23. Interest Rate Options Flashcards
How are standard variable rates set?
Lender decide, are influenced by base rate but lender get free choice
What are the advantages of being on an SVR? (2)
- no ERC
- Lower product fees
What are the disadvantages of being on SVR? (2)
- Difficult to budget
- No portability option
What a a discounted rate mortgage?
A variation of SVR where rate is SVR with a certain percentage discounted
What is stepped discount?
A type of discounted rate where the amount of SVR discount increases or decreases in steps each year
Are discounted rates subject to ERC and product fees?
Yes
Are discounted rates subject to rate increases?
Yes
What is a tracker mortage?
One which tracks interest rate benchmarks
What is a base rate tracker?
Tracker mortgage which tracks the bank of england base rate, usually for 5 YEARS before reverting to SVR (but can be longer or lifetime)
Is a base rate tracker equal to the base rate?
No, it won’t be the same as it, it just moves in line with it - bank decides a certain percentage above or below for it to track
Is a base rate tracker mortgage likely to be more or less expensive than an SVR mortgage?
Less - base rate tends to be lower than lender SVR rates
What is a collar? What is it designed to do?
A rate below which a tracker mortgage cannot fall - stops rates from going into minus figures when base rate is very low
Are Tracker mortgages subject to ERC, product fees, app fees?
YES
What is a LIBOR tracker?
Used to be common with commercial and sub-prime mortgages and tracked LIBOR.
No longer available but SONIA trackers are available instead
Are overpayments and lump sums usually allowed with tracker mortgages?
Yes, within limits (e.g 10% per year)
What is a fixed rate mortgage?
rate is fixed for typically 1-5 years before reverting back to SVR
What are the advantages of fixed rate mortgages? (2)
- easier to budget
- overpayments are usually permitted
What are the disadvantages of fixed rate mortgages? (1)
can’t take advantages of decreases in rates
Are fixed rate mortgages subject to ERC, Product fees, app fees?
Yes
What a a portability option? Which types of mtg is it common with? (2)
Allows you to transfer you mortgage to a new property without incurring an ERC
Common with fixed and special rate mtgs
special rate include capped
If you use the portability option with a mortgage, do rate and the term stay the same or change if:
1. equal value is needed
2. more is needed
3. less is needed
- stays the same
- anything over the original amount is charged at the lender’s normal rate
- erc will be charged on the difference between the old and new amount
How do lender raise funds for fixed rate mortgages?
Lender raises a tranche of funds on the wholesale market (eg £100m @ 1.5%)
to make enough profit, lender has to lend the money at a higher percentage (e.g 2.5-3%)
once the full £100m is loaned out, lender pulls the product and offers new ones based on the rate of the next amount
Why do lenders impose ERCs?
If the funds loaned to the customer are repaid early, they will need to be loaned to someone else for lender to keep receiving interest
rates may have fallen since the loan was offered to original borrower & lender might not be able to make enough profit back from what it paid for the money on the wholesale market. ERC is designed to cover any shortfall
What is a capped rate mortgage?
Like SVR but has a maximum rate payable, if the rate is below the cape, rate moves like SVR - there is just a ceiling
