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Cemap 2&3 Self Testing > 1. Property and Mortgage Markets > Flashcards

1. Property and Mortgage Markets Flashcards

1
Q

What are sub-prime mortgages?

A

Loans to people with poor credit.

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2
Q

What is securitisation?

A

Lenders selling bundles of mortgages to other lenders.

Reason: to remove the loans from their balance sheets, allowing them to borrow more.

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3
Q

How did the credit crunch affect the UK economy and workers?

A

It went into a recession. Widespread job losses, low pay, wage freezes and cuts in working hours.

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4
Q

How did the credit crunch affect the housing market? (sellers and buyers)

A

Sellers - wanted to hang on, hoping the economy would improve so they could get a better price

Buyers - holding out, hoping prices would go down further.

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5
Q

How did banks react to the credit crunch? How was this resolved?

A

Banks were reluctant to lend to homebuyers and each other as they wanted to build up reserves to protect themselves from collapse.

Resolved by BoE lending to banks below market rates, allowing them to increase their interest rates and lend more.

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6
Q

How did lenders react to the credit crunch?

A

More cautious approach.

Requested higher deposits and more borrower security.

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7
Q

What happened as a result of the mortgage market review (2014)?

A

Lenders were required to apply more stringent / precise affordability criteria.

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8
Q

What are the 6 main things that affect the mortgage market?

A
  1. Interest rates
  2. Inflation
  3. The economy
  4. Supply and demand
  5. Government action
  6. Non-property funding
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9
Q

How do high and low interest rates affect the mortgage market?

A

High
- homeowners struggle to meet repayments
- 1st time buyers can’t afford to buy
- house prices fall

Low
- repayments are affordable
- people commit to higher value mortgages
- willingness to borrow leads to housing price boom

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10
Q

Although mortgage interest rates are broadly linked to the BoE base rate, they are more closely affected by the interbank lending rates.

What is a basis point? And how many basis points above the BoE base rate do interbank lending rates tend to be?

A

Basis point = 1/100 of 1%, or 0.01

Interbank rates = 10-20 basis points above, or 0.1-0.2% more

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11
Q

What are the two main types of inflation? Explain them.

A
  1. General inflation
    - a decrease in spending or the power of money
  2. House price inflation
    - increase in house prices (tends to increase a lot faster than general inflation)
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12
Q

What happens as the result of the BoE increasing or decreasing inflation?

A

Increase - people have reduced disposable income and prices are driven lower

Decrease - people have increased disposable income and prices are driven higher

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13
Q

What happens to the housing market as a result of prolonged increases or decreases in inflation?

A

Prolonged increases
- stagnant or reduced house prices as people are reluctant to commit to buying

Prolonged decreases
- increase in house prices as payments become more affordable

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14
Q

Are people more or less likely to take out mortgages when the economy is in a good state?

A

More likely

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15
Q

What are the two key factors that affect supply and demand in the mortgage market?

A
  1. Geography (think london, Manchester and commuter towns)
  2. Property type (think one bedroom flats in London as this is all people can afford)
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16
Q

In which 4 ways has government action recently affected the mortgage market?

A
  1. SDLT - first time buyers exempt up to 300k
  2. SDLT - 3% surcharge on BTL properties
  3. Higher taxation on BTL properties
  4. Help to buy schemes for first time buyers with low deposits
17
Q

What is non-property lending in relation to mortgages?

A

Borrowing when not purchasing a property. Eg. to finance Home improvement or consolidate debt

18
Q

Banks didn’t offer mortgages until the 80’s but they now offer both residential mortgages because they feel them safe and profitable. What two advantages make banks very competitive as a type of mortgage provider?

A
  1. Size - they can raise money more cheaply and have access to better technology
  2. Cross-selling - they can sell other products to existing customers
19
Q

Which type of mortgage provider was the main lender for residential mortgages in the 80s?

A

Building societies

20
Q

What percentage of building society mortgages are required to be residential today?

A

75%

21
Q

What is a composite insurance company?

A

A company that offers both general and life insurance

22
Q

What are the key features of specialist mortgage companies as a Mortgage provider (3)

A
  1. Limited companies
  2. Centralised lenders - very few branches, operate via a hq
  3. Funded from the wholesale market
23
Q

What are challenger banks?

A

New entrants to the banking arena, eg TSB, Monzo, Virgin, Atom, Revolut

They increased lending at higher rates and have now become part of mainstream

24
Q

Why are challenger banks/specialist mortgage companies vulnerable?

A

Due to their size, they are vulnerable to increased wholesale interest rates when wholesale lending freezes up

25
Q

What is the securitisation of mortgages? Which types of lender commonly do this?

A

The packaging up of mortgages to sell them on to other companies in return for a cash sum

Commonly used by specialist lenders

26
Q

How does securitising mortgages help the original lender?

A

They receive a cash sum which is greater than the value of the original mortgage.

The new company doesn’t mind overpaying because they get all of the interest payments.

The original lender would lose out on the interest payments, but they make want to securitise because cash sums improve the balance sheets for them to meet capital adequacy requirements.

Sometimes, mortgages are packaged with a contract so the original lender can still receive regular payments from the new company.

27
Q

What changes for the borrower when lenders securitise their mortgage?

A

Very little, conditions must stay the same.

28
Q

What is a mortgage packager? What type of work do they do? What are their rates?

A

A middleman between the lender and intermediary.

They do much of the admin work, especially for specialist areas of lending eg BTL

Usually charge 1-2% of the mortgage value, but sometimes they have to give the intermediaries a cut out of this

29
Q

What types of borrowers would need to use a sub prime or other specialist lender? (4)

A
  1. Poor credit
  2. Difficulty proving income
  3. Don’t fit normal profiles, eg age, residency, income type
  4. Self employed - either for a business which has not long been established, or where they are unable to supply enough years of previous accounts
30
Q

What is prime lending?

A

Where a borrower meets the lenders usual requirements and present normal risk

31
Q

What is sub-prime lending?

A

Where the borrower doesn’t meet the lender’s usual requirements and the risk is higher

32
Q

Is sub prime lending bad business?

A

Not necessarily, it just requires a more in depth specialist assessment

33
Q

What is “setting the rate for risk”?

A

Where lenders set a higher rate for higher risk borrowers.

34
Q

What is a sale and rent back agreement? What are the two key fca regulated requirements for this?

A

Where a company buys a property off its owner for below market value and rents it back to them, allowing them to keep living in it.

  1. Have to have a fixed tenancy agreement
  2. The minimum length of agreement is 5 years
35
Q

What sort of person is likely to want a sale and rent back agreement?

A

Someone who can no longer manage their mortgage repayments

36
Q

What are finance houses? What type of mortgages do they offer?

A

Loan companies, they offer second charge loans to those who want to use their property as security to get loans

37
Q

What is bridging finance?

A

Loans for those who want to buy a new property before they have managed to sell their old one.

They get repaid when the original property is sold.

Cemap 2&3 Self Testing (29 decks)

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