Chapter 10: Other financial products Flashcards
When can a lender repossess the specific property which was purchased with a loan?
When a payment is missed
How can the interest rates on different loans be readily comparable?
Using the effective annual rate or true rate. E.G: 12% quarterly.
A: 12 divided by 4 = 3.
3/100 = 0.03
0.03 + 1 = 1.003
1.003 x 1.003 x 1.003 x 1.003 = 1.1255
1.1235 - 1 = 0.1255 x 100 = 12.55%
An individual took out a 2nd mortgage on their home, if the individual is unable to meet their outgoings and their property is repossessed, which mortgage will be repaid first ?
The first mortgage
What are the different ways in which interest is calculated on mortgages ?
- Variable - the borrow pays interest at a rate that varies with prevailing interest rates set by BOE
- Fixed - the interest is set for an initial period
- Capped - There is a max amount of interest that can be paid
- Tracker - It will track another rate such as BOE base rate and let’s say 1% above that.
What are the different types of mortgages ?
- Interest only - Pay back the interest monthly and set aside funds in an investment fund, at the repayment date they hope the fund has grown enough to pay back the capital.
- Off-set mortgages - The charges of interest are offset by any savings they have. E.G Mortgage of £100k but £10k savings. You pay interest on the £90k
What are the principle risks associated with interest only mortgages?
Interest rates could rise, their investments could not grow and may not be able to pay back the capital
What is the difference between whole of life assurance and term assurance ?
Whole of life pay back a lump sum upon death. Term assurance only pays if death occurs on set dates
What is the key differences between: non-profit, with-profits and unit linked life policies ?
Non-Profit - Guaranteed sum only
With-profits - Any profits made + lump sum
Unit-linked - The sum will be directly related to the investment performance of the units in the insurance companies fund
