16) MORTGAGE REPAYMENT METHODS

Question 1

How does a capital repayment work?

Answer 1

Capital repayment or repayment mortgage consists of making regular payments which constitute an element of both capital and interest in each payment.. If all payments are made when they fall due, the mortg is paid off at the end of the term. - at the start of the mortg, lender calcu how will need to be paid each month to repay capi at end of term and pay monthly int, assuming payment will remain same through the term. If lender’s int changes, lendr recalculates monthly payment to ensure payment needed by end of term - so payment smay incr or decr according to rate changes

Question 2

What are the adv and disadv of repayment mortg?

Answer 2

Flexibility - borrower usually has option to maintain existing level of payments when int is decr or incr
Debt reduction - Debt is reduced over time
Guaranteed repayment - loan is guaranteed to be repaid at end of term, if made on time.
No investment link - not dependent on an investt vehicle for repayment .

Disad is that there is no built in life cover

Question 3

How does interest-only mortg work?

Answer 3

Interest only element is calcu for the capital. The borrower arranges a repayment vehicle, alongside the mortg, but separately, for the repayment of the capital. Investt does not have to be arranged by lender. Investt vehicle could be an endowment policy - eith low profit, or unit linked. Most new int-only mortgs are supported by stocks and shares ISAs.

Question 4

What are the risks assoc with int-only mortgages?

Answer 4

Debt does not reduce as no capi is paid off,

Great risk if investt vehicle will not produce sufficient capi to repay mortg at end of term,

Question 5

What are the different ways of charging interest - and the adv/diadv to the borrower of each?

Answer 5

Calcu annually, monthly or daily- technically called rest.

Annual rest - int calcu annually at beg of year, payments credited annually, resulting in most amt of int paid ove rthe term and also slowest debt reduction.

Monthly rest - Int calcu at start of month, payments credited monthly, less int is paid over the term

Daily rest - Int calcu daily, payments credited immediately, potentially least int repaid over the terma nd the quickest debt reduction

Question 6

What is meant by APRC?

Assumptions made whn calcu APRC

• • int rate is constant for the entire term
• -borrower not default on payments
• -no life insu premiums are inclu in monthly payment
• -mortg will run its full term i.e. not redeemed early

Answer 6

Annual Percentage Rate of Charge - implemented after MCD 2016 wh resulted in mortgs being calcu in slightly diff way from APR, enables comparison of true cost of borrowing betn lenders. APRC takes into acc some (not all) of the costs involved in setting up and administering the loan, so higher than advertised flat rate.

Question 7

How is APRC arrived at?

Answer 7

True cost of borrowing is arrived at by calculating a total charge for credit (TCC), which is then converted into APRC.
Costs/charges inclu in TCC calcu are
1) Total int payable
2)Arrangmt and admin fees
3) Conveyancing charge/fee by lender relating to mortg
4) Valuation fees
5) Higher lending charges
6) Redemption fees for sealing mortg deed on redemption
7) Insu premiums wh are are part of compulsory arrangements
Fees/charges exclu in TCC calcu are:
_early repayment fee
_endowment/other premiums
_charges for defaults by borrower