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CeMAP 2 - MORT > Topic 1 > Flashcards

Topic 1 Flashcards

Property and mortgage markets

1
Q

Why is home ownership considered important in the UK?

A

It is seen as both desirable and essential, and often considered a natural life step and an investment.

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2
Q

What led to increased competition in the UK mortgage market?

A

Changes in regulation during the 1980s allowed new lenders to enter the market, and borrowers became more sophisticated in comparing mortgage deals.

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3
Q

What effect did borrower behaviour have on the mortgage market?

A

Borrowers began shopping around and comparing features and prices, leading to a wide array of mortgage products.

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4
Q

When did the credit crunch begin and when did it impact the UK mortgage market?

A

The credit crunch began in 2007, and by early 2008 it caused UK mortgage demand to stall and remain low for several years.

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5
Q

What were sub-prime mortgages?

A

Mortgages offered to people with poor credit histories who would not normally qualify for a conventional mortgage.

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6
Q

What is securitisation in the context of mortgage lending?

A

The process of bundling mortgages and selling them to other lenders, transferring the loan risk and generating income from mortgage payments.

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7
Q

How did the credit crunch start in the USA?

A

Risky borrowers began to default on mortgages, reducing income streams, and causing several US lenders to fail.

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8
Q

What happened to interbank lending during the credit crunch?

A

Banks became reluctant to lend to each other, interbank interest rates rose, and the housing market stalled.

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9
Q

What was the global financial impact of the credit crunch?

A

Share prices fell, credit dried up, and even financially sound businesses faced cash flow problems.

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10
Q

How did the UK mortgage market differ from the US during the crisis?

A

The UK had tighter controls, but some institutions like Northern Rock still held many risky mortgages.

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11
Q

Why did Northern Rock require emergency funds in 2007?

A

It struggled to raise funds in capital markets despite being relatively solvent, due to its reliance on securitisation.

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12
Q

What major action did the UK government take regarding Northern Rock?

A

In February 2008, the government nationalised Northern Rock after failing to find a buyer and guaranteeing funds.

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13
Q

What external economic factors worsened the financial crisis?

A

There were sharp rises in commodity prices and global market nervousness.

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14
Q

How did governments respond to the global financial crisis?

A

Many governments bailed out banks, pumped liquidity into the system, and cut interest rates to stimulate lending.

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15
Q

What happened to the UK property market after the credit crunch?

A

It remained depressed due to economic recession, low confidence, job losses, and cautious behaviour from both buyers and sellers.

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16
Q

How did the recession affect UK households and the housing market?

A

Many people lost jobs or had pay frozen, sellers held off listing properties, and buyers hesitated due to uncertainty about house prices.

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17
Q

How did banks respond to the crisis in terms of lending?

A

Banks were reluctant to lend to each other or to homebuyers, instead focusing on rebuilding their reserves.

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18
Q

What was the purpose of the 2012 government initiative involving the Bank of England?

A

It provided below-market rate loans to financial institutions to help reduce interest rates and increase mortgage lending.

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19
Q

What change occurred to the 2012 Bank of England lending scheme in 2013?

A

It was altered to focus on providing funding for small businesses instead of mortgage lending.

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20
Q

How did lenders’ behaviour change after the credit crunch?

A

They became more cautious, demanding higher deposits and stricter proof of borrowers’ ability to repay loans.

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21
Q

What types of borrowers became less desirable to lenders after the credit crunch?

A

Those with small deposits, low disposable income, or poor credit histories (sub-prime).

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22
Q

What was the Mortgage Market Review?

A

A regulatory initiative that enforced more stringent affordability checks on borrowers from April 2014.

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23
Q

How is a recession defined?

A

A decline in GDP for two consecutive quarters (six months).

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24
Q

When did the UK housing market begin recovering after the credit crunch?

A

From 2013, with average prices recovering to 2007 levels by Q2 of 2014.

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25
How have house price trends varied across the UK?
London and its commuter belt saw significantly higher price increases than other UK regions, though this trend is now changing.
26
Why should the London housing market not be used to assess typical UK house prices?
It is considered to operate under different market forces and is often referred to as a ‘housing bubble’.
27
What factors have driven house price increases in the UK?
Prices rising faster than wages Limited housing supply Lack of affordable homes Movement from cities to the home counties, especially post-Covid
28
What caused the UK average house price growth to slow in recent years?
End of temporary SDLT relief Rising inflation and interest rates Affordability issues for buyers Price stabilisation in late 2023
29
How did the temporary SDLT threshold increase affect the housing market?
It spurred demand and price increases, which then flattened once the threshold was phased out between July and September 2021.
30
How did rising inflation affect mortgage rates in 2022 and 2023?
The Bank of England raised interest rates, leading to higher mortgage rates and affordability challenges.
31
What is the outlook for interest rates and house prices from 2024?
Experts predict interest rate cuts from early 2024, with some regional house price increases already occurring.
32
Why is it especially hard for first-time buyers to enter the housing market?
Stricter affordability checks Larger deposit requirements Rising property prices, especially in London and the South-East
33
How has the number of first-time buyers changed since 2022?
It fell by 12% nationally and by 6% in London.
34
Why are first-time buyers important for the housing market?
They enable movement up the property ladder by allowing existing homeowners to sell and trade up.
35
What support has the government offered first-time buyers?
SDLT exemption for first-time buyers Measures to discourage buy-to-let investment Planning rules for affordable housing in new developments
36
How has the profile of first-time buyers changed over time?
They are generally older and require much larger deposits than in the past.
37
What are the main factors that affect the mortgage market?
Interest rates, inflation, the economy, supply and demand, government action, and non-property funding.
38
How do interest rates affect the mortgage market?
High rates increase repayment costs and can reduce affordability, leading to falling prices. Low rates make borrowing cheaper, often increasing property demand and prices.
39
What happened in the mortgage market when interest rates were low in the late 1990s and early 2000s?
There was a property boom, as people were more willing to borrow due to affordable mortgage repayments.
40
What might prevent property prices from rising even if interest rates are low?
A recession or general economic downturn can still cause property prices to fall despite low interest rates.
41
What is the interbank rate?
The rate at which banks lend to each other, usually based on the Sterling Overnight Index Average (Sonia).
42
How does the interbank rate compare to the Bank of England’s Bank rate?
It is usually 10–20 basis points higher than the Bank rate under normal conditions.
43
What is a basis point?
One-hundredth of one per cent (0.01%).
44
How do tracker mortgages differ from traditional variable-rate mortgages?
Tracker mortgages follow the Bank rate or interbank rate, often with a set margin, whereas variable-rate mortgages change at the lender’s discretion.
45
How have tracker mortgage margins changed over time?
They used to be set slightly above or even below the Bank rate, but now can be as high as 3% above.
46
What is Sonia and why is it used?
Sonia (Sterling Overnight Index Average) reflects actual overnight market transactions, is hard to manipulate, and has been the main sterling benchmark since 2021.
47
How does government borrowing affect interest rates?
Increased borrowing puts upward pressure on interest rates as the government competes for money in the economy.
48
Why is high individual borrowing a concern for governments?
It can overheat the economy, increase inflation, and leave households financially overstretched if interest rates rise.
49
What is the role of monetary policy in relation to interest rates?
It uses interest rate adjustments to control inflation and manage economic growth.
50
How do foreign interest rates impact the UK mortgage market?
Higher UK rates attract foreign investment, raising the value of sterling, which can hurt UK exports and industry.
51
What are the two elements of inflation in the property market?
General inflation (decrease in money’s spending power) and house-price inflation (increase in property prices over time).
52
What is the government's target for inflation and how is it measured?
2%, measured by the Consumer Prices Index (CPI).
53
How does the Bank of England attempt to reduce inflation?
By increasing interest rates, which reduces disposable income and consumer spending.
54
How does the Bank of England try to increase inflation?
By lowering interest rates, which increases disposable income and consumer spending.
55
What is the likely effect of prolonged interest rate increases on the housing market?
It can lead to stagnation or falling property prices due to reduced affordability and lower buyer confidence.
56
How does the state of the economy influence mortgage activity?
When the economy is strong (low unemployment, low interest), people are more confident to take out mortgages. In a weak economy, uncertainty reduces borrowing and property purchases.
57
What impact did the 2007–09 financial crisis and post-2022 cost-of-living crisis have on the mortgage market?
They reduced consumer confidence due to debt concerns, job insecurity, inflation, and rising interest rates.
58
How does supply and demand affect property prices?
More buyers than available properties drive prices up; excess supply drives prices down.
59
Why are property prices typically higher in London and the South of England?
Due to dense population and limited housing supply.
60
Give an example of government action affecting the property market.
Stamp Duty Land Tax (SDLT) exemption for first-time buyers or tax changes for buy-to-let investors.
61
What was the impact of the 2015 SDLT surcharge on buy-to-let properties?
It increased costs for investors, aiming to ease market entry for first-time buyers by reducing BTL competition.
62
What is negative equity?
When a property’s market value falls below the outstanding mortgage loan.
63
Why do people borrow against property for non-property purposes?
Mortgages offer lower interest and longer terms than other loans, making them a cost-effective way to consolidate debt or access cash.
64
How do rising house prices encourage second mortgages?
Homeowners borrow against increased equity in their homes to access cash and improve their lifestyle.
65
Who were the main mortgage providers before 1980 and why?
Building societies were the main providers as banks were restricted by government policy and building societies focused on residential lending.
66
What changed in the mortgage market during the mid-1980s?
Deregulation and increased competition led to more lenders entering the mortgage market, blurring traditional roles.
67
Why do banks actively seek mortgage business today?
Mortgages are seen as relatively safe and profitable, and banks benefit from economies of scale and opportunities for cross-selling.
68
What legislative change allowed building societies to diversify and when did it occur?
The Building Societies Act 1986 allowed building societies to offer services like unsecured loans and banking.
69
What is the legal requirement for building societies in terms of their lending?
At least 75% of their total lending must be on residential mortgages.
70
What options do building societies have if they want to expand their business freedoms?
They can convert to plc status, like Abbey National, Halifax, and Northern Rock did in the late 1980s and 1990s.
71
What role do insurance companies play in the mortgage market?
A small role directly, but they sell insurance and other services alongside mortgages from other providers.
72
What are specialised mortgage companies and how do they operate?
Centralised lenders that operate without branches, funded by the wholesale market, and lend through intermediaries.
73
What are challenger banks and how have they impacted the mortgage market?
Newer banks like TSB, Aldermore, Atom Bank, and Starling that offer innovative products and increased competition.
74
What is securitisation in the context of mortgage lending?
It is when a lender packages existing mortgages and sells them to raise cash, improve its balance sheet, and reduce risk.
75
How does securitisation affect borrowers?
It typically does not affect them – the terms remain unchanged, and the original lender may still manage the loan.
76
What is the role of mortgage packagers?
They act as middlemen, handling admin and tailoring mortgage applications for specific lenders and situations.
77
How do mortgage packagers make money?
By charging 1–2% of the mortgage amount and possibly sharing part of it as commission with intermediaries.
78
In what markets do mortgage packagers typically specialise?
They often specialise in areas like buy-to-let mortgages, using expert knowledge to meet lender requirements.
79
What is sub-prime lending?
Lending to borrowers who represent a higher risk than normal and do not meet standard lending criteria.
80
Give examples of borrowers who might need sub-prime lending.
Borrowers with poor credit history, irregular income, unusual borrower profiles, or self-employed individuals with limited accounts history.
81
What is ‘setting the rate for risk’?
Charging higher interest rates to compensate for the additional risk posed by sub-prime borrowers.
82
What contributed to the 2007–08 credit crunch in the sub-prime market?
Lenders, especially in the US, failed to properly assess risk and aggressively pursued market share.
83
Why has the sub-prime market reduced since the credit crunch?
Due to regulatory pressure and higher costs of raising lending funds.
84
What is anticipated about the future of the sub-prime market?
A revival is expected due to ongoing demand, with lenders revisiting underwriting and using risk-based pricing.
85
What is a 'sale and rent back' arrangement?
A company buys a home below market value and rents it back to the former owner with a fixed minimum tenancy of 5 years.
86
How can short-term secured loans help sub-prime borrowers?
They allow borrowers to access funds while repairing their credit.
87
What is buy-to-let lending?
Lending specifically for purchasing property to rent out; it's a specialist area with dedicated lenders and products.
88
Name a few specialist buy-to-let lenders.
BM Solutions (part of HBOS) and The Mortgage Works (part of Nationwide).
89
What are finance houses and what do they offer?
Institutions that provide loans secured on property, often for fixed terms and purposes like home improvement.
90
What is a second-charge loan?
A loan secured on property but repaid only after the primary mortgage (first charge) on sale or repossession.
91
What is bridging finance?
Short-term lending to help a borrower purchase a new home before selling their existing one.
92
How is bridging finance typically repaid?
From the proceeds of selling the original property or securing a mortgage on the new one.

CeMAP 2 - MORT (1 decks)

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