Financial jargon ... made simple

Known to its friends as the LIBOR, this is the variable rate of interest at which banks borrow money from other banks in a system called the London interbank market.

It’s one of the most common benchmarks for short-term interest rates: most registered social landlords’ loans are based on three- or six-month LIBOR rates. The relationship between the LIBOR and the Bank of England base rate shows how banks believe interest rates will move in future. For example, if the LIBOR is above base rate, the market expects the base rate to rise.

Free-standing swap

An interest rate swap allows an RSL effectively to fix its interest while still having a variable rate loan. Sometimes this is cheaper than taking out a fixed-rate loan.

Say an association has a variable-rate loan linked to LIBOR (see above) with bank A. The association asks bank B for a five-year interest rate swap based on the same sum as its loan with bank A: this means the RSL agrees to pay a fixed rate – say, 5.5% for five years – to bank B. In return, bank B pays the association the prevailing LIBOR (the variable rate to which its loan with bank A is linked). The association and bank B usually agree to exchange the difference.

In this example, if the LIBOR is higher than 5.5%, the bank will pay the difference to the housing association. The association is paying interest to bank A at a rate linked to the LIBOR and will receive the LIBOR from bank B, so it effectively has a fixed-rate hedge without having to take out a fixed-rate loan with bank A. The payments to and from bank A and bank B have to be made on the same days, so that the LIBOR is the same.

RSLs need Housing Corporation permission to do interest-rate swaps.

Security trustee

A trust holding an RSL’s properties that will be used as security on loans. Legal searches have to be done before homes can be used as security on loans; often they are done on a property every time it’s used for a loan with a different lender. However, the search can just be done once for homes in a trust, as long as the banks signed up to the trust agree with the arrangement. This saves housing associations time and legal fees.

Revolving facility

loan or part of a loan that can borrowed, repaid and borrowed again. The borrower will pay charges for having this facility, but it is usually cheaper than repaying a loan and taking out a new one.

Revolving facilities are popular with RSLs selling shared-ownership properties.

This is because the loan can be repaid when residents buy parts of their homes but money can be drawn down again quickly if a development opportunity arises that the RSL must act fast to secure.

VAT shelter

Many stock transfer associations have VAT shelters – tax structures that mean the registered social landlord doesn’t have to pay VAT on repairs needed to bring homes up to the decency standard after transfer.

VAT shelters were supposed to put transfer housing associations on an equal footing for VAT on repairs with the councils from which they received stock.

They were designed in 2002 by accountant KPMG in consultation with the ODPM and Customs & Excise. Often, transfer associations share the VAT savings with the council that formerly owned the homes. The RSL usually spends the cash on home improvements.

Gearing

Gearing is a measure of the proportion of an RSL’s assets that are borrowed – and therefore have to be repaid – rather than reserves or grant that will not have to be repaid.

In theory, the higher the proportion of loans, the higher the risk to the RSL. But if the association has strong cashflows that it could use to repay the loan, the risk is reduced.

A common calculation for gearing in housing associations is:

loans
(reserves + social housing grant)

Interest cover

This is a measure of an RSL’s ability to repay the interest on its borrowing. A common measure for interest cover is:

(operating surplus + interest receivable)
interest payable

Some finance directors exclude sales from the operating surplus because they can vary widely from year to year.

It is also sometimes expressed as surplus before interest and tax as a percentage of gross interest paid. The result for this should not be less than 100%: interest payments should not exceed surpluses.