B) Mortgages and loans Flashcards
What the term ‘mortgage’ means?
The common usage of the term ‘mortgage’ is to refer to a loan used to buy a property, but this is technically incorrect – the mortgage is actually the security offered in exchange for the loan.
What is ‘assignment’ (in mortgages)?
Transfer of the security ownership signed over to the lender in exchange for the mortgage
What is MMR, when was it introduced, and what changes it implemented?
Mortgage Market Review, April 2014, No more self-certified mortgages, fewer interest-only mortgages, and the requirement for mandatory advice on all mortgage products.
What is Capital and interest repayment?
Where monthly repayments to the lender include a sum to cover a contribution towards the repayment of the capital, plus a sum to cover the interest.
What is Interest-only repayment?
Where only the interest accruing on the loan is paid and the outstanding capital remains the same.
What is Capped mortgage?
The lender guarantees that the interest rate will not rise above a given level for a certain period of the loan.
What is Cap and collar mortgage?
The lender guarantees that the interest rate on the loan will not rise above a given level (the cap). However, there is also a minimum rate below which the interest will not fall (the collar).
What is a Discount mortgage?
The interest rate charged for an initial period of the loan (frequently for one, two or three years) is reduced by a set percentage below the standard rate charged by the lender.
What is Euro (or other foreign currency) mortgage?
The interest and capital of the loan is designated in euros (or another currency), usually to take advantage of lower interest rates. This can result in gains or losses as the currency exchange rate moves relative to sterling, but can be useful for individuals paid in the overseas currency.
What is Equity-linked mortgage, also called shared
appreciation mortgages (SAMs)
The lender takes a stake in the equity of the property that has been purchased. The amount loaned, on which interest is charged, is less than
the amount advanced for the purchase. On the sale of the property, the proportion of the lender’s equity stake is repaid to them. It is possible for
the borrower to slowly accrue the lender’s equity stake over time.
What is Fixed interest mortgage?
The interest rate charged remains fixed for a given period. The borrower takes a risk that interest rates generally might fall below the rate charged,
but in exchange have a known liability for mortgage interest over the fixed period. These schemes often carry early redemption penalties.
What is Flexible mortgage?
Monthly payments can be varied if required and lump-sum capital repayments made at any time. As capital is repaid, this creates a reserve
from which the borrower can withdraw cash up to the initial mortgage amount at any time. If a borrower experiences financial difficulties, they
can use the reserve to meet future interest payments.
What is Green mortgage?
Green mortgage is one that rewards the borrower for buying an energy-efficient home by offering them more favourable terms than come as
standard, such as a slightly lower interest rate, or cash back when they take out the mortgage, or both. Such deals may, however, be restricted to
new builds.
What is Offset mortgage?
This is where a mortgage account and a current account are linked. Interest is charged on the net balance of the two accounts, so if money is
kept in the current account the size of the mortgage is effectively reduced. Even the effect of a monthly salary going in can have an effect
and reduce the overall interest payments.
What is Tracker mortgage?
A variable rate mortgage where there is an automatic link built in, so the interest ‘tracks’ an index, usually the Bank of England base rate. It is
designed to move as the index moves, usually after a period of, say, 15 days.
What is Equity release?
Equity release describes a range of products only available to older clients, typically over the age of 60. It allows them to release the equity (cash) tied up in their home. The products have no fixed term and allow them to stay in their home for the rest of their life, or until they move into a long-term care facility.
What are Equity release schemes?
Lifetime mortgages or home reversion plans.
How Lifetime mortgages work?
The client takes out a loan secured on the home
What are 4 types of lifetime mortgages?
A roll-up mortgage (interest is added to the loan – for example, each year). The client
gets a lump sum or a regular income and is charged a monthly or yearly interest that is
added to the loan. The original amount borrowed plus the rolled-up interest is repaid
when the home is eventually sold.
A fixed repayment lifetime mortgage. The client gets a lump sum, but doesn’t have to pay
any interest. Instead, when the home is sold, they pay the lender a higher amount than
they borrowed. That amount is agreed in advance. The lender uses this higher sum to
repay the mortgage when your home is sold.
An interest-only mortgage. The client gets a lump sum, and pays a monthly interest on
the loan, which can be fixed or variable. The amount originally borrowed is repaid when
the home is eventually sold.
A home income plan. The money borrowed is used to buy a regular fixed income for life
(an annuity). This income is used to pay the interest on the mortgage and the rest is the
client’s. The amount originally borrowed is repaid when the home is eventually sold.
What shared appreciation means?
This means the lender has a share in the value of the home.
What is a drawdown facility (Lifetime Mortgage)?
The drawdown facility is suitable if clients want to take occasional small amounts rather than one big loan. It is also cheaper as clients only pay interest on the money they actually need.
What If there is not enough money left from the sale to pay off the lifetime mortgage?
Most lifetime mortgages offer a no negative equity guarantee. With this guarantee the lender promises that the client (or their beneficiaries) will never have to pay back more than the value of the home – even if the debt has become larger than this.
What is Home reversion plan?
The client sells all or part of the home in return for a cash lump
sum, a regular income, or both. The home, or the part of it sold, then belongs to the home reversion provider, but the client is allowed to carry on living in it under a lease until they die or move into a long-term care facility.
Usually 20% and 60% of the market value of the property
What are two types of Sharia-compliant home purchase plan?
- Ijara - the monthly payments made towards buying the property are held by the firm and used to buy the home at the end of the agreement.
- Diminishing musharaka - each payment made towards buying the property buys an extra slice of the firm’s share. As the client’s share increases, the firm’s share gets smaller and so does the rent paid for the use of the firm’s share.
