 5 )
The amount of money an endowment policy yields when it’s cashed in before reaching maturity.
Legal tax planning by taking full advantage of the tax laws to minimise your tax liabilities.
Illegal tax planning – where you are breaking the law. If you get paid in cash for doing some work and don’t declare it on your tax form – then you are engaging in tax evasion.
A life insurance policy which pays out a fixed sum on the death of the policy-holder within a fixed number of years – the term of the policy.
Sales people selling products and services on behalf of one company. Their financial advice is neither impartial nor independent.
A mortgage where the margin i.e. the profit to the lender, is set or tracked at a fixed percentage above the ECB interest rate for the duration of the loan term.
A trust is a legal entity – like a company, or a person for that matter. It allows assets by one set of people – beneficiaries – to be managed and run by other people – known as trustees. Trusts are a useful way of protecting your loved ones and also saving tax at the same time.
Investors pool their money into a fund which in turn invests in a number of different companies. It’s a good way to spread your risk because it allows you to diversify without having to buy lots and lots of shares.
A loan that is not supported by any asset to guarantee repayment of the loan. Personal unsecured loan examples are car loans, overdrafts, holiday and short term personal loans.
Can be either a report by a registered valuer on the value of a property and will be required when applying for a mortgage, or an estimate from a fund manager of the value of the assets in your investment or pension fund.
VARIABLE RATE MORTGAGE
A mortgage that permits the lender to adjust its interest rates periodically but generally on the back of interest rate rises around the globe and in particular, and pertinent to Ireland, from the European Central Bank.
WHOLE OF LIFE POLICY
A type of life policy that, as its name implies, provides cover for your whole life and pays out on your death providing the policy is still on force. Premiums are not fixed and will be reviewed – upwards – at regular intervals. Policies would also have an encashment value.
WITH PROFITS POLICY
An insurance policy that offers a policy holder a share of any surplus in the insurance company’s life insurance and pension profits from the business.