Specimin Paper A

Question 1

Why might Gillian have opted to use a series of part home reversions, rather than using the lump sum from a full reversion to purchase an annuity?

Answer 1

An annuity could carry Gillian into an income level that would have an impact on the Married Couple’s Allowance.

Question 2

The FCA definition of a home reversion plan includes that the individual’s right to occupy the property may end after what minimum specified period?

Answer 2

The FCA definition of a home reversion plan includes that the individual’s right to occupy the property may end after a minimum specified period of 20 years from the date the plan was entered into.

Question 3

The FCA definition of a home reversion plan includes that the individual’s right to occupy the property may end after what minimum specified period?

Answer 3

The FCA definition of a home reversion plan includes that the individual’s right to occupy the property may end after a minimum specified period of 20 years from the date the plan was entered into.

Question 4

Jeremy and Margaret, both aged 68, have been running their own business but now wish to retire. They lost faith in investing any further into their pensions because of poor equity returns and they will have limited income. They wish to remain living in their property for the foreseeable future, but they need to raise an additional tax-free lump sum. Which of the following is likely to be most appropriate?

Answer 4

This would give them the tax-free lump sum that they require.

Question 5

Jack and Pauline have recently started a full home reversion plan. As a result, they have:
A Become Tenants in common, B Become Beneficial owners, C Retained legal ownership, D retained rights to share any increase in the value of their home

Answer 5

The home reversion plan has become the legal owner of the property. Jack and Pauline have become the beneficial owners.

Question 6

Alicia is taking out an interest-only lifetime mortgage to release equity of £20,000 from her property to repay some debts and replace her windows. Which of the following is true? Will she need to provide a quite for costs of the windows installation?

Answer 6

Lifetime mortgage proceeds can be used for any purpose - evidence of how they are used is not required.

Question 7

Which of the following is not typical of a home reversion plan? Beneficial Ownership, Cash Lump Sum, Interest Payments, Lifetime Lease

Answer 7

Interest Payments

Question 8

Which equity release plan immediately removes part of the value of a property from an estate before the released funds are spent?

Answer 8

Home Reversion Plan-The property is sold so removes from the estate

Question 9

When Noreen took out her equity release plan, the provider was required to obtain a certificate signed by Noreen and her solicitor to confirm that the implications of the plan had been explained to her why was this?

Answer 9

This was because the provider was a member of the Equity Release Council

Question 10

Joe and Audrey have heard that their local authority can claim the value of their property to fund the costs of their long-term care. This would not be the case if an equity release scheme was written:

Answer 10

On a Full Reversion Basis

Question 11

Several years ago, Alan started a home reversion plan. He opted for a lump-sum payment and he also purchased an annuity. On which element of the arrangement, if any, was there a potential tax liability?

Answer 11

There was a potential liability to income tax on the interest element of the annuity.

Question 12

Under FCA regulations, which of the following is a key requirement of the lease related to a regulated home reversion plan?

Answer 12

There must be security of Tenure

Question 13

Jessie, aged 76, is considering an equity release plan to boost her pension. She can manage to pay most of her regular bills, but is caught out by extra expenditure at certain times. She wants to ensure that she can leave the maximum inheritance to her daughters. Which type of plan would most closely match her needs?

Answer 13

Drawdown plan

This would be the most suitable as it enables her to take cash as needed and would result in lower interest roll-up than taking the maximum cash at the start.

Question 14

Reuben is applying for a rolled-up interest lifetime mortgage. He has been advised that the maximum loan to value he is eligible for is 54.5%. This is most likely to be because:

Answer 14

He has a heath condition which could impact his life expectancy

At age 60 the maximum loan to value is likely to be around 30%. Maximum LTVs increase with age, but rarely exceed 50% unless enhanced terms apply.

Question 15

On what basis are equity release providers permitted to be selective as to where they can conduct business in the United Kingdom?

Answer 15

Providers make their own commercial decision, nothing to do with the ERC or FCA

Question 16

Irene has an equity release arrangement. Why might she undergo assessment of her ability to perform a number of ‘activities of daily living’?

Answer 16

If she is to enter long term care - Further drawdown funds are not usually subject to underwritng

Question 17

Which of the following is true regarding the application of the Mortgage Credit Directive (MCD) to equity release plans available in the current market?

Answer 17

Lifetime mortgages available in the current market are MCD-exempt. Home reversion plans are not a form of credit so are not covered by the directive.

Question 18

Brian has recently entered long-term care and his local authority realises that it cannot place a charge on his property. This is because:

Answer 18

A local authority cannot place a charge on Brian’s property if it is subject to a full reversion. This is because Brian no longer owns it.

Question 19

Emily is starting a home reversion plan and has been told her expenditure will increase on each anniversary of the plan. This relates to what?

Answer 19

This would releate to rental payments - No interest would be charged even at a small level.

Question 20

Henry and Pamela are unmarried and own their property on a joint tenancy basis. The sole beneficiary of Henry’s will is his daughter, Emma. Which of the following is true on Henry death?

Answer 20

Ownership of the property will pass automatically to the joint tenant, Pamela. Only when Pamela dies will his share go to Emma.

Question 21

William and Mary entered into a home reversion plan four years ago. They now wish to make certain adaptations to the property to assist them as they get older. When will They will be expected to obtain the plan provider’s agreement:

Answer 21

In all Circumstances of changing the property they will have to get the plan providers agreement

Question 22

Jason left his entire estate in his will to his children. This included his share of the house that he and his wife, Annie, owned as tenants in common. As a result:

Answer 22

With tenants in common, Annie would become legal owner of the whole property but the children would be the equitable owners of Jason’s share. His share would be held in trust for the children. As single owner, Annie could not sell without the other trustees’ agreement and the children could not force her to sell.

Question 23

Lesley is thinking about starting a rolled-up interest lifetime mortgage and wants to understand the effect of the rolled-up interest. She is advised that the debt will have roughly quadrupled after 20 years. This means that the annual fixed-interest rate would be approximately:

Answer 23

At a rate of 7% the debt is likely to double every ten years, so will quadruple after 20 years.

Question 24

Reg, aged 80, has held a 100% home reversion plan for some time and he has now suggested that his niece, Jane, shares his house with him. Under what circumstances, if any, could Jane normally be added to the plan?

Answer 24

it is not usually possible to add another person to it. Jane will have to sign a waiver and will have no occupancy rights upon Reg’s death.

Question 25

Polly and Mick took out a part home reversion scheme four years ago. They now seek a further reversion from their existing plan to pay for home improvements. What rule applies

Answer 25

Under a part reversion, a further drawdown may be permitted. The amount of the further reversion will depend on the applicants’ ages and the value of their property at the time it is applied for.

Question 26

Mandy has, in recent years, benefited from full Council Tax Reduction. Her family have agreed with her that a home reversion plan will be to her advantage. After receipt of the funds from the plan she should advise her local authority:

Answer 26

She needs to tell them immediately if her financial circumstances change

Question 27

An enhanced plan typically offers what to people with existing medical conditions

Answer 27

A higher loan to value - can borrow more.

Question 28

Which of the following is NOT a principle that Members of the Equity Release Council must uphold?

Answer 28

Ensure that interest rates do not alter during the term of their plan

Question 29

Are the Equity Release Councils Standard statement of principles legally binding

Answer 29

No they are voluntary

Question 30

If a customer takes out a home reversion plan and is subsequently declared bankrupt what may the trustee in the Bankcruptcy be able to do?

Answer 30

Pursue Legal action to recover the funds

Question 31

A client has received his annual statement on his lifetime mortgage. Which of the following would NOT be included in the statement A.Rate of interest B Early Repayments C Confirmation of Insurance products purchased through the firm D The type of Contract?

Answer 31

C. Confirmation of insurance products would be under separate correspondence

Question 32

A property is owned by Steve and Wendy as Tenants in Common. Steve dies while Wendy is in residential Care, what is the position regarding the property?

Answer 32

50% of the property goes to Steve’s estate and passed subject to his will, 50% continues to be owned by Wendy. The question does not mention any Equity Release so will follow the rules of Intestacy.

Question 33

Which of the following product features is applicable ONLY to lifetime mortgages? A. Method of repayment B. Rent to Be Paid C. Wheter a part of the property can be sold. D Tenancy Obligations.

Answer 33

A. Method of Repayment. The other 3 options are all related to Home Reversion Plans

Question 34

Leon has taken a cash scheme in the 1990s on his death the lender has requested additional payments from his estate. This is LIKELY because A. The lender has imposed redemption charges B. Interest Rates have increased. C Property has reduced in Value D. Property was in poor state of repair.

Answer 34

C. Property has reduced in value. Schemes in the early 90s were discredited due property values decreasing and money being asked from the estate. A No Negative Equity guarantee has since been added.

Question 35

Erin has taken out a lifetime mortgage, if she goes into residential care what will likely happen to her loan annuity? A. It will revert to the provider B. It will be redirecte to the residential home provider C. The annuity payments will stop D. Her annuity will continue to be paid and her property sold by the provider to pay off the lifetime mortgage

Answer 35

D. Annuity payments will continue. The property would only revert to the provider if it was a Home Reversion plan.

Question 36

What type of Annuity qualifies for favourable income tax treatment where part of the regular payment is treated as income and part as capital? A. Purchased Life Annuity B. Pension Annuity C. Open Market Annuity D. Compulsary Purchase Annuity

Answer 36

A. Purchased Lifetime Annuity.

Question 37

David owns a house which he has been using 50% for business purposes. Which tax does he need to take into account when selling the property? A. Income Tax B.Value Added Tax C.Capital Gains Tax D. Inheritance Tax

Answer 37

C. Capital Gains Tax as part of the property is for business use.

Question 38

What factor determines the split between taxable and non taxable income on a Purchased Lifetime Annuity?

Answer 38

Life Expectancy of the annuitant determined in mortality tables. Also Annuity monthly income is not tax free it is taxed on top of your income if it totals more than £12500 per annum at a basic rate of 20% up to £50k

Question 39

Hilary has built up significant dept on her credit cards. Why might a lifetime mortgage with roll up be appropriate option for her? A. The interest rate will always be lower B. Interest only repayable on death C. No Capital or interest has to be paid D. No negative equity guarantee

Answer 39

C. No capital or interest has to be paid. It would not be A. As you cannot guarantee the interest will always be lower on the liftime mortgage. You don’t know the rates on the credit cards or the mortgage.

Question 40

Gloria has given up work to look after her elderly mother, who is in receipt of full Attendance Allowance on a full time basis. What benefit can may Gloria be able to claim?

Answer 40

Job Seekers Allowance as she has given up work. Carers allowance will depend on how many hours she is caring.

Question 41

Rosie and John are contemplating taking a Home Reversion Plan but want to wait 5 years what is LIKELY to have an impact on the percentage of equity they can release in 5 years? A. Increase as they are older B. Decrease due to more stringent underwriting C. Decrease as Rates may be higher D. Increase as house values may be higher.

Answer 41

It will likely increase as they are older. An increase in house values is not guaranteed and could decrease.

Question 42

Wayne has a shared appreciation mortgage, and the bank base rate has gone up 1% what affect will this have on his mortgage?

Answer 42

There will be no effect as no monthly repayments were made.

Question 43

Explain a Shared Appreciation Mortgage

Answer 43

The borrower had to pay the amount borrowed plus rolled up interest AND a share of the appreciated value of the property. They were deemed unfair and are no longer sold. The lender lent approx 25% of the property value. The borrower retained ownership and paid no repayments until the property was sold or the borrower died. At that time the repayment was the original loan amount plus a share of the increase in property value. The contraversy happened when clients could not downsize as 75% of thier house price value plus the rolled up interest on the loan mean a large amount of negative equity. Some owners had their depts rise 500 percent of the original amount borrowed.