12. Suitability Flashcards
When should a firm not make a recommendation?
If there is no contract suitable for the customers needs and circumstances within the range available to the firm. It is not acceptable to recommend the closest fit from those available
An example of this is where the advisor is a super prime specialist offering mortgage products designed for those with poor credit records. If a customer with a good credit record asks for advice the advisor must not recommend a sub-prime mortgage. The exception is if the advisor can demonstrate that the costs, terms and conditions of the contract will not disadvantage the customer when compared with suitable standard mortgages
What needs to be considered in relation to the mortgage term?
The effect payments will have on the borrowers monthly budget
The agent which the customer would like to have repaired the mortgage
Whether the customer feels there is a possibility of paying the loan early - if there is, mortgages with early repayment penalties should be avoided
If the mortgage term takes the customer near or into retirement, will there be sufficient income to maintain the repayments?
Mortgage risk is a factor that must be taken seriously. In mortgage terms, what are some of the associated risks?
Risk to the home: the Home is at risk if the borrower fails to keep up repayments
Negative equity: borrowing a high percentage of the properties value presents the risk of negative equity if the price goes down
Repayment risk: those who do not wish to run the risk of the mortgage not being repaired at the end of the term should be advised to select a repayment mortgage rather than interest-only
Interest-rate risk: rates can increase making the payments higher and squeezing monthly budgets. Depending on the attitude to risk, a fixed or capped rate may suit the customer
Fixed-rate risk: there is a risk that variable rates may fall below the fixed rate. This means the customer is paying more than someone on the variable rate. The customer must be aware of this risk and satisfied that the benefit of the fixed rate outweighs the risk
Rate rises at the end of a fixed or discount term: there is the risk that variable rates may have risen significantly by the end of a fixed rate or discount term
Under performance of investment vehicle: the risk of an investment vehicle running alongside an interest-only mortgage may not perform to expectations. Is the customer aware of this risk and do they have all the resources that might be used to repay the mortgage in that situation?
What are the two main issues to consider in the context of the customers attitude to risk?
The risk of not being able to repay the mortgage
The risk posed by interest rate changes
How is the customers attitude to risk assessed?
Most advisors now use a risk questionnaire. However, it is important that the advisor does not rely solely on the outcome of the questionnaire; they should ensure the client understands the questions and their implications and then use their own knowledge and experience in assessing risk
Some lenders use psychometric profiling where the advisor uses software tools to assess the clients psychological attitude to risk in general
What do risk psychometrics assess?
The clients knowledge, experience, attitudes and personality rather than considering the risk we are prepared to take. The tests are validated statistically by using a large sample of the population
For interest-only mortgages what are considered potentially acceptable strategies?
Regular deposits into a savings or investment product
Periodic repayment of capital from regular sources of income (such as bonuses awesome sources of self-employment income)
Sale of assets such as another property or land owned by the customer
The sale of the property for a shared equity or retirement interest-only mortgage
For interest-only mortgages what are NOT considered potentially acceptable strategies?
Expectations of the value of the mortgage property will increase sufficiently over the mortgage term to enable the customer to sell the property and repay the mortgage
Intention to use an expected, but uncertain, inheritance to pay the mortgage
Sale of the mortgaged property, where it is the customers main residence (unless The lender has considered whether it will have the potential to provide enough for the customer to repair the mortgage and allow them to buy another property to live in or execute another strategy)
The lender must keep records of each interest – only mortgage for the term of the mortgage contract. What should the records include?
The reasons for the decision to offer an interest-only mortgage
Evidence of the customers repayment strategy and, where applicable, its cost
Details of the firms attempts to contact the customer for reviews
The outcome of each review
