Chapter 18: Mortgage Loans and Repayment Options

Question 1

Deed of loan

Answer 1

Loan agreement (deed of loan) regulates:
* amount and term of loan
* interest and fixed interest period
* form of repayment

Question 2

Amount and term of loan

Answer 2

Amount is set in advance
Usually 30 years
Fixed Interested can be 1,5, 10, 15, or 20 years
IR is higher for longer fixed-interest periods

Variable IR might be chosen if IRs are currently high and expected to drop

Question 3

Types of mortgage repayment: Periodical repayment

Answer 3

Regular instalments (e.g. every month)
* Straight line mortgage: loan in equal instalments, interest charges slowly get smaller
* Annuity mortgage: Gross instalment amount is the same throughout the entire term, same with interest. Gradually pays less interest.

Question 4

Types of Mortgage repayment: Lump sum repayment

Answer 4

Loan principal remains the same in the term and borrower pays interest on the principal.
Borrower accumulates capital tax free and pays at the end of the term
Some tax benefits

• Endowment mortgage: consumer accrues capital via a life insurance policy and paid off at maturity date
• Savings-based mortgage: Return on savings-based mortgage is equal to mortgage IR. Limits impact of changes in IR
• Investment-based mortgage: Contributions of borrower are not saved but invested. Final capital based on investment results, all risk to the borrower.
• Interest-only mortgage: Often only repaid out of proceeds from sale of house