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Mortgages and General Insurance > Mortgages > Flashcards

Mortgages Flashcards

1
Q

What 5 factors affect an individual’s borrowing capacity?

Arranging a mortgage

A
  • Income
  • Employment status
  • Liabilities
  • Amount of deposit
  • Credit history
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2
Q

How is a borrower’s income assessed against loan value?

Income

A

Since 2014 lenders use additional factors to consider the affordibility of the loan for the borrower:
* It is no longer just based on a multiple of income
* However, this is still a general guide

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3
Q

How many years income history is assessed of the borrower?

Unsecured income?

A

Two to Three
* Generally, unsecured income is excluded from assessment, however, if this income has been received for 3 or more years it may be included.

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4
Q

How do lenders typically assess the borrower’s ability to pay?

Ability to pay

A

Lenders base the amount of meny they are prepared to loan on ability to repay not just a multiple of income. This includes:
* Other loans or liabilities
* Basic living expenses.

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5
Q

What are 6 types of income/renumeration that may be considered by lenders in support of a mortgage application?

Evidence of income

A
  1. Salary/Wages
  2. Bonuses (guaranteed and non-guaranteed)
  3. Commission
  4. Overtime (both guaranteed and non-guaranteed)
  5. Income from investments
  6. Part-time income.
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6
Q

What will a lender require a evidence of earnings for employed and self-employed borrowers? ( 3 for each)

A

Employed
* P60
* Wage slips
* income reference - employer’s letter

Self-emplyed
* Audited accounts - usually three years
* Accountant’s letter
* HMRC confirmation

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7
Q

What forms of liabilities are typically taken into account when assessing borrowers suitability? (name 7)

A
  1. Credit card balance
  2. Hire purchase agreements
  3. unsecured loans and unsecured bank overdrafts
  4. Mortgages on other properties
  5. Outstanding tax bills
  6. Maintenance payments
  7. Any other payments made that are regular in nature.
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8
Q

Amount of deposit - What does this affect?

A
  • Greater deposit = Lower borrowing amount = lower interest payments
  • Greater deposit also typically gives lower interest rates
  • Lenders are usually willing to accept a minimum deposit of 5% of the valuation of the property.
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9
Q

What are the 6 main costs in arranging a mortgage?

A
  • Arrangement fee
  • Legal fees and conveyancing
  • Stamp Duty
  • Higher lending charge - One off charge for loans in excess of 75% of loan/value (typically 6-8% of amount above 75%)
  • Survey fee
  • Land registry and search fee
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10
Q

What is an arrangement fee?

A

Typically applies to fixed rate, discount or other products with beneficial options and will tend to attract an arrangement fee from the lender which is usually non-refundable.
* Do not normally apply to standard variable rate mortgages

Lenders use fees for two reasons:
* It shows commitment from the borrower
* The fee offsets some of the administration costs, improving profitability.

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11
Q

What is conveyancing and what is a typically amount that solicitors charge?

A

Conveyancing is the legal transfer of land ownership from one person to another.
* Solicitor may charge 1% of the purchase price.

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12
Q

Stamp duty land tax - a puchase tax levied by the government. What are the rates and thresholds? (Not first time buyers)

A
  • Up to £250,000 = 0%
  • £250,001 - £925,000 = 5%
  • £925,001 - £1.5m = 10%
  • Above £1.5m = 12%

For additional properties, there is no 0% rate threshold:
* Up to £250,000 = 5%
* £250,001 - £925,000 = 10%
* £925,001 - £1.5m = 15%
* Above £1.5m = 17%

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12
Q

First time buyers and SDLT

A

As of 2023/2024, first time buyers will pay no SDLT on properties valued at £425,000 or under. This is reducing to £300,000 in 2024/2025.

  • They pay 5% on properties from £425,001 and £625,000.
  • Above £625,001, normal SDLT rules apply. This will also reduce to £500,000 on April 1st 2025.
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13
Q

What is the Higher Lending Charge (Mortgage indemnity Guarantee Premium)

A

This is a one-off insurance premium, which is usually required by the lender where a loan is in excess of 75% of the property value.

Typically the charge for an MIGP will be calculated at between 6 – 8% of the loan amount over 75% of the value of the property.

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14
Q

Help to Buy: shared ownership - What is it? What are the conditions?

A
  • Allows individuals to own a share of a home.
  • Owners pay rent on the remaining share.
  • A bigger share can be bought when affordable

The scheme is available if:
* Household earnings are under £80,000, or £90,000 in London.
* First time buyer, or used to own a home but cant afford one now, or is an existing shared-owner looking to move.

The property will be a leasehold

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15
Q

Help to Buy: equity loan - What is it? What are the conditions?

A

No longer available
* The home must have been newly built and valued up to £600,000.
* Buyers could not sublet.

The Government lends up to 20% of the cost of the newly built home (40% in London), so the buyer needs a 5% cash deposit, and a 75%/35% mortgage to make up the rest. The 20%/ 40% equity loan is interest free for the first five years.

16
Q

Help to Buy: ISA - What is it? What are the conditions?

A

No longer available as of Nov 2019, though they can still be paid into. Superceeded by the LISA.

  • 25% bonus from government.
  • Initial Deposit: Up to £1,200 in the first month.
  • Monthly Deposit Limit: Up to £200 per month.
  • Bonus Eligibility: Minimum balance of £1,600 to qualify for a government bonus (£400 minimum bonus).
17
Q

Help to Buy: LISA - What is it? What are the conditions?

A

Lifetime ISA - savers receive a 25% from the government for every £ deposited. The funds held in LISA can only be used to purchase a first home or for retirement.

  • Maximum bonus = £1000 per tax year (By savings £4000)
  • Contributions can be made up to age 50 and receive this bonus
  • LISA can be cash or S&S.
  • Retirement = post 60
  • Property must be valued at £450,000 or less.
  • LISA must have been open for 12 months to receive bonus.
18
Q

Mortgage repayment methods - Capital and Interest (Repayment)

A
  • Loan set for a set period
  • Monthly payment consists of part interest and part capital.
  • The capital repayment element increases towards the end of the term.
  • As repayments are made, borrower’s equity increases, and loan decreases.
  • Loan period can be extended to decrease monthly payments.
  • Life cover can be arranged for the balance of the load - decreasing term assurance

Default recommendation from SJP

19
Q

Mortgage repayment methods - Interest Only

A
  • Usually set for a specified period
  • Borrower repays mortgage at the end of the term as a capital sum
  • Lender will require a suitable repayment vehicle be set up alonside the load, historically, this was an endowment plan but now, ISAs are more likely.
  • Life cover needs to be arranged to cover the loan, if a non-life product is used for loan the repayment.
  • It is possible for a mortgage to be set up on a part capital and interest, part interest only basis.
20
Q

Higher risk mortgage areas - 5 times the lender will require special attention to affordablitly, income, and outgoings.

A
  • Debt Consolidation
  • Sub Prime Mortgages
  • Buy to Let Mortgages
  • Right to Buy Mortgages
  • High loan to value Mortgages
21
Q

Considerations by lenders for BTL morgages.

A

Size of deposit
* Most lenders require 20%-50% of the purchase price. Specialist lenders can be more flexible.

Borrower’s employment, income/earnings
* Some lender’s require a £40,000+

The potential rental income from the rented property
* Many lenders want the potential rental value to be 20-30% above the mortgage repayment.

22
Q

Interest rate options - 10 options.

A
  • Fixed
  • Standard variable rate
  • Capped/collared
  • Low start
  • Deferred
  • Flexible
  • Cashback
  • Discounted
  • Base Rate Tracker
  • Offset Mortgage
23
Q

Fixed Interest rate - Explain

A

Interest rate remains the same throughout an agreed term.
* No interest deferment on fixed rate mortgages
* The lender’s standard variable rate will come into effect at the end of a fixed period
* An Early repayment Charge may be payable if the loan is redeemed before the end of the fixed rate period - this may be significant and are typically higher than other forms of interest arrangement

24
Q

Standard variable rate - Explain

A
  • Borrower’s payment risees and falls in line with the lender’s Standard Variable Rate.
  • More difficult to budget for
  • If interest rates fall, borrowers could pay less than the Fixed rate.
25
Q

Capped/Collared rate - Explain

A
  • Variable rate mortgage with caps
  • Fixed max (Cap) and Fixed Min (Collar)
  • Normally a short term option on a SVR mortgage.
  • Arrangement fees may apply.
  • Early repayment Charge may be payable.
26
Q

Low Start rate - Explain

A
  • Lower rate in first few years
  • Capital is not normally repaid in the early year
  • Redemption fees may be payable
  • Attractive to young professionals who expect their incomes to rise significantly in the short term.
27
Q

Deferred rate - Explain.

A
  • Deferred rate mortgages are where the borrower only pays interest on part of the loan and the remaining unpaid interest is added to the outstanding loan.
  • Capital value of the loan increases for a period
  • At the end of the deferred period, the borrower pays interest on the full loan outstanding.
  • An Early Repayment Charge may be payable.
28
Q

Flexible rate - Explain

A
  • Borrower can vary repayments
  • Payment holidays and underpayments can be made if overpayments have previously been made.
  • Most lenders offer the facility to increase borrowings subject ot the LTV being below a certain limit (usually 80% LTV).
  • Interest is calculated daily.
29
Q

Cashback rate - Explain

A
  • Offers cash incentive for borrowers
  • Amount of cashback usually expressed as a percentage of the loan.
  • ERCs generally apply.
  • Often combined with another mortgage type.
30
Q

Discounted rate - explain

A
  • A percentage is deducted from the SVR
  • Lenders may offer a variety of discounts depending on market conditions.
  • The discount is usually a percentage deducted from the standard variable rate.
  • There is no roll-up of interest, as there is under a deferred mortgage.
  • ERCs may be payable.
31
Q

Base rate trackers - Explain

A
  • Tracks the BoE base rate and changes in accordance with a constant differential set by the lender.
  • The interst rate is usually between** 0.5% and 1% greater **than the BoE base rate.
  • Monthly mortgage interest payments go up when base rate rises and reduce when base rate falls.
32
Q

Offset mortgages - Explain.

A
  • Interest is only charged on the outstanding balance of the mortgage less any money held on deposity with the lender.
  • Money needs to be held on deposit with the same lender to be effective.
  • Some lenders will include only certain types of deposit accounts in the offset calculation.
  • Offsetting can have the effect of reducing the term of the mortgage or lowering monthly payment.
33
Q

Repayment vehicles - Endowment plans

A

An endowment as a regular payment, investment-based savings plan that provided a lump sum at a set date. The amount provided was not guaranteed. New endowment plans are no longer available. There were 4 types:
* Full with-profits
* Without-profits
* Low-cost
* Unit linked.

34
Q

Repayment vehicles - Pension Plans

A

Borrowers may choose to utilise their TFC to repay the balance of the mortgage. Lenders may restrict borrowing to 80% of the projected tax-free cash lump sum

  • Advantages:
  • Tax relief on premiums.
  • Fund grows tax-efficiently.
  • Maximum tax-free lump sum available to pay mortgage.
  • Moving house does not affect the invested fund.
  • Remaining fund can be used for retirement income.
  • Part of the tax-free lump sum may remain after repaying the mortgage.

Disadvantages:
* Tax-free lump sum limited to 25% of the fund.
* Using tax-free lump sum may cause a retirement shortfall.
* Uncrystallised Fund Pensions Lump Sum (UFPLS) is partially taxable and triggers the MPAA, limiting future contributions.
* Mortgage cannot be repaid until age 55 (or 57 from 2028).
* Life cover may need to be arranged separately.
* 25% of fund value is not guaranteed to repay mortgage.
* Usually a more expensive option.
* Pension contributions may be limited by the annual allowance or tapering.

35
Q

Repayment vehicles - ISAs

A

Advantages:
* Tax-efficient growth.
* Potential for high growth.
* Early mortgage repayment saves interest payments.
* Suitable for long-term growth (via equity investments).
* Easy access to funds.

Disadvantages:
* No guarantee of sufficient funds to repay the mortgage.
* Separate life cover required.
* Contributions limited by annual tax table maximums.

36
Q

Protecting a mortgage - Options

A

Mortgage protection
* Repayment mortgages are usually covered by decreasing term assurance
* Interest only mortgages may be covered by a level term assurance.

Income protection
* Orgainsed to cover the monthly mortgage repayments should the individual be unable to earn an income.
* Paid after a certain period (deferred period).
* IPI could be paid until retirement.
* Typically covers 50-65% of the life assured’s income.

The client’s existing provisions, including the state benefits need to be carefully considered before recommending IPI

Mortgages and General Insurance (3 decks)

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