Chapter 2B - Mortgages and Loans Flashcards
Mortgage refers to the security against a residential home loan; what is typically used for this security?
Property deeds
True or False: All lenders keep physical property deeds against mortgages
False - due to cost and risk, most register a charge with the Land Registry instead
What are the two main ways that a mortgage can be repaid?
Capital and Interest
Interest Only
Define “Capital and Interest” in terms of mortgage repayment
- monthly payments reduce borrowed amount and interest
- interest reduces as capital is repaid, so the later payments reduce capital even further
- monthly payments try to stay the same, so ratio changes
- interest rate will change if not fixed
Define “Interest Only” in terms of mortgage repayment
- only interest is repaid monthly
- borrowed value is expected to be repaid from another source (pension, endowment, ISA etc.)
- lower monthly cost as no capital repaid
What led to the rise in popularity of Interest Only mortgages?
Rising house prices made Interest Only the only affordable option for many
What came into effect in April 2014 to drastically reduce the availability of Interest Only mortgages, and required lenders to ensure the borrower had a credible repayment strategy?
The Mortgage Market Review (MMR)
What are the most popular types of mortgage structure? (nine answers)
- capped
- cap and collar
- discount
- Euro (or other foreign currency)
- Equity-linked/share appreciation mortgage (SAM)
- Fixed Interest
- flexible
- offset
- tracker
Define a “Capped” mortgage
interest rate wont go above a set level for a set period
Define a “Cap and Collar” mortgage
interest rate wont go above or below set levels for a set period
Define a “Discount” mortgage
interest rate charged for an initial period is a percentage below standard rate
Define a “Euro (or other foreign currency)” mortgage
- designated in another currency, usually to take advantage of lower interest rates
- changes with the currency exchange rate
- useful if client is paid in that currency
Define an “Equity Linked” or “Shared Appreciation Mortgage (SAM)”
- lender has a stake in the property, so the loan is less than the value of the property
- on sale, the lender recoups their stake
- borrower can sometimes accrue the lenders stake over time
Define a “Fixed Interest” mortgage
- interest rate is fixed for a given period
- borrower risks a fall in interest rate in exchange for knowing what they have to pay
- often have penalties for early pay off
Define a “Flexible” mortgage
- payments can vary and lump sums can be paid at any time
- payments create a reserve that can be used against further interest payments, if needed
Define an “Offset” mortgage
- mortgage and current account are linked
- interest charged on the net balance of the two accounts
- keeping capital in the current account can reduce mortgage payments
Define a “Tracker” mortgage
- interest tracks to an index, usually the BoE base rate or London Interbank Offered Rate (LIBOR)
- move as the index moves
What other home finance products may require additional qualifications before an adviser is allowed to advise on them?
- Equity Release
- Home Purchase Plans
- Sale and Rent Back agreements
Equity Release is typically only offered to which age range?
60+
How does equity release work?
- release cash tied up in home
- no fixed term
- stay in home for rest of life
What potential pitfalls exist with equity release?
- can be expensive
- inflexible if circumstances change in future
- may affect current or future entitlement to State or local authority benefits
What are the two kinds of equity release?
Lifetime Mortgage
Home Reversion Plan
How do Lifetime Mortgages and Home Reversion Plans differ?
Lifetime Mortgage is a loan secured against property; Home Reversion is selling all or part of the home
What four ways can a Lifetime Mortgage be taken?
- Roll up; interest added and loan + interest are repaid
- Fixed repayment; sum agreed in advance, pay back higher amount when home is sold
- Interest only; only pay off the interest, loan repaid when home is sold
- Home income; buys annuity which pays off interest before paying client
Why can a drawdown facility be beneficial when taking equity release?
Interest is only paid on what is taken
What is used on Lifetime Mortgages to protect against the client or their beneficiaries having to repay more than the value of the home?
A No Negative Equity Guarantee
How does a Home Reversion work?
- sell all or some of a home for lump sum, income or both
- allowed to lease until death
- usually get 20-60% of home, dependent on age when taking
- may be asked to pay a nominal rent
What name is given to a method of purchasing a home without paying interest?
Home Purchase Plans
Who are home purchase plans of particular interest to?
Muslims, as they are Sharia-law compliant
What are the two kinds of Sharia-compliant home purchase plans?
- Ijara; payments are pooled by the firm and the property is purchased at the end of the agreement
- Diminishing Musharaka; each payment buys an extra portion of the firms’ share, slowly diminishing the rental portion
What other names might be used to describe a sale and rent back agreement?
- Flash Sale
- Mortgage Rescue
- Rent Back
- Sell-to-Let
How quickly can sell and rent back agreements purchase a home?
as little as a week, but more commonly three to four
What should you watch out for when dealing with a sell and rent back agreement?
- normally less than full value
- initial rental period does not have to be extended
- could still be evicted if terms of rental are breached
- if new owner gets into financial hardship, property could still be repossessed
What are the two types of Buy-to-Let mortgages?
Consumer- and Business-buy-to-let
What is the main difference between consumer and business buy to let mortgages?
Consumer has FCA protection and is considered accidental - the rental is not a regular form of income
Business is not FCA regulated and is assumed to be a conscious effort to turn profit
What are the two main types of loan?
Structured and Unstructured
Describe an Unstructured loan
- mortgages and commercial loans; overdrafts and some personal loans (example)
- can increase payments to reduce capital and interest
- can be repaid anytime to save on interest (usually no penalty)
- interest rate varies in line with risk; 1% above base rate is good, 4% above suggests it is risky
Describe a Structured loan
- usually for smaller purchases
- fixed rate and fixed payment schedule
- payments do not change with base rate change
- higher risk so higher costs
- usually an early repayment fee
- lender makes a fixed profit, so will charge to recoup if paid early
