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                                                                     Exhibit 4.1
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Draft: 25/02/03

THIS AGREEMENT is dated [6th March], 2003

BETWEEN:

(1)      PERMANENT FUNDING (NO. 1) LIMITED (registered in England and Wales No.
         4267660) whose registered office is at Blackwell House, Guildhall Yard,
         London EC2V 5AE ("FUNDING 1");

(2)      PERMANENT FINANCING (NO. 2) PLC (registered in England and Wales No.
         4623188) whose registered office is at Blackwell House, Guildhall Yard,
         London EC2V 5AE (the "SECOND ISSUER");

(3)      U.S. BANK NATIONAL ASSOCIATION, a national banking association formed
         under the laws of the United States of America, acting through its
         office at 1 Federal Street, 3rd Floor, Boston, Massachusetts 02110,
         acting in its capacity as Security Trustee; and

(4)      CITIBANK, N.A., LONDON BRANCH, whose offices are at 5 Carmelite Street,
         London EC4Y 0PA, acting in its capacity as Agent Bank.

IT IS AGREED as follows:

1.       INTERPRETATION

1.1      The Amended and Restated Master Definitions and Construction Schedule
         signed for the purposes of identification by Allen & Overy and Sidley
         Austin Brown & Wood on [5th March], 2003 (as the same may be amended,
         varied or supplemented from time to time with the consent of the
         parties hereto) and the Second Issuer Master Definitions and
         Construction Schedule signed for the purposes of identification by
         Allen & Overy and Sidley Austin Brown & Wood on [5th March], 2003 are
         expressly and specifically incorporated into this Agreement and,
         accordingly, the expressions defined in the Amended and Restated Master
         Definitions and Construction Schedule and/or the Second Issuer Master
         Definitions and Construction Schedule (as so amended, varied or
         supplemented) shall, except where the context otherwise requires and
         save where otherwise defined herein, have the same meanings in this
         Agreement, including the Recitals hereto and this Agreement shall be
         construed in accordance with the interpretation provisions set out in
         CLAUSE 2 of the Amended and Restated Master Definitions and
         Construction Schedule and the Second Issuer Master Definitions and
         Construction Schedule. In the event of a conflict between the Amended
         and Restated Master Definitions and Construction Schedule and the
         Second Issuer Master Definitions and Construction Schedule, the Second
         Issuer Master Definitions and Construction Schedule shall prevail.

1.2      Unless the context otherwise requires, references in the Intercompany
         Loan Terms and Conditions to:

         "CLOSING DATE" means [6th March], 2003;

         "INTERCOMPANY LOAN" means the Second Issuer Intercompany Loan;

         "INTERCOMPANY LOAN AGREEMENT" means the Second Issuer Intercompany Loan
         Agreement;

         "INTERCOMPANY LOAN CONFIRMATION" means the Second Issuer Intercompany
         Loan Confirmation;


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         "ISSUER" means the Second Issuer;

         "ISSUER TRANSACTION ACCOUNT" means the Second Issuer Sterling Account;

         "NEW BASEL CAPITAL ACCORD" means the new or revised capital accord as
         described in the consultative document "The New Basel Capital Accord"
         published by the Basel Committee on Banking Supervision in January
         2001;

         "NOTES" means the Second Issuer Notes; and

         "SECOND ISSUER TERM ADVANCES" has the meaning given in the Second
         Issuer Master Definitions and Construction Schedule.

2.       INTERCOMPANY LOAN TERMS AND CONDITIONS

         Each of the parties to this Agreement agree that the Intercompany Loan
         Terms and Conditions signed by Funding 1, the Security Trustee and the
         Agent Bank for the purposes of identification on 14th June, 2002, and
         the provisions set out therein shall form part of this Agreement and
         shall be binding on the parties to this Agreement as if they had
         expressly been set out herein. References in this Agreement to "THIS
         AGREEMENT" shall be construed accordingly.

3.       THE SECOND ISSUER TERM ADVANCES

3.1      SECOND ISSUER TERM AAA ADVANCES

         On and subject to the terms of this Agreement, the Second Issuer grants
         to Funding 1 a term loan which consists of the following sub-loans:

         (a)      the series 1 term AAA advance in the maximum aggregate
                  principal amount of Pound Sterling[607,976,654] (the "SECOND
                  ISSUER SERIES 1 TERM AAA ADVANCE") and which corresponds to
                  the sterling equivalent of the principal amount upon issue of
                  the Series 1 Class A Second Issuer Notes;

         (b)      the series 2 term AAA advance in the maximum aggregate
                  principal amount of Pound Sterling[759,970,817] (the "SECOND
                  ISSUER SERIES 2 TERM AAA ADVANCE") and which corresponds to
                  the sterling equivalent of the principal amount upon issue of
                  the Series 2 Class A Second Issuer Notes;

         (c)      the series 3 term AAA advance in the maximum aggregate
                  principal amount of Pound Sterling[816,139,984] (the "SECOND
                  ISSUER SERIES 3 TERM AAA ADVANCE") and which corresponds to
                  the sterling equivalent of the principal amount upon issue of
                  the Series 3 Class A Second Issuer Notes;

         (d)      the series 4 term AAA advance in the maximum aggregate
                  principal amount of Pound Sterling[759,970,817] ("THE SECOND
                  ISSUER SERIES 4 TERM AAA ADVANCE") and which corresponds to
                  the sterling equivalent of the principal amount upon issue of
                  the Series 4 Class A Second Issuer Notes, and

         (e)      the series 5 term AAA advance in the maximum aggregate
                  principal amount of Pound Sterling[1,000,000,000] (the "SECOND
                  ISSUER SERIES 5 TERM AAA ADVANCE") and which corresponds to
                  the principal amount upon issue of the Series 5 Class A Second
                  Issuer Notes,


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         and together the Second Issuer Series 1 Term AAA Advance, the Second
         Issuer Series 2 Term AAA Advance, the Second Issuer Series 3 Term AAA
         Advance, the Second Issuer Series 4 Term AAA Advance and the Second
         Issuer Series 5 Term AAA Advance are referred to herein as the "SECOND
         ISSUER TERM AAA ADVANCES".

3.2      SECOND ISSUER TERM AA ADVANCES

         On and subject to the terms of this Agreement, the Second Issuer grants
         to Funding 1 a term loan which consists of the following sub-loans:

         (a)      the series 1 term AA advance in the maximum aggregate
                  principal amount of Pound Sterling[20,671,206] (the "SECOND
                  ISSUER SERIES 1 TERM AA ADVANCE") and which corresponds to the
                  sterling equivalent of the principal amount upon issue of the
                  Series 1 Class B Second Issuer Notes;

         (b)      the series 2 term AA advance in the maximum aggregate
                  principal amount of Pound Sterling[26,142,996] (the "SECOND
                  ISSUER SERIES 2 TERM AA ADVANCE") and which corresponds to the
                  sterling equivalent of the principal amount upon issue of the
                  Series 2 Class B Second Issuer Notes;

         (c)      the series 3 term AA advance in the maximum aggregate
                  principal amount of Pound Sterling[28,728,127] (the "SECOND
                  ISSUER SERIES 3 TERM AA ADVANCE") and which corresponds to the
                  sterling equivalent of the principal amount upon issue of the
                  Series 3 Class B Second Issuer Notes,

         (d)      the series 4 term AA advance in the maximum aggregate
                  principal amount of Pound Sterling[26,116,480] (the "SECOND
                  ISSUER SERIES 4 TERM AA ADVANCE") and which corresponds to the
                  sterling equivalent of the principal amount upon issue of the
                  Series 4 Class B Second Issuer Notes; and

         (e)      the series 5 term AA advance in the maximum aggregate
                  principal amount of Pound Sterling[35,000,000] (the "SECOND
                  ISSUER SERIES 5 TERM AA ADVANCE") and which corresponds to the
                  principal amount upon issue of the Series 5 Class B Second
                  Issuer Notes,

         and together the Second Issuer Series 1 Term AA Advance, the Second
         Issuer Series 2 Term AA Advance, the Second Issuer Series 3 Term AA
         Advance, the Second Issuer Series 4 Term AA Advance and the Second
         Issuer Series 5 Term AA Advance are referred to herein as the "SECOND
         ISSUER TERM AA ADVANCES".

3.3      SECOND ISSUER TERM BBB ADVANCES

         On and subject to the terms of this Agreement, the Second Issuer grants
         to Funding 1 a term loan which consists of the following sub-loans:

         (a)      the series 1 term BBB advance in the maximum aggregate
                  principal amount of Pound Sterling[20,671,206] (the "SECOND
                  ISSUER SERIES 1 TERM BBB ADVANCE") and which corresponds to
                  the sterling equivalent of the principal amount upon issue of
                  the Series 1 Class C Second Issuer Notes;

         (b)      the series 2 term BBB advance in the maximum aggregate
                  principal amount of Pound Sterling[26,142,996] (the "SECOND
                  ISSUER SERIES 2 TERM BBB ADVANCE") and which

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                  corresponds to the sterling equivalent of the principal amount
                  upon issue of the Series 2 Class C Second Issuer Notes;

         (c)      the series 3 term BBB advance in the maximum aggregate
                  principal amount of Pound Sterling[28,728,127] (the "SECOND
                  ISSUER SERIES 3 TERM BBB ADVANCE") and which corresponds to
                  the sterling equivalent of the principal amount upon issue of
                  the Series 3 Class C Second Issuer Notes; and

         (d)      the series 4 term BBB advance in the maximum aggregate
                  principal amount of [26,116,480] (the "SECOND ISSUER SERIES 4
                  TERM BBB ADVANCE") and which corresponds to the sterling
                  equivalent of the principal amount upon issue of the Series 4
                  Class C Second Issuer Notes,

         (e)      the series 5 term BBB advance in the maximum aggregate
                  principal amount of Pound Sterling35,000,000 (the "SECOND
                  ISSUER SERIES 5 TERM BBB ADVANCE") and which corresponds to
                  the principal amount upon issue of the Series 5 Class C Second
                  Issuer Notes,

         and together the Second Issuer Series 1 Term BBB Advance, the Second
         Issuer Series 2 Term BBB Advance, the Second Issuer Series 3 Term BBB
         Advance and the Second Issuer Series 4 Term BBB Advance and the Second
         Issuer Series 5 Term BBB Advance are referred to herein as the "SECOND
         ISSUER TERM BBB ADVANCES".


3.4      TERM ADVANCE RATING

         The Term Advance Rating in respect of the Second Issuer Term AAA
         Advances shall be AAA/Aaa/AAA, the Term Advance Rating in respect of
         the Second Issuer Term AA Advances shall be AA/Aa3/AA and the Term
         Advance Rating in respect of the Second Issuer Term BBB Advances shall
         be BBB/Baa2/BBB.

3.5      CONDITIONS PRECEDENT

         Save as the Second Issuer and the Security Trustee may otherwise agree,
         the Second Issuer Term Advances will not be available for utilisation
         unless the Security Trustee has confirmed to Funding 1 that it or its
         advisers have received all the information and documents listed in
         SCHEDULE 1 hereof in form and substance satisfactory to the Security
         Trustee.

4.       INTEREST

4.1      RATE OF INTEREST TO FIRST FUNDING 1 INTEREST PAYMENT DATE

         On the Closing Date the Agent Bank will determine the "INITIAL RELEVANT
         SCREEN RATE" (as defined below) in respect of each Second Issuer Term
         Advance as at or about 11.00 a.m. (London time) on that date. If the
         Initial Relevant Screen Rate is unavailable, the Agent Bank will
         request the principal London office of each of the Reference Banks to
         provide the Agent Bank with its offered quotations to leading banks for
         two-month and three-month sterling deposits of Pound
         Sterling10,000,000, in the London inter-bank market as at or about
         11.00 a.m. (London time) on such Closing Date. The Term Advance Rates
         of Interest for the first Interest Period shall be the aggregate of (1)
         the Relevant Margin and (2) the Initial Relevant Screen Rate or, if the
         Initial Relevant Screen Rate is unavailable, the linear interpolation
         of the arithmetic mean of such offered quotations for two-month
         sterling deposits and the arithmetic mean of

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         such offered quotations for three-month sterling deposits (rounded
         upwards, if necessary, to five decimal places).

         "INITIAL RELEVANT SCREEN RATE" means the linear interpolation of the
         arithmetic mean of the offered quotations to leading banks for
         two-month sterling deposits and the arithmetic mean of the offered
         quotations to leading banks for three-month sterling deposits (rounded
         upwards if necessary to five decimal places) displayed on the Moneyline
         Telerate monitor at Moneyline Telerate page number 3750 (or such
         replacement page on that service which displays the information) or, if
         that service ceases to display the information, such other service as
         may be determined by the Second Issuer with the approval of the
         Security Trustee.

4.2      TERM ADVANCE RATES OF INTEREST(1)

         The Term Advance Rate of Interest payable on each Term Advance shall be
         LIBOR for three-month sterling deposits as determined in accordance
         with CLAUSE 6 of the Intercompany Loan Terms and Conditions plus a
         "RELEVANT MARGIN" which shall be:

         (a)      in respect of the Second Issuer Series 1 Term AAA Advance, a
                  margin of [o] per cent. per annum;

         (b)      in respect of the Second Issuer Series 2 Term AAA Advance, a
                  margin of [o] per cent. per annum;

         (c)      in respect of the Second Issuer Series 3 Term AAA Advance, a
                  margin of [o] per cent. per annum up to an including the
                  Interest Period ending in December 2008 and thereafter [o] per
                  cent. per annum;

         (d)      in respect of the Second Issuer Series 4 Term AAA Advance, a
                  margin of [o] per cent. per annum;

         (e)      in respect of the Second Issuer Series 5 Term AAA Advance, a
                  margin of [o] per cent. per annum up to and including the
                  Interest Period ending in December 2008 and thereafter [o] per
                  cent. per annum;

         (f)      in respect of the Second Issuer Series 1 Term AA Advance, a
                  margin of [o] per cent. per annum up to and including the
                  Interest Period ending in December 2008 and thereafter [o] per
                  annum;

         (g)      in respect of the Second Issuer Series 2 Term AA Advance, a
                  margin of [o] per cent. per annum up to and including the
                  Interest Period ending in December 2008 and thereafter [o] per
                  cent. per annum;

         (h)      in respect of the Second Issuer Series 3 Term AA Advance, a
                  margin of [o] per cent. per annum up to and including the
                  Interest Period ending in December 2008 and thereafter [o] per
                  cent. per annum;

         (i)      in respect of the Second Issuer Series 4 Term AA Advance, a
                  margin of [o] per cent. per annum up to and including the
                  Interest Period ending in December 2008 and thereafter [o] per
                  cent. per annum;


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         (j)      in respect of the Second Issuer Series 5 Term AA Advance, a
                  margin of [o] per cent. per annum up to and including the
                  Interest Period ending in December 2008 and thereafter [o] per
                  cent. per annum;

         (k)      in respect of the Second Issuer Series 1 Term BBB Advance, a
                  margin of [o] per cent. per annum up to and including the
                  Interest Period ending in December 2008 and thereafter [o] per
                  cent. per annum;

         (l)      in respect of the Second Issuer Series 2 Term BBB Advance, a
                  margin of [o] per cent. per annum up to and including the
                  Interest Period ending in December 2008 and thereafter [o] per
                  cent. per annum;

         (m)      in respect of the Second Issuer Series 3 Term BBB Advance, a
                  margin of [o] per cent. per annum up to and including the
                  Interest Period ending in December 2008 and thereafter [o] per
                  cent. per annum;

         (n)      in respect of the Second Issuer Series 4 Term BBB Advance, a
                  margin of [o] per cent. per annum up to and including the
                  Interest Period ending in December 2008 and thereafter [o] per
                  cent. per annum; and

         (o)      in respect of the Second Issuer Series 5 Term BBB Advance, a
                  margin of [o] per cent. per annum up to (and including) the
                  Interest Period ending in December 2008 and thereafter [o] per
                  cent. per annum;

4.3      INTEREST PERIODS

         The first Interest Period shall commence on (and include) the Closing
         Date and end on (but exclude) the Funding 1 Interest Payment Date
         falling in June 2003. Each subsequent Interest Period shall commence on
         (and include) a Funding 1 Interest Payment Date and end on (but
         exclude) the following Funding 1 Interest Payment Date.

5.       REPAYMENT

5.1      REPAYMENT SUBJECT TO TERMS OF THE FUNDING 1 DEED OF CHARGE

         The terms and provisions of this CLAUSE 5 are to be read subject to the
         provisions of PART II of SCHEDULE 3 to the Funding 1 Deed of Charge and
         as the same may be further amended or varied from time to time in
         accordance with the terms of the Funding 1 Deed of Charge. Without
         limiting the generality of the foregoing, the Second Issuer Term
         Advances shall become due and payable as described in PARAGRAPH 1 of
         PART II of SCHEDULE 3 of the Funding 1 Deed of Charge.

5.2      REPAYMENT OF SECOND ISSUER TERM AAA ADVANCES PRIOR TO THE OCCURRENCE OF
         A TRIGGER EVENT AND PRIOR TO THE SERVICE ON FUNDING 1 OF AN
         INTERCOMPANY LOAN ACCELERATION NOTICE OR THE SERVICE ON EACH ISSUER OF
         A NOTE ACCELERATION NOTICE

         Subject to the provisions of CLAUSES 1 and 2 of PART II of SCHEDULE 3
         of the Funding 1 Deed of Charge, prior to the occurrence of a Trigger
         Event and prior to the service on Funding 1 of an Intercompany Loan
         Acceleration Notice or the service on each Issuer of a Note
         Acceleration Notice, Funding 1 shall repay to the Second Issuer:

         (a)      the Second Issuer Series 1 Term AAA Advance on the Funding 1
                  Interest Payment Date falling in March 2004;


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         (b)      the Second Issuer Series 2 Term AAA Advance on the Funding 1
                  Interest Payment Date falling in September 2005 but if there
                  are insufficient funds available to repay the Second Issuer
                  Series 2 Term AAA Advance on such Funding 1 Interest Payment
                  Date, then the shortfall shall be repaid on subsequent Funding
                  1 Interest Payment Dates from Funding 1 Available Principal
                  Receipts until the Second Issuer Series 2 Term AAA Advance is
                  fully repaid;

         (c)      the Second Issuer Series 3 Term AAA Advance in two equal
                  instalments (each a "SCHEDULED AMORTISATION INSTALMENT") on
                  the Funding 1 Interest Payment Date falling in March 2006 and
                  June 2006 but if there are insufficient funds available to
                  repay the Scheduled Amortisation Instalments on such Funding 1
                  Interest Payment Dates, then the shortfall shall be repaid on
                  on subsequent Funding 1 Interest Payment Dates from Funding 1
                  Available Principal Receipts until the Second Issuer Series 3
                  Term AAA Advance is fully repaid;

         (d)      the Second Issuer Series 4 Term AAA Advance on the Funding 1
                  Interest Payment Date falling in December 2007 but if there
                  are insufficient funds available to repay the Second Issuer
                  Series 4 Term AAA Advance on such Funding 1 Interest Payment
                  Date, then the shortfall shall be repaid on subsequent Funding
                  1 Interest Payment Dates from Funding 1 Available Principal
                  Receipts until the Second Issuer Series 4 Term AAA Advance is
                  fully repaid; and

         (e)      on each Funding 1 Interest Payment Date falling on or after
                  the Funding 1 Interest Payment Date on which the Second Issuer
                  Series 4 Term AAA Advance is fully repaid, the Second Issuer
                  Series 5 Term AAA Advance to the extent of Funding 1 Available
                  Principal Receipts until the Second Issuer Series 5 Term AAA
                  Advance is fully repaid.

5.3      REPAYMENT OF SECOND ISSUER TERM AA ADVANCES PRIOR TO THE OCCURRENCE OF
         A TRIGGER EVENT AND PRIOR TO THE SERVICE ON FUNDING 1 OF AN
         INTERCOMPANY LOAN ACCELERATION NOTICE OR THE SERVICE ON EACH ISSUER OF
         A NOTE ACCELERATION NOTICE

         Subject to the provisions of CLAUSES 1 and 2 of PART II of SCHEDULE 3
         of the Funding 1 Deed of Charge, prior to the occurrence of a Trigger
         Event and prior to the service on Funding 1 of an Intercompany Loan
         Acceleration Notice or the service on each Issuer of a Note
         Acceleration Notice, Funding 1 shall repay to the Second Issuer:

         (a)      on each Funding 1 Interest Payment Date falling on or after
                  the Funding 1 Interest Payment Date on which the Second Issuer
                  Series 1 Term AAA Advance is fully repaid, the Second Issuer
                  Series 1 Term AA Advance to the extent of Funding 1 Available
                  Principal Receipts until the Second Issuer Series 1 Term AA
                  Advance is fully repaid;

         (b)      on each Funding 1 Interest Payment Date falling on or after
                  the Funding 1 Interest Payment Date on which the Second Issuer
                  Series 2 Term AAA Advance is fully repaid, the Second Issuer
                  Series 2 Term AA Advance to the extent of Funding 1 Available
                  Principal Receipts until the Second Issuer Series 2 Term AA
                  Advance is fully repaid;

         (c)      on each Funding 1 Interest Payment Date falling on or after
                  the Funding 1 Interest Payment Date on which the Second Issuer
                  Series 3 Term AAA Advance is fully repaid, the Second Issuer
                  Series 3 Term AA Advance to the extent of Funding 1

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                  Available Principal Receipts until the Second Issuer Series 3
                  Term AA Advance is fully repaid;

         (d)      on each Funding 1 Interest Payment Date falling on or after
                  the Funding 1 Interest Payment Date on which the Second Issuer
                  Series 4 Term AAA Advance is fully repaid, the Second Issuer
                  Series 4 Term AA Advance to the extent of Funding 1 Available
                  Principal Receipts until the Second Issuer Series 4 Term AA
                  Advance is fully repaid; and

         (e)      on each Funding 1 Interest Payment Date falling on or after
                  the Funding 1 Interest Payment Date on which the Second Issuer
                  Series 5 Term AAA Advance is fully repaid, the Second Issuer
                  Series 5 Term AA Advance to the extent of Funding 1 Available
                  Principal Receipts therefor until the Second Issuer Series 5
                  Term AA Advance is fully repaid.

5.4      REPAYMENT OF SECOND ISSUER TERM BBB ADVANCES PRIOR TO THE OCCURRENCE OF
         A TRIGGER EVENT AND PRIOR TO THE SERVICE ON FUNDING 1 OF AN
         INTERCOMPANY LOAN ACCELERATION NOTICE OR THE SERVICE ON EACH ISSUER OF
         A NOTE ACCELERATION NOTICE

         Subject to the provisions of CLAUSES 1 and 2 of PART II of SCHEDULE 3
         of the Funding 1 Deed of Charge, prior to the occurrence of a Trigger
         Event and prior to the service on Funding 1 of an Intercompany Loan
         Acceleration Notice or the service on each Issuer of a Note
         Acceleration Notice, Funding 1 shall repay to the Second Issuer:

         (a)      on each Funding 1 Interest Payment Date falling on or after
                  the Funding 1 Interest Payment Date on which the Second Issuer
                  Series 1 Term AA Advance is fully repaid, the Second Issuer
                  Series 1 Term BBB Advance to the extent of Funding 1 Available
                  Principal Receipts until the Second Issuer Series 1 Term BBB
                  Advance is fully repaid;

         (b)      on each Funding 1 Interest Payment Date falling on or after
                  the Funding 1 Interest Payment Date on which the Second Issuer
                  Series 2 Term AA Advance is fully repaid, the Second Issuer
                  Series 2 Term BBB Advance to the extent of Funding 1 Available
                  Principal Receipts until the Second Issuer Series 2 Term BBB
                  Advance is fully repaid;

         (c)      on each Funding 1 Interest Payment Date falling on or after
                  the Funding 1 Interest Payment Date on which the Second Issuer
                  Series 3 Term AA Advance is fully repaid, the Second Issuer
                  Series 3 Term BBB Advance to the extent of Funding 1 Available
                  Principal Receipts until the Second Issuer Series 3 Term BBB
                  Advance is fully repaid;

         (d)      on each Funding 1 Interest Payment Date falling on or after
                  the Funding 1 Interest Payment Date on which the Second Issuer
                  Series 4 Term AA Advance is fully repaid, the Second Issuer
                  Series 4 Term BBB Advance to the extent of Funding 1 Available
                  Principal Receipts until the Second Issuer Series 4 Term BBB
                  Advance is fully repaid; and

         (e)      on each Funding 1 Interest Payment Date falling on or after
                  the Funding 1 Interest Payment Date on which the Second Issuer
                  Series 5 Term AA Advance is fully repaid, the Second Issuer
                  Series 5 Term BBB Advance to the extent of Funding 1 Available
                  Principal Receipts therefor until the Second Issuer Series 5
                  Term BBB Advance is fully repaid.


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                                       9


5.5      REPAYMENT OF SECOND ISSUER TERM ADVANCES FOLLOWING THE OCCURRENCE OF A
         NON-ASSET TRIGGER EVENT BUT PRIOR TO THE SERVICE ON FUNDING 1 OF AN
         INTERCOMPANY LOAN ACCELERATION NOTICE OR THE SERVICE ON EACH ISSUER OF
         A NOTE ACCELERATION NOTICE

         On and from the Funding 1 Interest Payment Date following the
         occurrence of a Non-Asset Trigger Event but prior to the service on
         Funding 1 of an Intercompany Loan Acceleration Notice or the service on
         each Issuer of a Note Acceleration Notice, Funding 1 shall repay the
         Second Issuer Term Advances on each Funding 1 Interest Payment Date
         from Funding 1 Available Principal Receipts in the manner set out in
         CLAUSE 3 of PART II of SCHEDULE 3 to the Funding 1 Deed of Charge.

5.6      REPAYMENT OF SECOND ISSUER TERM ADVANCES FOLLOWING THE OCCURRENCE OF AN
         ASSET TRIGGER EVENT BUT PRIOR TO THE SERVICE ON FUNDING 1 OF AN
         INTERCOMPANY LOAN ACCELERATION NOTICE OR THE SERVICE ON EACH ISSUER OF
         A NOTE ACCELERATION NOTICE

         Following the occurrence of an Asset Trigger Event but prior to the
         service on Funding 1 of an Intercompany Loan Acceleration Notice or the
         service on each Issuer of a Note Acceleration Notice, Funding 1 shall
         repay the Second Issuer Term Advances on each Funding 1 Interest
         Payment Date from Funding 1 Available Principal Receipts in the manner
         set out in CLAUSE 4 of PART II of SCHEDULE 3 to the Funding 1 Deed of
         Charge.

5.7      REPAYMENT OF SECOND ISSUER TERM ADVANCES FOLLOWING THE SERVICE ON EACH
         ISSUER OF A NOTE ACCELERATION NOTICE BUT PRIOR TO THE SERVICE ON
         FUNDING 1 OF AN INTERCOMPANY LOAN ACCELERATION NOTICE

         Following the service on each Issuer (including the Second Issuer) of a
         Note Acceleration Notice pursuant to the terms of the Second Issuer
         Deed of Charge but prior to the service on Funding 1 of an Intercompany
         Loan Acceleration Notice, Funding 1 shall apply Funding 1 Available
         Principal Receipts in the manner set out in CLAUSE 5 of PART II of
         SCHEDULE 3 to the Funding 1 Deed of Charge.

5.8      REPAYMENT FOLLOWING THE SERVICE ON FUNDING 1 OF AN INTERCOMPANY LOAN
         ACCELERATION NOTICE

         Following the service on Funding 1 of an Intercompany Loan Acceleration
         Notice pursuant to the terms of the Funding 1 Deed of Charge, the
         Second Issuer Intercompany Loan shall be repaid in the manner set out
         in PART III of SCHEDULE 3 to the Funding 1 Deed of Charge (as the same
         shall be amended from time to time).

5.9      ACKNOWLEDGEMENT OF FIRST ISSUER INTERCOMPANY LOAN

         The Second Issuer hereby acknowledges and agrees that Funding 1 has
         entered into an intercompany loan agreement with Permanent Financing
         (No. 1) PLC (the "FIRST ISSUER") dated 14th June, 2002 (the "FIRST
         ISSUER INTERCOMPANY LOAN AGREEMENT") and accordingly, the obligation of
         Funding 1 to repay this Second Issuer Intercompany Loan and the First
         Issuer Intercompany Loan will depend on the Term Advance Ratings of the
         various Term Advances made to Funding 1 under this Second Issuer
         Intercompany Loan Agreement and the First Issuer Intercompany Loan
         Agreement and the provisions of SCHEDULE 3 to the Funding 1 Deed of
         Charge.


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                                       10


5.10     ACKNOWLEDGEMENT OF NEW INTERCOMPANY LOANS

         The Second Issuer hereby acknowledges and agrees that from time to time
         Funding 1 may enter into New Intercompany Loans with New Issuers and
         that the obligation of Funding 1 to repay this Second Issuer
         Intercompany Loan and any New Intercompany Loan will depend on the Term
         Advance Rating of the individual Term Advances made to Funding 1 under
         any of the First Issuer Intercompany Loan, this Second Issuer
         Intercompany Loan any New Intercompany Loans and the provisions of
         SCHEDULE 3 to the Funding 1 Deed of Charge. Subject to CLAUSE 25 of the
         Funding 1 Deed of Charge (Supplemental Provisions Regarding the
         Security Trustee), any amendments to this Agreement will be made only
         with the prior written consent of each party to this Agreement.

6.       PREPAYMENT

6.1      PREPAYMENT OF SECOND ISSUER TERM ADVANCES

         If the New Basel Capital Accord has been implemented in the United
         Kingdom, whether by rule of law, recommendation of best practices or by
         any other regulation and PROVIDED THAT a Second Issuer Note
         Acceleration Notice has not been served, then Funding 1 may, on any
         Funding 1 Interest Payment Date on or after the Funding 1 Interest
         Payment Date falling in December 2007, having given not more than 60
         days and not less than 30 days' [(or such shorter period as may be
         agreed with the Second Issuer and the Security Trustee)] prior written
         notice to the Second Issuer and the Security Trustee, prepay all but
         not some only of all of the Second Issuer Term Advances without penalty
         or premium but subject to CLAUSE 15 (Default interest and indemnity) of
         the Intercompany Loan Terms and Conditions.

6.2      APPLICATION OF MONIES

         The Second Issuer hereby agrees to apply any amounts received by way of
         prepayment pursuant to CLAUSE 6.1 (Prepayment of Second Issuer Term
         Advances) in making prepayments under the Second Issuer Notes.

7.       CERTAIN FEES, ETC.

7.1      FEE FOR PROVISION OF SECOND ISSUER TERM ADVANCES

         Funding 1 shall (except in the case of payments due under paragraphs
         (c), (e), (f) and (i) below, which shall be paid when due) on each
         Funding 1 Interest Payment Date pay to the Second Issuer for same day
         value to the Second Issuer Transaction Account a fee for the provision
         of the Second Issuer Term Advances. Such fee shall be an amount or
         amounts in the aggregate equal to the following:

         (a)      the fees, costs, charges, liabilities and expenses and any
                  other amounts due and payable to the Security Trustee pursuant
                  to the Second Issuer Deed of Charge together with interest
                  thereon as provided therein;

         (b)      the fees, costs, charges, liabilities and expenses and any
                  other amounts due and payable to the Note Trustee pursuant to
                  the Second Issuer Trust Deed together with interest thereon as
                  provided therein;

         (c)      the reasonable fees and expenses of any legal advisers,
                  accountants and auditors appointed by the Second Issuer and
                  properly incurred in their performance of their functions
                  under the Transaction Documents which have fallen due;


<PAGE>
                                       11


         (d)      the fees, costs and expenses due and payable to the Paying
                  Agents, the Registrar, the Transfer Agent and the Agent Bank
                  pursuant to the Second Issuer Paying Agent and Agent Bank
                  Agreement;

         (e)      any amounts due and payable by the Second Issuer to the Inland
                  Revenue in respect of the Second Issuer's liability to United
                  Kingdom corporation tax (insofar as payment is not satisfied
                  by the surrender of group relief or out of the profits, income
                  or gains of the Second Issuer and subject to the terms of the
                  Second Issuer Deed of Charge) or any other Taxes payable by
                  the Second Issuer;

         (f)      the fees, costs, charges, liabilities and expenses due and
                  payable to the Second Issuer Account Bank, pursuant to the
                  Second Issuer Bank Account Agreement (if any);

         (g)      the fees, costs, charges, liabilities and expenses due and
                  payable to the Second Issuer Cash Manager, pursuant to the
                  Second Issuer Cash Management Agreement;

         (h)      any termination payment due and payable by the Second Issuer
                  to any Second Issuer Swap Provider, pursuant to any Second
                  Issuer Swap Agreement;

         (i)      the fees, costs, charges and liabilities and expenses due and
                  payable to the Corporate Services Provider pursuant to the
                  Second Issuer Corporate Services Agreement;

         (j)      an amount equal to "G" where G is calculated as follows:

                  G = (A - D - H) or, if such calculation is less than zero,
                  then G shall be zero

                  where,

                  A        = 0.01 per cent of the interest amounts paid by
                           Funding 1 to the Second Issuer on the Second Issuer
                           Term Advances on the immediately preceding Funding 1
                           Interest Payment Date;

                  D =      E - F

                          where,

                          E         = the interest amounts (which excludes those
                                    fee amounts in this CLAUSE 7.1) paid by
                                    Funding 1 to the Second Issuer on the Second
                                    Issuer Term Advances on the immediately
                                    preceding Funding 1 Interest Payment Date;
                                    and

                          F         = amounts paid by the Second Issuer under
                                    paragraphs (d) to (h) of the Second Issuer
                                    Pre-Enforcement Revenue Priority of Payments
                                    on the immediately preceding Funding 1
                                    Interest Payment Date;

                                    and

                  H       = the cumulative aggregate of (D - A) as calculated on
                          each previous Funding 1 Interest Payment Date. If such
                          cumulative aggregate of (D - A) is less than zero,
                          then H shall be zero;


<PAGE>
                                       12


         (k)      any other amounts due or overdue by the Second Issuer to third
                  parties including the Rating Agencies and the amounts paid by
                  the Second Issuer under the Subscription Agreement and the
                  Underwriting Agreement (excluding, for these purposes, the
                  Noteholders) other than amounts specified in paragraphs (a) to
                  (j) above; and

         (l)      if on any Funding 1 Interest Payment Date there are Second
                  Issuer Principal Receipts remaining in the Second Issuer Bank
                  Accounts, an amount equal to the difference between (i) the
                  interest that would be earned by the Second Issuer on such
                  Second Issuer Principal Receipts remaining in the Second
                  Issuer Bank Accounts during the next succeeding Interest
                  Period and (ii) the interest that would be payable by the
                  Second Issuer applying the weighted average rate of interest
                  payable on the Series 5 Second Issuer Notes or the relevant
                  Second Issuer Currency Swap Agreements due for repayment at
                  the end of that Interest Period to such Second Issuer
                  Principal Receipts remaining in the Second Issuer Bank
                  Accounts,

         together with, (i) in respect of taxable supplies made to the Second
         Issuer, an amount in respect of any value added tax or similar tax
         payable in respect thereof against production of a valid tax invoice;
         and (ii) in respect of taxable supplies made to a person other than the
         Second Issuer, any amount in respect of any Irrecoverable VAT or
         similar tax payable in respect thereof (against production of a copy of
         the relevant tax invoice), and to be applied subject to and in
         accordance with the provisions of the Second Issuer Pre-Enforcement
         Revenue Priority of Payments in the Second Issuer Cash Management
         Agreement.

7.2      SET-OFF

         Funding 1 and each of the other parties to the Second Issuer
         Intercompany Loan Agreement agree that the Second Issuer shall be
         entitled to set-off those amounts due and payable by Funding 1 pursuant
         to this CLAUSE 7 on the Closing Date against the amount to be advanced
         by the Second Issuer to Funding 1 by way of the Second Issuer Term
         Advances on the Closing Date.

8.       APPLICATION OF CERTAIN PROVISIONS

         The provisions set out in CLAUSE 4.2 (Limited Recourse) of the
         Intercompany Loan Terms and Conditions shall apply to:

         (a)      the Second Issuer Term AA Advances; and

         (b)      the Second Issuer Term BBB Advances.

9.       ADDRESSES

         The addresses referred to in CLAUSE 18.4 of the Intercompany Loan Terms
         and Conditions are as follows:


<PAGE>
                                       13



         THE SECURITY TRUSTEE:

         For the attention of:      Corporate Trust Services
         Address:                   1 Federal Street
         `                          3rd Floor
                                    Boston
                                    Massachusetts 02110


         Facsimile:                 + 1 (617) 603 6638
         THE SECOND ISSUER:

         For the attention of:      The Secretary

         Address:                   Permanent Financing (No. 2) PLC

         Facsimile:                 +44 (0) 20 7556 0975

         Copy to:                   HBOS Treasury Services plc
                                    33 Old Broad Street
                                    London EC2N 1HZ

         Facsimile:                 +44 (0) 20 7574 8784

         For the attention of:      Head of Capital Markets and Securitisation

         FUNDING 1:

         For the attention of:      The Secretary

         Address:                   Permanent Funding (No. 1) Limited

         Facsimile:                 +44 (0) 20 7556 0975

         Copy to:                   HBOS Treasury Services plc
                                    33 Old Broad Street
                                    London EC2N 1HZ

         Facsimile number:          +44 (0) 20 7574 8784

         For the attention of:      Head of Capital Markets and Securitisation

         RATING AGENCIES:

        <TABLE>
        <CAPTION>
       <S>                          <C>
        MOODY'S:

        Address:                     2 Minster Court, Mincing Lane, London EC3R 7XB

        For the attention of:        Nicholas Lindstrom

        Telephone:                   +44 (0) 20 7772 5332

        Facsimile:                   +44 (0) 20 7772 5400
        </TABLE>


<PAGE>
                                       14

        <TABLE>
        <CAPTION>
       <S>                          <C>
        S&P:

        Address:                     Garden House, 18 Finsbury Circus, London EC2M 7NJ

        For the attention of:        Andre Vollmann

        Telephone:                   +44 (0) 20 7826 3855

        Facsimile:                   +44 (0) 20 7826 3598

        </TABLE>

        <TABLE>
        <CAPTION>
       <S>                          <C>
        FITCH:

        Address:                     Eldon House, 2 Eldon Street, London EC2M 7UA

        For the attention of:        European Structured Finance

        Telephone:                   +44 (0) 20 7417 4355

        Facsimile:                   +44 (0) 20 7417 6262

        </TABLE>



<PAGE>
                                       15



                                   SCHEDULE 1

                   CONDITIONS PRECEDENT IN RESPECT OF DRAWDOWN


1.       AUTHORISATIONS

(a)      A copy of the memorandum and articles of association, certificate of
         incorporation and certificate of incorporation on change of name of
         Funding 1.

(b)      A copy of a resolution of the board of directors of Funding 1
         authorising the entry into, execution and performance of each of the
         Transaction Documents to which Funding 1 is a party and authorising
         specified persons to execute those on its behalf.

(c)      A certificate of a director of Funding 1 certifying:

         (i)      that each document delivered under this PARAGRAPH 1 of
                  SCHEDULE 1 is correct, complete and in full force and effect
                  as at a date no later than the date of execution of the Second
                  Issuer Intercompany Loan Agreement and undertaking to notify
                  the Security Trustee if that position should change prior to
                  the first Drawdown Date; and

         (ii)     as to the identity and specimen signatures of the directors
                  and signatories of Funding 1.

2.       SECURITY

(a)      The Funding 1 Deed of Charge duly executed by the parties thereto.

(b)      Duly completed bank account mandates in respect of the Funding 1 GIC
         Account and the Funding 1 Transaction Account.

(c)      Security Power of Attorney for Funding 1.

3.       LEGAL OPINION

         Legal opinions of:

         (a)      Allen & Overy, English and U.S. legal advisers to the Seller,
                  the Second Issuer and the Servicer, addressed to, inter alios,
                  the Security Trustee;

         (b)      Sidley Austin Brown & Wood, English and U.S. legal advisers to
                  the Co-Arrangers, addressed to, inter alios, the Security
                  Trustee.

4.       TRANSACTION DOCUMENTS

         Duly executed copies of:

         (a)      the Servicing Agreement;

         (b)      the Mortgages Trust Deed;

         (c)      the Halifax Deed and Power of Attorney;


<PAGE>
                                       16


         (d)      the Funding 1 Deed of Charge;

         (e)      the Funding 1 Swap Agreement;

         (f)      the Corporate Services Agreements;

         (g)      the Funding 1 Liquidity Facility Agreement;

         (h)      the First Issuer Intercompany Loan Agreement and the Second
                  Issuer Intercompany Loan Agreement;

         (i)      the Cash Management Agreement;

         (j)      the Bank Account Agreement;

         (k)      the Funding 1 Guaranteed Investment Contract;

         (l)      the First Start-up Loan Agreement and Second Start-up Loan
                  Agreement;

         (m)      the Mortgage Sale Agreement;

         (n)      the Seller Power of Attorney;

         (o)      the Insurance Acknowledgements;

         (p)      the Insurance Endorsements;

         (q)      the Second Issuer Deed of Charge;

         (r)      the Second Issuer Cash Management Agreement;

         (s)      the Second Issuer Swap Agreements;

         (t)      the Second Issuer Bank Account Agreement;

         (u)      the Second Issuer Post-Enforcement Call Option Agreement;

         (v)      the Second Issuer Trust Deed;

         (w)      the Second Issuer Global Notes;

         (x)      the Second Issuer Paying Agent and Agent Bank Agreement;

         (y)      the Underwriting Agreement;

         (z)      the Subscription Agreement;

         (aa)     the Mortgages Trustee Guaranteed Investment Contract; and

         (bb)     the Amended and Restated Master Definitions and Construction
                  Schedule, the First Issuer Master Definitions and Construction
                  Schedule and the Second Issuer Master Definitions and
                  Construction Schedule.


<PAGE>
                                       17


5.       BOND DOCUMENTATION

(a)      Confirmation that the Second Issuer Notes have been issued and the
         subscription proceeds received by the Second Issuer; and

(b)      Copies of the Prospectus and the Offering Circular.

6.       MISCELLANEOUS

         Solvency certificates from Funding 1 signed by two directors of Funding
         1 in or substantially in the form set out in SCHEDULE 2 to the
         Intercompany Loan Terms and Conditions.



<PAGE>
                                       18




IN WITNESS WHEREOF the parties have caused this Agreement to be duly executed on
the day and year appearing on page 1.


FUNDING 1

SIGNED by                                              )
for and on behalf of                                   )
PERMANENT FUNDING (NO. 1) LIMITED                      )



SECOND ISSUER

SIGNED by                                              )
for and on behalf of                                   )
PERMANENT FINANCING (NO. 2) PLC                        )



SECURITY TRUSTEE

SIGNED by                                              )
for and on behalf of                                   )
U.S. BANK NATIONAL ASSOCIATION                         )




AGENT BANK

SIGNED by                                              )
for and on behalf of                                   )
CITIBANK, N.A.,                                        )
LONDON BRANCH                                          )



<PAGE>






                             DATED [6TH MARCH], 2003



                        PERMANENT FUNDING (NO. 1) LIMITED
                                  as Funding 1


                         PERMANENT FINANCING (NO. 2) PLC
                                as Second Issuer


                         U.S. BANK NATIONAL ASSOCIATION
                               as Security Trustee


                          CITIBANK, N.A., LONDON BRANCH
                                  as Agent Bank





             -------------------------------------------------------

                                LOAN CONFIRMATION

                    SECOND ISSUER INTERCOMPANY LOAN AGREEMENT
             -------------------------------------------------------











                                  ALLEN & OVERY
                                     London
                                  ICM:638658.4
                                    CONTENTS


<PAGE>



<TABLE>
<CAPTION>
<S>                                                                                                      <C>
CLAUSE                                                                                                    PAGE

1.    Interpretation..........................................................................................1
2.    Intercompany Loan Terms and Conditions..................................................................2
3.    The Second Issuer Term Advances.........................................................................2
4.    Interest................................................................................................4
5.    Repayment...............................................................................................6
6.    Prepayment.............................................................................................10
7.    Certain Fees, etc......................................................................................10
8.    Application of Certain Provisions......................................................................12
9.    Addresses..............................................................................................12

SCHEDULE

Conditions Precedent in Respect of Drawdown..................................................................15
SIGNATORIES..................................................................................................18
</TABLE>