Repayment of debt Flashcards
19 points
Additional questions before advising on mortgage
- Early repayment penalties or any repayment overhang
- Willingness to use other assets to repay the mortgage, willngness to use savings for an offest mortgage
- Expectation regarding rises in interest rates
- ATR & CFL for this objective and where is it in Tom and Sally’s order of priorties scale
- Would they you use any inheritances towards paying off the mortgage
- Do they want their mortgage to be paid off before Tom and Sally retires
- Are Tom and Sally willing to make overpayments
- does their current deal allow overpayments
Any penalties for overpayments
if so how much - What is their budget
- Would they be williing to add CIC to life policy or get rid of the life policy altogether
- When do they wish to be mortgage free
- Performance and any charges penalties on the ISAs
- Are there any penalties for fixed rate savings if they withdrew early
- Would Tom consider using the investment bond to repay the mortgage
- Would Tom and Sally be willing to consider protection such as CIC and IPI
- Are their assets earmarked for needs or objectives such as hellping children uni costs
- Are they expecting to extend or move home
- Will the children be living at home or in university accommodation
- How much emergency fund do they have or wish to retain
Benefits of paying off mortgage
- Tom and Sally has peace of mind that a large debt has been repaid and dont have to worry about any shortfalls in the future caused by unemployment or longterm illness
- Reduces outgoing now and have more disposable income for other needs and objectives
- Save on interest rate paymens
- Reducing or paying off debt will increase Tom and Sally’s credit score
- Cashing in some of their investment reduces Tom and Sally’s investment risk
- Saves on cost of re-mortgaging for example solictor fees, arrrangement fees, valuation fees, mortgage adviser fees
- Less protectoin needed
- Reduces taxation implication of savings interest at 40%
Drawback of repaying mortgage debt
- Interest rate was low and cheap
- Loss of emergency fund and reduction of liquidity
- Investment could have been earmarked for other needs and objective and will now be impacted
- Loss of potential investment opportunity and growth from the assets used
- Loss of tax efficient wrappers and savings within this would need to be built up again
- Having no credit can harm cedit score if Tom and Sally decide to move house or extend their property and need to take out additional borrowings
- Maybe penalties in repaying mortgage early, particularly as Tom and Sally are midway through a five year fixed term mortgage
- Penalties in cashing in investment to repay debt
- Tom and Sally could be withdrawing from the market during a market downturn and creating a loss by using it to payback the mortgage
- Tom could create an income tax liability by withdrawing funds from the bond if he withdraws more than the culmulative 5% withdrawal which would be subject to topslicing at taxed at 40% as a higher rate tax payer or even push him into additional tax threshold and pay additional higher rate income tax of 45%
- Could be difficult to borrow again
12 points
Outline factors you would take into account when adivising Tom and Sally on their current mortgage arrangement
- Tom and Sally have a low LTV of 38%
- The existing term of their mortgage
- The assets that could be used to reduce or repay the mortgage and willingness to consider
- Current protection arrangement does not protect in even of serious illness or longterm disabilty, current level life policy is over insured
- Redemption penalties payable on the mortgage
- The current rate of interest their paying and that is fixed until Dec 2026
- Tom and Sally are paying 40% income tax on their savings interest
- Their ability to overpay as they have a large disposable income and penalties on over paying or percentage limit they are able to overpay by
- Their assets that could be used to pay off mortgage and tax implications of accessing thier current investments
- Date they wish to retire
- Penalties on their savings deposit account
- Whether they intend to stay in the property, extend the property
12 points
Sally and Tom are considering making overpayments to their mortgage. State the key benefits for them of making such overpayments
- Tom and Sally can afford to as they have in excess of £3,000 of disposable income
- The wont have to access there other investments earmarked for other needs and objectives
- This would avoid paying a penalty to payoff the mortgage which would be more than likely as there in the middle of a 5 year fixed rate mortgage or if payments are within permitted percentage over payements
- Overpayment means they can pay off their mortgage earlier and save on interest rate payments or reduce interest on the amount overpaid
- This means there would have cleared their mortgage debt before they retire leaving more disposable income for their retirement needs
- They can diverst money saved from paying the mortgage off early to their other need and objectives with the rest of their disposable income
- It wouldnt affect their standard of living but would reduce their debt
- Would reduce their loan to value and get better rates in the future
- They are not locked and can stop and start whenever they want and have the flexibility to do so
- Still have access to capital in case of an emergency
- No investment risk
- Reduces protection need
Identify five advantage and disadvantages for Tom and Sally if they chose to invest their excess income in ISAs rather than overpayment to their mortgage
Advantages
* Low fix rate mortgage, compared to better investment return
* Benefit from tax free income and growth
* Flexibility of contributions into ISA
* The ISA’s would grow faster than if invested without the ISA wrapper growth could be better than saving on interest saved
* Could payoff mortgage quicker due to fund growth compared to overpayments
* Invest to match ATR
* Withdrawals to payoff mortgage wont have any tax implications whereas repayments could incur penalties if over the percentage limits
* They could wait till penalty free period and pay a larger amount off than being limited by overpayment percentages
* They have flexibility access ISA funds for other needs and objectives or in event of an emergency, whereas if needed to access the overpayments would depend on credit score and apply to borrow the money again
Disadvanges
* Investment risk the value could be impacted if there was downturn in the market
* Interest rate risk, rise in interest rates could exceed investment returns
* Could result not getting as much growth as hoped to payoff the mortgage
* Cost and charges on the investment
* Need for advice on the investment
* no advice or charges on making overpayments
* Could result in a shortfall which would mean they would have either access other investments to pay off the mortgage or have a longer term to pay the mortgage off than certainty of making over payments
11 points
Explain to
Tom and Sally the action that they could take when their fixed - rate mortgage deal expire in December 2026, to ensrure that their mortage payments continue to be affordable
- They could use their assets to pay off the mortgage entirely and have the peace of mind that it is paid off or pay a lump sum
- Their loan to value would reduce and give them access to better rates
- There is no early redemption penalties after fixed rate ends
- They could consider an offset mortgage
- The can use their savings to offset against their mortgage borrowings and reduce the term or repayments by doing so
- Means the savings still accesible in case of an emergency or need for funds
- They could extend the term of their mortgage and reduces the monthly payments. However does increase overall interest paid
- They can make overpayments and have the flexibility to be started and stopped at any time depending of when they feel its affordable to them,
- They could pay a fixed amount above the mortgage repayments
- They could shop around for a better deal
- Consider a new fix rate deal for certaintiy of reyments
- Swith to interest only mortgage (if conditions are met) and use one of their existing investment as repayment vehicle
10 points
What further information would be required in order to assess the suitability of Tom and Sally’s existing joint life first death level term assurance policy
- Why did Tom and Sally choose a level cover when their mortgage was decreasing
- Can the policy be change from level to decreasing
- Are the premiums guaranteed or reviewable
- Was the premium rated, were there any special terms on the policy
- Can CIC be added onto the policy, if so there level of conditions covered by the policy
- Is there any waiver of premiums on the policy
- Would Tom and Sally be willing to put the policy into Trust
- Claims history of provider
- Is there any guaranteed insurability options
- Willingness to earmark for family protection needs
List 5 benefits and 5 drawbacks of replacing Tom and Sally’s existing level term assurance policy with a suitable decreasing term assurance policy
Benefits
* The benefit would match Tom and Sally’s repayment mortgage and they would
* Not be over insuring themselves
* Decreasing term tends to be more cheaper than level term and so would save money
* Current policy not suitable
* Both Tom and Sally are both realatively young and healthy and so the premiums are likely to be competitive
* Simple underswriting to get policy to match their needs
Drawbacks
* Due to Tom and Sally’s age or their hobbies could result in rated premiums that could be more expensive premiums
* It only covers the mortgage and not have any surplus for anything else
* They may not get the same terms as their existing policy
* Further underwriting required as Tom and sally are older
* Extra administration
* Loss of potential surplus payout on death
* Additional cost of advice
State the reasons why Tom and Sally’’s existing morgage protection policy may be unstuiable to meet their needs
- It only pays out ondeath, there is no CIC cover
- The cover is level term and does not match the repayment mortgage where debt will decreases
- Eventually they will be overinsurred as the sum asasured will exceed morgage debt over time
- They are paying higher premiums for level cover, decreasing term tends to be cheaper
- Its unclear when in 2021 the policy was taken out, their mortgage was taken out at the end of 201, the policy term may not match that of the mortgage term
12 points
Recommend and justify the actions that Tom and Sally could take to improve their mortgage protection
- Tom and Sally could tke out a completely new decreasing term
- joint life first death
- Include cic if affordable
- This will pay out a tax free lump sum on either of them to be diagnosed with a serious illness or die
- The sum assured should be the remaining debt on the mortgage £200,000 - So that the mortgage can be fully repaid
- The term should be over the mortgage term remaining and match repayment date - The cover will align with when the mortgage ends
- Guarantees repyament of mortgage in case of iether first death/serious illness
- Premiums would be low cost compared to level cover
- The premiums should be guaranteed - The cost is known and affordable over the longterm
- The policy should be put into Trust using a split Trust - So that the life element benefits are outside Tom and Sally’s estate for the purposes of IHT and immediatly paid out to pay off mortgage death
- The policy should have waiver of premium - To ensure their premiums continue to be paid and cover continue in event of accident or sickness
- Cancel existing plan when policy is in force, ensure no break in cover
7 points
Identify the key issues that you would discuss with Tom and Sally when their mortgage reaches the end of its fixed term in December 2026
- Do they wish to pay off their mortgage
- Performance of investments
- Update on childrens university plans and how this interact with morgage plans
- Mortgage rates available from other lender
- Changes to their mortgage objective
- Any overhand charges
- Use of tax allowances
