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R01 - Financial Services, Regulation and Ethics > Chapter 2B - Mortgages and Loans > Flashcards

Chapter 2B - Mortgages and Loans Flashcards

1
Q

Mortgage refers to the security against a residential home loan; what is typically used for this security?

A

Property deeds

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2
Q

True or False: All lenders keep physical property deeds against mortgages

A

False - due to cost and risk, most register a charge with the Land Registry instead

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3
Q

What are the two main ways that a mortgage can be repaid?

A

Capital and Interest

Interest Only

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4
Q

Define “Capital and Interest” in terms of mortgage repayment

A
  • 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
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5
Q

Define “Interest Only” in terms of mortgage repayment

A
  • 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
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6
Q

What led to the rise in popularity of Interest Only mortgages?

A

Rising house prices made Interest Only the only affordable option for many

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7
Q

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?

A

The Mortgage Market Review (MMR)

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8
Q

What are the most popular types of mortgage structure? (nine answers)

A
  • capped
  • cap and collar
  • discount
  • Euro (or other foreign currency)
  • Equity-linked/share appreciation mortgage (SAM)
  • Fixed Interest
  • flexible
  • offset
  • tracker
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9
Q

Define a “Capped” mortgage

A

interest rate wont go above a set level for a set period

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10
Q

Define a “Cap and Collar” mortgage

A

interest rate wont go above or below set levels for a set period

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11
Q

Define a “Discount” mortgage

A

interest rate charged for an initial period is a percentage below standard rate

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12
Q

Define a “Euro (or other foreign currency)” mortgage

A
  • 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
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13
Q

Define an “Equity Linked” or “Shared Appreciation Mortgage (SAM)”

A
  • 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
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14
Q

Define a “Fixed Interest” mortgage

A
  • 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
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15
Q

Define a “Flexible” mortgage

A
  • 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

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16
Q

Define an “Offset” mortgage

A
  • 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
17
Q

Define a “Tracker” mortgage

A
  • interest tracks to an index, usually the BoE base rate or London Interbank Offered Rate (LIBOR)
  • move as the index moves
18
Q

What other home finance products may require additional qualifications before an adviser is allowed to advise on them?

A
  • Equity Release
  • Home Purchase Plans
  • Sale and Rent Back agreements
19
Q

Equity Release is typically only offered to which age range?

A

60+

20
Q

How does equity release work?

A
  • release cash tied up in home
  • no fixed term
  • stay in home for rest of life
21
Q

What potential pitfalls exist with equity release?

A
  • can be expensive
  • inflexible if circumstances change in future
  • may affect current or future entitlement to State or local authority benefits
22
Q

What are the two kinds of equity release?

A

Lifetime Mortgage

Home Reversion Plan

23
Q

How do Lifetime Mortgages and Home Reversion Plans differ?

A

Lifetime Mortgage is a loan secured against property; Home Reversion is selling all or part of the home

24
Q

What four ways can a Lifetime Mortgage be taken?

A
  • 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
25
Q

Why can a drawdown facility be beneficial when taking equity release?

A

Interest is only paid on what is taken

26
Q

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

A No Negative Equity Guarantee

27
Q

How does a Home Reversion work?

A
  • 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
28
Q

What name is given to a method of purchasing a home without paying interest?

A

Home Purchase Plans

29
Q

Who are home purchase plans of particular interest to?

A

Muslims, as they are Sharia-law compliant

30
Q

What are the two kinds of Sharia-compliant home purchase plans?

A
  • 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
31
Q

What other names might be used to describe a sale and rent back agreement?

A
  • Flash Sale
  • Mortgage Rescue
  • Rent Back
  • Sell-to-Let
32
Q

How quickly can sell and rent back agreements purchase a home?

A

as little as a week, but more commonly three to four

33
Q

What should you watch out for when dealing with a sell and rent back agreement?

A
  • 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
34
Q

What are the two types of Buy-to-Let mortgages?

A

Consumer- and Business-buy-to-let

35
Q

What is the main difference between consumer and business buy to let mortgages?

A

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

36
Q

What are the two main types of loan?

A

Structured and Unstructured

37
Q

Describe an Unstructured loan

A
  • 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
38
Q

Describe a Structured loan

A
  • 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

R01 - Financial Services, Regulation and Ethics (10 decks)

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