Mortgages Flashcards
Capped Mortgage
A guarantee is given by the lender to the borrower that interest rates will not rise above a given level for a certain period of the loan.
Cap and Collar Mortgage
The lender guarantees that the interest rate on the loan will not rise above a given level (the cap). However, there is also a minimum rate below which the interest will not fall (the collar). The two can be applied together, so that rates are guaranteed to be between an upper and lower limit for a given period of time. The arrangements continue for an agreed period, e.g. two years.
Deferred Interest Mortgage
This is an arrangement whereby the rate of interest repaid is less than the interest rate accruing to the loan. With this arrangement unpaid interest is accrued and added to the capital outstanding on the loan. Following the implementation of the MMR, it is unlikely that this option will be readily available as it was originally designed to help those who would struggle to afford their monthly repayments. Lenders must now check that their borrowers can afford repayments before agreeing to a mortgage.
Discount Mortgage
The interest rate charged for an initial period of the loan (frequently for one, two or three years) is reduced by a set percentage below the standard rate charged by the lender.
Euro Mortgage (or any other currency).
The interest and capital of the loan is designated in euros or another currency, usually to take advantage of lower interest rates. This can result in gains or losses as the currency exchange rate moves relative to sterling, but can be useful for individuals paid in a different currency such aseuros or US dollars.
Flexible Reserve Mortgage
Monthly payments can be varied if required and lump sum capital repayments made at any time. As capital is repaid, this creates a reserve from which the borrower can withdraw cash up to the initial mortgage amount at any time. If a borrower runs into problems at any time, they can use the reserve to meet future interest payments. Following the implementation of the MMR, it is unlikely that this option will be as readily available.
Offset Mortgage
This is where a mortgage account and a bank account are linked. Interest is charged on the net balance of the two accounts, so if money is kept in the bank account the size of the mortgage is effectively reduced. Even the effect of a monthly salary going in can have an effect and reduce the overall interest payments.
Equity-Linked or Shared Appreciation Mortgage
The lender takes a stake in the equity of the property which has been purchased. The amount loaned, on which interest is charged, is less than the amount advanced for the purchase. On the sale of the property, the proportion of the equity stake owned by the lender is repaid to them. It is possible for the borrower to slowly accrue the lender’s equity stake over time.
Equity Release Mortgage - Lifetime
A property is mortgaged (or remortgaged) to release money for any purpose the householder wishes, e.g. borrowing for house improvements, to release money to buy another property, for home improvements, to buy a car or even to consolidate other loans. Retired individuals can use this to release money to live on in retirement.
A Roll Up Mortgage - Lifetime
means that interest is added to the loan. The borrower receives the released equity as a lump sum or regular income and is charged a monthly or annual interest on the amount advanced. Rather than having to make regular interest payments to the lender, the interest is added to the loan, increasing the amount outstanding. The original amount borrowed and the rolled-up interest is repaid when the home is sold
A Fixed Repayment Lifetime Mortgage
gives the borrower a lump sum without any interest. However when the home is sold, a higher amount has to be repaid to the lender, which is agreed at the outset. The lender uses the higher sum to repay the mortgage when the home is sold. An interest only mortgage gives the borrower a lump sum which is usually invested to create additional income, out of which the borrower makes monthly interest payments to the lender and is free to use the surplus as he wishes. The interest on the loan can be fixed or variable, and the original amount borrowed is repaid when the home is sold.
A Home Income Plan - Lifetime
The money you borrow is used to buy a regular fixed income for life (an annuity). This income is used to pay the interest on the mortgage and the rest is yours. The amount you originally borrowed is repaid when your home is eventually sold.
An Interest Only Mortgage - Lifetime
You get a lump sum, and pay a monthly interest on the loan, which can be fixed or variable. The amount you originally borrowed is repaid when your home is eventually sold.
Home Reversion Schemes
This scheme involves the sale of the applicant’s home, in whole or in part, in exchange for a cash lump sum, a regular income or both. Although all or part of the home belongs to the home reversion scheme provider, the seller is allowed to continue living in it under the terms of a lease. This may involve them paying a nominal rent each month or they can select to pay a higher rent and receive more from the sale. Sellers will normally receive between 20% and 60% of the home value due to the fact that they are being allowed to continue living in it. The older the individual is when they start the scheme the higher the amount they will receive.
Sale and Rent back agreements
Some companies may be able to help clients with financial difficulties by buying their home off them and subsequently renting it back to them for a fixed period of time. These arrangements are sometimes referred to as ‘flash sales’ because of the speed with which the arrangement can be set up – normally 3 to 4 weeks – but are also known as ‘mortgage rescue’, ‘rent back’ and ‘sell to let’ schemes. It should be noted that these arrangements are not the same as home reversion schemes, where the client has already paid off their mortgage and obtains a cash sum and the right to remain in the home for a nominal rent. In this arrangement, the client will normally be paid less than the full market value for their home, they may have to vacate the property after the term of the original lease runs out – normally between 6 and 12 months – or they could be evicted if they breach any of the terms of the tenancy.
