Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Cemap 2&3 Self Testing > 23. Interest Rate Options > Flashcards

23. Interest Rate Options Flashcards

1
Q

How are standard variable rates set?

A

Lender decide, are influenced by base rate but lender get free choice

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the advantages of being on an SVR? (2)

A
  1. no ERC
  2. Lower product fees
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the disadvantages of being on SVR? (2)

A
  1. Difficult to budget
  2. No portability option
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What a a discounted rate mortgage?

A

A variation of SVR where rate is SVR with a certain percentage discounted

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is stepped discount?

A

A type of discounted rate where the amount of SVR discount increases or decreases in steps each year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Are discounted rates subject to ERC and product fees?

A

Yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Are discounted rates subject to rate increases?

A

Yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is a tracker mortage?

A

One which tracks interest rate benchmarks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is a base rate tracker?

A

Tracker mortgage which tracks the bank of england base rate, usually for 5 YEARS before reverting to SVR (but can be longer or lifetime)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Is a base rate tracker equal to the base rate?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Is a base rate tracker mortgage likely to be more or less expensive than an SVR mortgage?

A

Less - base rate tends to be lower than lender SVR rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is a collar? What is it designed to do?

A

A rate below which a tracker mortgage cannot fall - stops rates from going into minus figures when base rate is very low

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Are Tracker mortgages subject to ERC, product fees, app fees?

A

YES

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is a LIBOR tracker?

A

Used to be common with commercial and sub-prime mortgages and tracked LIBOR.

No longer available but SONIA trackers are available instead

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Are overpayments and lump sums usually allowed with tracker mortgages?

A

Yes, within limits (e.g 10% per year)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is a fixed rate mortgage?

A

rate is fixed for typically 1-5 years before reverting back to SVR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What are the advantages of fixed rate mortgages? (2)

A
  1. easier to budget
  2. overpayments are usually permitted
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What are the disadvantages of fixed rate mortgages? (1)

A

can’t take advantages of decreases in rates

19
Q

Are fixed rate mortgages subject to ERC, Product fees, app fees?

A

Yes

20
Q

What a a portability option? Which types of mtg is it common with? (2)

A

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

21
Q

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

A
  1. stays the same
  2. anything over the original amount is charged at the lender’s normal rate
  3. erc will be charged on the difference between the old and new amount
22
Q

How do lender raise funds for fixed rate mortgages?

A

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

23
Q

Why do lenders impose ERCs?

A

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

24
Q

What is a capped rate mortgage?

A

Like SVR but has a maximum rate payable, if the rate is below the cape, rate moves like SVR - there is just a ceiling

25
Q

Is a capped rate likely to be more or less expensive than SVR?

A

More, premium of around 0.25% is charged for the security of having a cap

26
Q

What are the benefits of a capped mortgage? (3)

A
  1. Benefit from rate reductions
  2. portability option
  3. overpayments permitted within limits
27
Q

Are capped rate mortgages likely to be subject to ERC, product and app fees?

A

yes

28
Q

When do capped mortgages become more popular? when do they become less popular?

A

More popular when rates are high, less when rates are low

29
Q

What is a flexible mortgage?

A

No standard definition, but they usually have the following features in common:

  1. Interest calculated daily
  2. Overpayments permitted at any time w/o penalty (within limits)
  3. Able to underpay if circumstances warrant it
  4. able to take payment holidays if circumstances warrant it
  5. portability option
  6. offset facility
30
Q

What circumstances are needed for someone with a flexible mortgage to be able to underpay or take a payment holiday?

A

Usually need to have overpaid in the past and built up ‘credit’

31
Q

What is a Payback Facility?

A

Used by some lenders as an alternative to underpayments and payment holidays. They allow overpayments to be paid back to you when you need them

32
Q

Some flexible mortgages offer a drawdown facility, what does this mean?

A

Borrower takes out an initial loan below the max LTV available. They are then allowed to borrow further amounts later on, ‘drawing down’ funds so long as they don’t go over the LTV max

it also means you can borrow back money you have already paid off in the loan

33
Q

True or false, affordability checks are needed before each drawdown of a drawdown mortgage?

A

True

34
Q

What is an offset mortgage?

A

A mortgage linked to a savings account. For any amount of savings kept within the savings account, the same amount of the mortgage becomes interest free

35
Q

If you have an offset mortgage, what two repayment options do you have?

A
  1. pay less interest each month
  2. pay interest on the full loan, thus overpaying and making the term shorter

second is the most cost effective as the capital will reduce faster and less interest payable overall

36
Q

Do you earn any interest of the savings held within an offset mortgage account?

A

no

37
Q

Can you withdraw your money at any time from an offset mortgage account?

A

Yes, but it’s only worth having this type of mortgage if you can maintain consistent levels of savings or reductions wont be great enough

38
Q

What type of mortgage is an offset mortgage an example of?

A

Flexible mortgage

39
Q

Who is the target borrower of a flexible mortgage?

A

Those with high levels of financial awareness due to their complexity

40
Q

Are flexible mortgages subject to ERCs, product fees and app fees?

A

yes

41
Q

Are flexible mortgages likely to be more or less expensive than SVR?

A

More, for the privilege of the flexibility, though discounted rates are starting to be offered

42
Q

What are the main product incentives offered by lenders? (5)

A
  1. no val fee
  2. lender pays legal fees
  3. free insurance
    - for a set period (1 year)
    - tends to be MPPI, IPI, CIC
  4. cashback facility
    - tax free lump sum on completion as a gift, not part of the debt, but if you redeem mtg within set period you owe it back
  5. portability
43
Q

SEE NOTES FOR 1 PAGE SUMMARY

A

:)

Cemap 2&3 Self Testing (29 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions