Objective: To ensure their mortgage is repaid before retirement

Question 1

State the benefits of switching their mortgage from interest only to capital repayment. (5)

Answer 1

Benefits:
 Guaranteed to be repaid at the end of the term
 No shortfall at retirement/peace of mind
 Equity gradually increases as capital reduces
 So can remortgage and raise funds again if necessary
 Investments can be used for other purposes

Question 2

State the drawbacks of switching their mortgage from interest only to capital repayment (4)

Answer 2

Drawbacks:
 Does not match their ATR
 Higher cost, less disposable income for other objectives
 Easier to fall into arrears
 Missing out on growth potential of increasing contributions to investments instead

Question 3

State the advantages of keeping their existing mortgage

on interest-only and using investments as the repayment vehicle (7)

Answer 3

Advantages:
 More compatible with their ATR
 Possibility of surplus if investments perform well
 Can access investments during mortgage term if required (not pension)
 Can increase or decrease regular contributions if necessary
 Can encash some of the investment and make a capital repayment
 Can convert to repayment method at anytime
 Choice of funds

Question 4

State the disadvantages of keeping their existing mortgage

on interest-only and using investments as the repayment vehicle (6)

Answer 4

Disadvantages:
 No guarantee that mortgage is repaid at the end of the term
 Market conditions may not be favourable at the time funds are needed
 Could be tempted to access investments, leaving shortfall at end
 Higher interest charges as balance does not decrease
 Requires monitoring

Question 5

Detail and justify the recommendation you would make in relation to
ensuring their existing mortgage is repaid before retirement (11)

Answer 5

Keep their existing mortgage on an interest-only basis
 Using their existing investments as their repayment vehicle
 Although there is no guarantee of mortgage being repaid at end of term,
 an interest-only is compatible with their adventurous attitude to risk
 It means more interest is payable in total over the term,

 but it leaves more disposable income to increase contributions to ISAs and benefit
from growth
 They could possibly make a capital repayment out of their joint deposit account,
assuming no penalties or ERCs
 Investments would not be available for other purposes
 Review fund choice of their investments to ensure compatibility with ATR
 and provide greater chance of repaying the mortgage in the timeframe
 Interest rate is low, but if this increase, consider remortgaging to a more competitive
rate