19) INTEREST-RATE OPTIONS Flashcards
What is a Standard Variable-rte mortg?
Most common type of mortg sometime ago but not so now - int rates varies with mkt rates in gen. Altho varies with bank rates, it is up to the lender to change rates with bank rates. If rates change then payments inc or dec accordingly for borrower.
Easy to understand, but not protected against steep changes, do not usually offer portability.
What is discounted-rate mortg?
Popular version of SVR - a discounted rate of interest is offered than SVR. Sometimes stepped discount - 1% in first yr, 1.25% in 2nd yr, etc….or stepped downwards 1.5%, 1.25% then 1% etc……
Recently there is an int-rate floor - a min int rate specified. Early repayment charge applies. and also other products need to be purchased - eg insurance
What is a tracker-mortg?
1) Base-rate tracker - int-rate follows base-rate for a fixed prd, or lifetime for lifetime trackers.
eg 2% above base rate always or 1% below it. Reverts to SVR at end aof term.
Will usually have
a) arrangement fee, early repayment charge, and compulsory addl product purchase eg insu
2) LIBOR tracker (LIBOR-linked tracker) - follows 3 month LIBOR rate, wh is usually 0.1 to 0.2 % above base-rate. More used by sub-prime lenders, commercial lenders, for people with impaired credit rating etc than for std residential mortg…..will charge arrangement fee and early repayment charge on full/partial redemption.
What is fixed-rate mortg?
((FIXED-RATE MORTGS ALSO USUALLY HAVE PORTABILITY OPTION - EXISTING ARRANGEMENT CAN BE TRANSFERRED TO A NEW PROP FOR SAME AMT, AND SAME TERM AS PREV. PROP))
Int-rate is fixed for an agreed prd., at tht eend of wh it follows SVR. known as ‘reversion’ rate….more common mortg these days as int rates are low.
Helps borrower to budget, overpayments and one-off payments are usually allowed on outstanding or remaining mortg within specified limits. Above that incurs charges.
Arrangement fees apply, lowering of bank rates does not reflect in changes to int-rates.
Some lenders insist on other product purchases - eg insu
What is capped-rate mortg?
NOT COMMON NOW AS INT-RATES ARE LOW
Max. int-rate is capped to a certain level above rate changes , giving security of payment not rising a certain level, for the borrower.
There cd also be a ‘collar’ - the lowest rate not dropping below an agreed rate…protects the lender.
What is flexible-mortg?
Gen rules for flex-mortg are
1—daily int calcu
2—overpayments allowed, underpayments (if borrower’s circumstances warrant it),
3—payment holidays, if circums warrant it
4—can be transferred to ano prop without penalties
5—sometimes come with offset facility
Underpayments and payment holi are subj to borrower having overpaid at some point and has blt a ‘credit’ - an amt above what wd normally have been paid off at that pt.
Payback facility - allowed to take back if overpayments have been made in past.
What does ‘draw-down’ facility mean in a flexible mortgage?
A maxi borrowing limit for borrower is agreed at the start, usually 75% of prop value, if borrower has not borrowed up to that limit, can borrow further without having to go through affordability checks or second charge. The drasw down amt is underwritten as first charge.
What is an offset mortg?
Similar to flexible mortg - main diff being that borrower’s mortg and savings are linked, and any savings held in sav acc is offset against mortg and mortg-int on that amt of sav bal is not charged. Alt, savings int is not paid to borrower when it is offset against the mortg.
(This type if being more sophisticated and can be offset against other secured and unsecured loans too)
List some of product incentives offered by lenders of mortgages
1—no valuation fee (sometimes chargd and refunded)
2—All legal feees paid by lender
3—free insu cover paid for given prd - eg 12 months payment protec insu/income protec/critical illness etc
4—tax-free lump sum upon completion of mortg. - either a fixed amt or percentage of amt borrowed. (can be clawed back if mortg redeemed within a set prd)
5—portability - mortg transferred to new prop - on fixed, discounted and capped rate mortgs
