Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Unit 5 - CeMAP 2 > Repayment Methods > Flashcards

Repayment Methods Flashcards

1
Q

Calculating Interest - Annual

A
  • Interest is calculated on the balance outstanding at the beginning of the year
  • With Capital Repayment no adjustment is made so each monthly payment is made on the same debt outstanding over 12 months
  • More interest paid that with other methods
  • No longer used much
  • Benefit of repaying capital is not seen until the following year
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Calculating Interest - Monthly

A
  • Interest is calculated on a monthly basis
  • Calculated on capital left each month
  • More popular
  • Monthly overpayments immediately impact the level of interest paid
  • Pay much less interest over the term
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Interest Annual Review Schemes

A
  • Client pays the same each month
  • Payment amount is set for the year
  • This leads to overpayment of the mortgage
  • Account is reviewed annually for new monthly payment amount based on the loan amount left and the appropriate level of interest
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Calculating Interest - Daily

A
  • For flexible mortgages
  • As soon as a payment is made the interest is calculated on the outstanding balance
  • Overpayments result in an immediate drop in interest
  • Most beneficial for people overpaying their mortgage
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Capital Repayment

A
  • Loan is structured to pay capital & interest
  • Guaranteed to pay off the loan
  • Rates are higher than interest only
  • As capital is paid off the interest lowers as it’s based on the capital amount left
  • If interest rates go down during the term & the borrower maintains the same level of payment it can help to reduce the term
  • Low risk
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Interest Only

A
  • No capital reduction
  • Lower payments
  • Capital required at the end of the term via a repayment vehicle

Payment calculated as:
£100k x 5% / 12 = £417pm

  • High risk
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Pure interest only

A

Doesn’t have a repayment vehicle or term, the loan is paid by the sale of the property

+ Only suitable for BTL

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Retirement Interest Only Mortgage

A

Introduced in 2018 for borrowers over a certain age

  • For borrowers with interest only mortgages before MMR that didn’t have a repayment vehicle or couldn’t repay the capital
  • Open ended
  • Repaid at death
  • No repayment vehicle or roll up interest
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Capital Repayment Vs Interest Only Payment

A

Interest only
£100k x 5% = £5k
Interest is £5k per year or £ £417 per month

Capital Repayment
£100k/1000 x 5.9127 (bank figure) = £591.27 per month or £7,095 per year

£5k still interest but £2,095 Capital is now paid

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

APRC

A
  • Must show ARPC more prominently than the interest rate
  • Not required if the actual rate isn’t shown
    To calculate it is assumed
    + rates are to stay the same for 12 months
    + payments to be made on time
    + no insurance is added to the loan
    + the loan is not redeemed early
Costs included
\+ total interest 
\+ arrangement fees 
\+ valuation costs 
\+ conveyancing
\+ HLC if applicable 
\+ redemption fee on completion
\+ home insurance if no alternative is offered

Does not include

  • Early redemption fee
  • Endowment/life assurance premiums or charges on default
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

ESIS Sheet

A

Shows warning for variable rate mortgage that rates may rise - shown as a 2nd APRC charge

  • Second APRC rate must be shown
  • If capped rate is reached straight away
  • If uncapped APRC rate must be the highest in 20 yrs
  • If tracker must show the highest rate in 20 years
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Interest only repayment vehicles

A

Mortgage advisors can’t offer advice - only a level 4 advisor who is RDR compliant can

Options
+ Endowments
- full with profit & life cover
- Low cost with profit & life cover
- Unit-linked endowment & life cover
- Unitised with profit endowment & life cover
+ Collectives - no life cover, separate level term required
+ ISA - no life cover, separate life cover required
+ Pension Plan - no life cover, separate level term required

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Qualifying/Non-Qualifying Rules (Life Cover)

A

Qualifying Life Assurance

  • No further tax is paid other than 20% paid at source
  • All UK companies offering whole of life policy & investment subject to 20% internal tax on profits
  • Non tax payers 20% tax at source (non-refundable)
  • Policy of a 10 year term or more
  • Premiums paid for 10 years or 75% of the original term if less
  • Premiums paid regularly, at least annually
  • Sum assured on death is min of 75% of the premium payable
  • Premiums paid in 1yr can’t exceed 2x premiums paid in another year
  • Each person gets £3,600 PA paid per year, for joint policies it’ll be £7,200 PA

Non-qualifying means that more tax is paid if more than £3,600 is invested each year.

  • HRT 20%
  • ART 25%
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Endowment with Profits

A
  • Receive revisionary bonuses
    + insurer offers a smoothing effect normalising the dips and peaks
    + Simple bonus: declared as a percentage of original guaranteed sum assured
    + compound bonus: declared as a percentage of the original guaranteed sum assured plus the previous years bonus

Terminal bonus is added at death or maturity
- Client pays a monthly fee
- An annual management charge is taken from the fund
- Policy can be paid up but this reduces the GSA applied on maturity
+ Will still pay sum assured on death

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Market Value Adjustment (MVA) - Life Assurance

A

Early surrender invokes a penalty if there are poor market conditions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Unit Linked Endowment

A
  • Pays sum assured on death not maturity
  • Can be extended or cashed in early
  • Regular reviews - 10 years 15, 20 then every year
  • Life cover is paid by cashing in units from the fund throughout the duration of the term

Charges

  • Bid/offer- initial charge is 5%
  • Annual management charge 0.5-1.5% annually
  • Early surrender charge within the first 10 yrs with a reducing % until the end of the cancellation period
17
Q

Endowment Shortfalls

A

Interest rates were high in the 90’s. As they dropped the value of the sum assured dropped and clients could no longer pay off their capital.

Now there is a traffic light system and regular reviews to avoid this for endowment linked mortgages

  • in 1999 the FSA implemented new rules to reduce the risk of shortfall.
    Policy providers must review endowments every 2 years and send letters to the policy holder in paper corresponding to traffic light classification

Red - High risk - Prompt action to be taken
Amber - Significant risk, consider action
Green - All is well

18
Q

Endowment policyholders can complain to FOS if…

A
  • The advisor recommended surrendering an existing endowment & taking a new one
  • Mortgage loan is due before maturity
  • The advisor didn’t explain the risks
  • Policy holder retired before the endowment policy matured & the advisor didn’t check income affordability at retirement

Process
+ complain to the provider first then the FOS
+ complaint must be made within 6 years or 3 years from becoming aware (red letter) whichever is later.

19
Q

Endowment shortfall solutions

A
  • Switch shortfall to a capital repayment mortgage
  • Repay early with a lump sum from a different source
  • Convert mortgage to capital repayment & surrender endowment - new life cover will be required
  • Savings elsewhere
  • Extend endowment term (unit linked) and mortgage term
  • Increase premiums, subject to qualifying rules
  • Use compensation paid out from mis-selling
20
Q

Collectives

A
  • Unit Trusts
  • Open Ended Investment Companies (OEIC)

Advantages

  • Lump sum or periodically or both
  • Get the skill of an experienced fund manager while spreading the costs across investors
  • Reduces risk with fund diversification
  • Manager can negotiate dealing costs due to the vast sums involved

Disadvantage

  • Less control over where your money is invested
  • Subject to capital gains & income tax
  • Prices can go down as well as up
21
Q

Unit Trusts

A
  • Trust deed outlines the investment parameters
  • Open ended (can sell more units to more investors)
  • Each unit is a fraction of total assets
  • Buy at offer price (higher as includes commission and admin fee) sell at Bid price
  • Annual fund management charge 0.5-1.5% of fund value - this is deducted from the fund
  • Valued at the same time each day

Forward Pricing
- If investor makes a purchase today the price of the unit want to be known until the revaluation point

For mortgage

  • Advisor calculates how much is invested at projected growth rate to pay of the mortgage.
  • Regular reviews are needed

Unit trust manager - fund manager

  • Prices up units daily
  • Sell & buy back units
  • Mange investments in line with trust deed
22
Q

Types of Unit Trusts

A

Accumulation Units (growth)

  • Reinvested at growth
  • Good for capital growth not income
  • Income must be declared event though it isn’t received

Distributed Units (income)

  • Income is distributed to unit holders
  • Capital growth is lower
  • Investor can still choose to reinvest
23
Q

Unit Trust Approaches

A

Passive (tracker) Funds
- Not actively managed (lower fees)

Managed (active) Funds

  • Actively managed
  • Sticks to the parameters in the deed trust
24
Q

Unit Trust Tax

A 
Equity Trust - Dividends Paid Gross
£2k Allowance 
- 7.5% BRT 
- 32.5% HRT
- 38.1% ART 
Fixed Income (non-equity) Unit Trust 
Income paid gross, can use interest allowance 
BRT - £1k
HRT - £500
and usual bands for the rest

CGT only applies when moving or cashing in

25
Q

Open Ended Investment Company (OEIC)

A
  • Structured as a company
  • Sell shares, not units
  • Established under company law not the trust deed

Authorised Corporate Director (ACD)
- Fund manager

  • No bid/offer spread
  • Shares are single priced on a forward basis
  • Initial charge is 3-6%
26
Q

Cash ISA

A
  • 16 years+
  • Tax Free
  • Not appropriate for mortgage
27
Q

Stocks and Shares ISA

A
  • 18 years+
  • Income gains are tax free
  • Risky as it’s based on stocks and shares, could go up or down
  • Seen as suitable for a mortgage
28
Q

Innovative Finance ISA

A
  • Peer to peer lending
  • Interest is tax free
  • Unsuitable for mortgages as it’s very risky
29
Q

ISA’s

A
  • CGT free (losses can’t be offset)
  • Annual investment cap of £20k
  • ISA’s for single people not joint
  • Withdrawals at anytime from stocks and shares, cash and innovative finance NOT H2B or Lifetime
30
Q

Death with an ISA

A
  • Can be transferred to a partner and stays tax free but the beneficiary cannot add additional funds.
  • ISA remains invested until
    + Administration of the Estate
    + Closure of the account
    + 3rd anniversary of death
    The transfer is called additional permitted subscription this will be for the value on death or at the point of transfer
31
Q

Help to Buy ISA

A

Available since 2015

  • Must have a National Insurance Number
  • Joint savers have one each

Rules

  • Max payments £1k upfront & £200 PM
  • Max initial payment of £1,200
  • When a property is found the government adds an additional 25%
  • Scheme is available for 4 years
  • Maximum bonus is £3k with £12k invested
  • Minimum bonus is £400 with £1,600 invested
  • Paid on completion directly to the solicitor
  • Can’t contribute to a cash ISA in the same year
  • House must be less than £450k in London
  • House must be less than £250k outside London
32
Q

Pension Mortgage

A

Client aims to use the 25% tax free lump sum at maturity

  • Max input is £40k per year or the same as their salary if lower than £40k
  • Non-taxpayer can invest £3,600 tax free
  • Can make unlimited contributions, these are just tax free levels
  • ART now lose £1 for every £2 they earn over £150k until it lowers to min of £10k
  • Can carry forward an allowance for 3 years
  • Any excess over lifetime allowance £1,073,000 at crystallisation is taxed at 55% if taken as a lump sum or 25% on excess if taken as income.
33
Q

Pension Mortgage - Advantages

A
  • Tax relief on contributions, 20% into the fund and a HRT & ART can claim extra relief via self-assessment.
  • Tax free growth, no income or CGT within the fund
  • Tax free lump sum up to 25%
  • Wide selection of fund choice
  • Flexibility on contributions going in
  • Outside of the estate for bankruptcy and IHT
34
Q

Pension Mortgage - Disadvantages

A
  • Annual allowance is restricted to £40k
  • Lifetime allowance is capped at £1,073,000
  • Pension is not guaranteed to pay the capital in your mortgage.
  • Can only be in a single name, cannot be in joint names
  • Mortgage must cease over 55 yrs (57 in 2028)
    + might not be able to repay early
  • Separate life cover is required
  • Pensions cannot be assigned to third parties
  • Only 25% is tax free, might not be enough to cover the mortgage, anything withdrawn over the 25% is subject to 55% tax
  • Cannot be put into trust
35
Q

Lifetime ISA

A
  • Since 2017
  • 18-40yrs to fund up to 60yrs old
  • Can invest £4k each year (cash or equities)
  • Government gives 25% bonus each month up to £1k per year
  • Withdrawal before 60 gets a penalty unless it’s for a property purchase
  • Can be withdrawn after 60 tax free
36
Q

Capital Repayment Vs Interest Only Payments

A
  • Capital repayment payments are higher than interest only as they include Capital & Interest

Unit 5 - CeMAP 2 (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions