20. Mortgage Repayment Methods Flashcards
Is a capital repayment mortgage guaranteed to be paid off at the end of term?
yes
How are payments made up of capital and interest at start of term compared to the end with repayment mortgages?
More interest at start, more capital at end
Bob has a loan of £60,000 over 25 years. His interest rate is currently 5% and he pays £354.78 in repayments per month. How much capital is he paying back monthly?
(Loan amount / 100)*Interest rate = Amount of interest paid annually
Annual interest /12 = Interest paid monthly
Repayment amount – monthly interest = capital paid back each month
Capital paid back each month * 12 = capital paid back annually
So,
(60,000/100)5 = 3,000
3,000/12=250
354.78-250=104.78
104.7812=1257.36
In what ways do repayment mortgages usually allow flexibility? (4)
- If interest payments decrease
- allow you to carry on paying same so you overpay - Overpayments are usually allowed irrespective of rate changes
- popular with those who get pay rises and want to reduce term
- if situation changes you can usually revert back to lower amount - One off partial repayments
- Reduced monthly payments
- can be agreed if struggling but would extend term
What are the main advantages of choosing a repayment mortgage? (3)
- Debt reduction - you know it goes down over time
- Guaranteed to be repaid
- not reliant on investment performance
What is the one main disadvantage of repayment mortgages?
Life cover is not included and needs to be arranged separately
How do you calculate monthly payments for an interest only mortgage?
(Loan amount /100) * Interest rate = annual interest
Annual interest / 12 = monthly interest
Who is able to give advice on interest vehicles?
Only qualified financial advisers
Are I/O mortgages guaranteed to be repaid at the end of term?
No
What used to be the most common Investment vehicle? What is it now?
before - endowments
now - stocks and shares ISAs
why = endowments previously underperformed and were not enough to pay off
What must lenders do in relation to those choosing I/O?
1. Before the contract starts
2. During the term
- Check they have a CREDIBLE REPAYMENT STRATEGY (vehicle does not need to be in place) and CLEARLY UNDERSTAND. Assess whether it is likely to work as a strategy.
- Review at least once, with enough time to rectify
What types of repayment vehicles are not acceptable?
Speculative ones, like relying on house price inflation, potential inheritance, windfalls and ad-hoc investment
What is a ‘pure’ interest only mortgage? When might they be acceptable?
An I/O mortgage without a repayment vehicle in place
still can’t be speculative, only allowed in instances like eventual sale of the mortgaged property. but even then, the price of the house must already be enough to repay - only works on properties with low LTV
In what instance is no repayment vehicle at all needed?
Retirement I/O mortgages
What are the fca rules on allowing someone to switch contracts or changing the existing terms of their contract with a provider?
Allowed, so long as the loan is not increased by more than the cost of switching
What are the main advantages of using I/O?(2)
- Variety of investment products
- Repayment vehicle can perform better than expected - possible to repay early
What are the main disadvantages of I/O mortgages? (3)
- No capital repaid during term - debt does not reduce
- Risk of vehicle underperforming - not suitable for the risk adverse
- Total interest payable is much higher than C/R
What is ‘rest’ in relation to mortgage interest?
The frequency at which interest is calculated
What is annual rest?
Interest calculated annually at start of the year. When you make repayments, they are not taken off the debt until the end of the year.
This way has the slowest debt reduction and most interest payable
What is monthly rest?
Interest is calculated at the start of the month. Payments are taken from the debt monthly also.
Less interest than annual, more than daily
What is daily rest?
Interest calculated daily. Payments deducted from debt immediately
Fastest debt reduction and lowest interest payable
What type of customers would annual rest be particularly unsuitable for?
Those who wish to repay in lump sums - would be paying off a big chunk of mortgage., but the actual debt would not be reduced until end of year. They would be better off keeping the money in savings until the end of the year to earn interest on it and pay it off right at the end
Does annual interest benefit the borrower or the lender more? why?
Lender, because it is easier to operate and the lender ends up getting more interest
For those who just pay their regular monthly instalments (not those wishing to make overpayments) is monthly or daily interest best?
Neither, they would both work out exactly the same. Daily is better for those who wish to make ad-hoc overpayments
