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Fundamentals of Personal Finance > Lecture 5-Mortgages > Flashcards

Lecture 5-Mortgages Flashcards

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1
Q

Statistics on buying and renting

A

-Researchers suggest that across OECD countries,
people prefer to own home
rather than renting it.

• Similarly, home ownership is the most dominant
form of housing tenure across Europe. The
average level of owner occupancy is 70% across
the EU as a whole.

• 64% households are owner-occupied in the US.

• Owner occupied homes also include mortgaged
properties.

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2
Q

4 advantages of buying a home

A
  • Quality of life
  • Stability
  • Psychological reason
  • Investment potential
  • Increase in house prices
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3
Q

Quality of life as an advantage of buying a home

A
  • Rental properties are normally poorly maintained, and many have restrictions on how you may use them (e.g no pets), and even if you decorate you are wasting money that ultimately benefits landlord
  • Owning your own home gives you the freedom to live how you choose
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4
Q

Stability as an advantage buying your own home

A

-Rental contracts do not often give you the right to stay
for as long as you wish to stay in the same place.

-Owning your own
property means that you can stay there for as long as you may choose.

-Living in the same area helps one to develop a sense of belongingness, better social life and stronger support networks – sometimes called ‘social capital’.

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5
Q

Psychological reasons as an advantage of buying a home

A

-May be viewed as a sign of status or achievement

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6
Q

Investment potential as an advantage of buying a home

A
  • Monthly outlay to buy a home is different to rent
  • Rent referred to as ‘dead’ money
  • Whereas buying lets you build up a potentially valuable asset
  • This can increase your financial security, not just buy selling your home at a profit , but borrowing against its value-to provide for retirement through letting
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7
Q

Disadvantages of buying a home

A
  • Expensive
  • Inflexible
  • Maintenance costs
  • Deposit
  • Risk of negative equity
  • Social housing
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8
Q

Effect on jobs and cost effectiveness as a disadvantage of buying a home.

A
  • More expensive to sell home than hand in notice to landlord
  • Would have an impact on ability to change jobs especially and move for family reasons especially in the earlier stages of a persons career and need job mobility.
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9
Q

Maintenance costs as a disadvantage of buying a home

A

Landlords are responsible for maintaining rented
property. If you own your home, you will have to incur all the cost on
maintaining the house.

This can mean large and unexpected bills.

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10
Q

Deposit as a disadvantage of buying a home

A

amount is much bigger if you buy a house. Buying also includes other significant costs such as legal charges, stamp duty etc. Thus renting
might be a more affordable choice.

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11
Q

Risk of negative equity as disadvantage of buying a home

A

If you fail to keep up the regular mortgage payments, you may lose your home.

However, you will always have to pay the rent, as
long as you live at that place, while mortgage payment will stop once the loan amortises. You are eventually rent free.

-The value of rent that you save is called imputed rent

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12
Q

Social housing as a disadvantage of buying a home

A

-Rent may be subsidised as people will have more security due to longer contracts rather than short term

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13
Q

House prices rise as an advantage of buying a house

A

-Reap the reward of increase in value of house especially effective when leveraging property

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14
Q

Ability to borrow against your house as an advantage of buying a house

A

-Access to mortgages to cover the majority outright cost of the property.

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15
Q

How does leverage make residential property a good investment

A
  • Buying houses when the price of the house is low.
  • Any gain from this strategy is magnified if you increase the amount you invest through leveraging.

-By purchasing a house through mortgage
financing, people make an investment while using
borrowed money. Resultantly, they can make a sizeable gain if house prices rise later on.

-However, if the prices of the houses fall, they may
also suffer a loss resulting from negative equity

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16
Q

Housing v stock market

A

-Investing in housing is considered a safer
investment compared to investing in stock
market.

• Evidence suggests that housing market is less
risky as it is less volatile with fewer and
shallower swings up and down.

• The increase in the level of share prices and
house prices was found to be similar in the long run.

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17
Q

Different taxation on property

A
  • Recurrent taxes on property
  • Recurrent taxes on wealth
  • Tax on increase in wealth when in changes hands
  • Taxes on inheritance, estates and gifts
  • Transaction based taxes
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18
Q

What are recurrent taxes on property?

A

Payable by owners or tenants, e.g. council

tax. Charges may vary from one place to another and the value of the property

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19
Q

What are recurrent taxes on wealth?

A

-Property is a part of wealth and this tax is paid
on wealth less debts. U.K does not have an annual wealth tax but many
other EU countries do have it.

20
Q

What are taxes on increase in wealth when it changes hands?

A

-Capital gains tax is to
be paid whenever a profit is being made on the sale of a capital asset (including property). Your only or first home is exempt from this tax

21
Q

What are taxes on inheritance, estates and gifts?

A
  • When estate of property passes down, there may be a tax payable when it passes from one owner to the next.
  • Inheritance tax paid by the giver is the example in the UK
22
Q

What are taxes on property when it is acquired?

A

to be paid while purchasing property, e.g., stamp

duty

23
Q

What are two main types of mortgage?

A
  • Repayment/capital and interest mortgage

- Interest only mortgage

24
Q

What is a repayment/capital and interest mortgage?

A
  1. Periodic repayments made to the lender are sum of interest and ‘capital’ sum borrowed.
  2. It is an example of ‘reducing-balance loan’.
  3. The amount you pay each month consists of a part of principal
    and a part of interest.
  4. The principal keeps on reducing gradually and whole loan clears by the end of the mortgage term.
25
Q

What is a reducing balance loan?

A

-This is where the interest is calculated each month on the amount of loan still outstanding and the amount you pay each month is set at a level that clears the whole loan by the end of the mortgage term

26
Q

What is an interest only mortgage?

A

-Periodic repayments solely consist of the
interest due and capital is paid off in full at the
end of the mortgage.

  • The borrower needs to plan how to pay
    principal sum at the end of mortgage term.
    For example, one could start investing in a
    savings plan to build up a lump sum by the
    end of mortgage term.
27
Q

What are interest only and capital and interest repayment mortgages an example of?

A

-Fixed rate mortgage

28
Q

What are examples of non-fixed mortgage rates?

A
  • Standard variable rate
  • Tracker rate
  • Discounted rate
  • Fixed rate
  • Capped and/or collared mortgage
  • Offset mortgage
29
Q

What is a standard variable rate?

A

The interest rate tends to go up and down in line
with interest rates in the economy as a whole.

-Often it changes faster going up than it does coming down

30
Q

What is a tracker rate?

A

-A variable rate that automatically goes up and down in line with a particular interest rate, such as Bank of England base rate.

31
Q

What is a discounted rate?

A

-A variable rate that is set number of percentage points lower than standard variable rate. A borrower may be given some discount Which often lasts only for a few years.

32
Q

What is a fixed rate?

A
  • For a period of one to five years, you pay a set interest rate that does not change
  • Can help you budget as you know the exact amount of interest that you will be paying
33
Q

What is capped and/or collared mortgage:

A

The interest rate can vary but can not go higher (capped) than or lower (Collard) than a set rate.

34
Q

What is an offset mortgage

A

A positive balance in current or savings account is

deducted to pay for outstanding mortgage

35
Q

What is the annual percentage rate?

A

-The interest and other compulsory charges in a standardised way that also takes into account when you have to pay them.

-A loan with a higher APR is more expensive than a loan with
lower APR.

-It calculates cost of mortgage over its life taking in account,
discounts, additional costs.

36
Q

What is the loan-to-value ratio?

A

-The maximum mortgage that the lender is willing to offer relative to the value of the property.

37
Q

How is the loan-to-value ration regulated?

A

-The loan-to value ratio is normally 90 percent, however if it is 100% then they have to pay an insurance fee incase they default on their payments etc.

38
Q

Economics of the housing market

A
  • If demand for housing exceeds housing supply, then prices normally increase.
  • One way to increase housing supply is to build new homes or the sale of existing home/only a proportion of the existing housing stock will be up for sale at a given time
  • Or house owners will defer from selling due to the value of it being lower than they are hoping to achieve.
  • They could put up their house for let to increase rental homes.
  • Demand for housing is also influenced by the ability to obtain a mortgage which is another market in itself
39
Q

Factors that influence the demand for housing

A

-Demand for housing is influenced by such factors as intention to buy, ability to buy, availability of financing
options, availability of alternatives, prevailing rates of interest and perceptions about the future prices of houses.

40
Q

Politics of housing market

A
  • Government likes to have people occupied in home because they perceive that owners are more likely to occupy a home for the long term which contributes to building a community, low crime and a well maintained housing
  • Property a store of wealth which can be used in retirement to provide income and pay for care=less burden on state.
  • Green belt policies can use public money to build home using public money. Offer grants to private companies to build.
  • Government proposes conditions where a proportion of housing is made for social housing
41
Q

How does the government help first time buyers get on the housing ladder?

A

-Helping build a deposit through tax-incentivised schemes which allow these savings to be drawn out early if used for a deposit on buying a home.

42
Q

What is a help-to-buy ISA

A
  • Savings scheme where first time buyers build up tax free savings and the government adds a bonus if you use the money as a deposit on a home.
  • Kick it off with a lump sum up to £1000 and add up to £200 a month.
  • When you are ready to buy, the government adds a bonus equal to 25 percent of your savings, up to a maximum bonus of £3000
43
Q

What is a lifetime ISA?

A

a longer-term tax-free savings account that gives you a government bonus of 25% of the money you put in, up to a maximum of £1,000 a year. As with other ISAs, you won’t pay tax on any interest, income or capital gains from cash or investments held within a Lifetime ISA

-Savings can be drawn out before 60 to be used for a deposit on a house.

44
Q

What is a help-to-buy equity loan?

A

Government lends you up to 20% of the cost of your newly built home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest.

You won’t be charged loan fees on the 20% loan for the first five years of owning your home.

45
Q

What is a help-to-buy mortgage guarantee?

A
  • Encourages lenders to offer 95% Loan-to-value

- Help get a mortgage if only a little deposit

46
Q

What is shared ownership?

A

Shared Ownership gives first time buyers and those that do not currently own a home the opportunity to purchase a share in a new build or resales property, The purchaser pays a mortgage on the share they own, and pays rent to a housing association on the remaining share.

-Because the purchaser only needs a mortgage for the share they are purchasing, the amount of money required for a deposit is a lot lower when compared to the amount that would be required when purchasing outright.

47
Q

What is Right-to-buy?

A

Tenants living in social housing are given the right to buy their home at a discounted rate. If you sell within five years, you must repay some or all of the discount.

Fundamentals of Personal Finance (8 decks)

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