Discover what various financial terms mean, from Sub-prime Mortgages to Surpluses.
Sub-prime mortgages
Sellers of sub-prime mortgages and other loans target borrowers with poor credit records who are often unable to obtain more conventional loans. When signing up for a sub-prime mortgage, borrowers put down little or no cash themselves. These mortgages offer very low 'teaser' rates initially, which then rise steeply – a fact that's buried in the small print – and which many borrowers find difficult, if not impossible, to continue to pay.
The explosion in sub-prime mortgages in the US was at first seen as a positive development, as they allowed the poor to buy homes. But as interest rates rose and people couldn't keep up with their payments, repossessions increased. In the meantime, the banks that made the loans had repackaged them and sold them on to other financial institutions. In this game of 'pass the parcel', many institutions have found themselves holding assets of little or of no value.
Surplus and deficit
These terms are usually associated with government budgets. When a government has a budget surplus, it has taken in more in revenues than it has spent: the US had a surplus of $350 billion when Bill Clinton left office in 2000.
A budget deficit is the opposite – the government has spent more than it has taken in. The red ink grew under George W Bush as he cut taxes and increased defence spending due to the wars in Iraq and Afghanistan. As a result, the US recorded its biggest-ever budget deficit – $413 billion – in 2004.
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