12) SUITABILITY

Question 1

General considerations for an adviser when assessing suitability

Answer 1

*Lender’s eligibility - inc, LTV etc
*Repayment, int-only or combn of the two
*Mortgage term
*Preference /need for stability of monthly payments
Preference/need for reduce ini payments
*Intend to make early repayments?
Pref/need for other features - overpayments, payment holiday etc

Question 2

List key issues to consider in relation to mortg term

Answer 2

Age at wh cust wd like to repay fully
Early repayment? - consider penalties
Term takes cust into/nr retirement - income considerations
Make cust aware of shorter terms req higher monthly payments

Question 3

Types of risk relating to mortg products

Answer 3

Risk to the home
Negative equity
Repayment risk
Interest-rate risk
Fixed rate risk
Rate rises at end of fixed/discount term
Underperformance of investment vehicle

Two main risks -

• _ risk of mortg not being paid
• _ risk posed by interest rate changes

Question 4

Borrower Risk catergories for mortg repayment

Answer 4

Cautious - minimal risk, repayment mortg
Balanced - maybe part repayment/part int-only mortg
Adventurous - int-only with investt linked repayment vehicle

Question 5

How is customer’s attitude to risk assessed

Answer 5

Adviser’s questioning, increasingly psychometric profiling wh incl
borrower’s own feelings or their attitude to, and tolerance of, risk;
past financial decisions they have made;
how they would feel and react in a number of ‘what if’ financial scenarios containing positive and negative outcomes;
how they would feel about a number of hypothetical events and outcomes in relation to their finances.

Question 6

Give some examples of potentially suitable repayment strategies

Answer 6

Regular dep into savings/ investt pdt
Periodic repayment of capi - from bonuses, other inc etc
Sale of assets such as another property
Sale of property for shared equity or retirement int-only mortg

Question 7

Diff betn int-only and retirement int-only mortg

Answer 7

int-only - a repayment vehicle shd be in place and it cannot be the sale of the prop
Retirement int-only - avai to those of certain age who wish to extend their mortg into their retirement, whr int payments are made just as int-only mortg, but sale of prop can be used for repayt upon borrower/surviving borrower’s death, move into resi care, or sale of prop