Topic 1 - Property and mortgage markets Flashcards
What is the ‘interbank rate’?
What is the ‘bank rate’
What is a basis point?
How are all these things linked?
The interbank rate is the rate at which banks lend to one another. Measured by the Sterling Overnight Index Average (SONIA).
The ‘bank rate’ is another name for the ‘base rate’. It is the rate at which the BOE lends to other financial institutions.
A basis point is 1/100th of 1% . The interbank rate is generally 10 to 20 basis points higher than the bank rate. Ie if the bank rate is 2% the interbank rate may be 2.1%.
Read 1.5.1
If the UK has higher interest rates than other countries, what negative impact could this have on UK businesses who sell their goods abroad?
When the UK interest rates are higher than those abroad, the pound is popular (why?) and the exchange rate increases.
This can have a negative effect on industry, because UK goods become expensive abroad and sales may be affected.
Briefly explain how increasing interest rates and decreasing interesting rates can affect property prices?
If the bank increases interest rate to control inflation it will lead
to stagnation, or even a reduction, in house prices because people will be less likely to make major financial commitments ( because they have less money )
When interest rates are reduced in an attempt to promote inflation, property prices tend to rise as mortgage repayment becomes more affordable ( people have more money )
What is negative equity in property?
Where the market value of a property
falls below the outstanding amount of the mortgage loan secured on it
All the following factors affect the mortgage market (ie how many people take out mortgages) :
Interest rates
Inflation
The economy
Supply and demand
Government action
Non-property funding
Briefly explain governmental action and non property funding:
Governmental action: Something the government introduces which effects the mortgage market. Ie, first time buyers don’t pay SDLT or like in the 2015 Autumn statement where 3%
stamp duty land tax surcharge on buy-to-let property was introduced…
Non property funding (ie refinancing against your mortgage to pay off other debt or for something like home improvements)
When house prices increase many consumers take out a second mortgage to release some of the equity they gained from the price increase. ( if they didn’t do this, they may feel more rich as their home is more valuable but their standard of living doesn’t change because the equity is locked in the home until they take out that second mortgage)
Why was the mortgage finance market ‘split into two’ between banks and building societies up until 1980?
Until 1980, the range of institutions offering mortgage finance was limited.
Most banks didn’t offer mortgages. Those that did were restricted by government policy about how much they could lend.
Building societies were the main providers of mortgages
Therefore the market was split into two – the building societies
looked after the residential mortgage sector, and other institutions looked after everything else
Building societies must devote minimum of 75 per cent of their total lending activities to residential mortgages? true or false
True.
If they wanted to have more freedom than this, they can convert to a plc status like a bank through demutualisation
PLC = public limited company
If an insurance company offers both life assurance and general insurance what is it known as?
Composite
What are challenger banks?
The name used to describe new entrants to the
banking arena ( ie revolute, monzo etc or TSB back in the day)
What are specialized mortgage companies?
Where do specialized mortgage companies obtain the funds to lend out as mortgages?
They are limited companies. They are either independent providers or subsidiaries of larger financial institutions
They are known as ‘centralised lenders’
Specialized mortgage houses are funded from
the wholesale market and lend on a centralised basis
If a company is classed as a subsidiary, what does this mean?
A subsidiary is where a company is owned by another company
TSB is a subsidiary for Banco Sabadell
Who are mortgage packagers?
They are the middlemen who operate between the ultimate lender and the intermediary or customer
They complete much of the administrative work
What is sub prime lending?
Certain potential borrowers have difficulty meeting the lending criteria for mainstream lenders. These include borrowers who have poor credit history, who cannot prove certain elements of their income and so on
Lending to this type of borrower is classed as subprime lending
What is prime lending?
What is subprime lending?
PRIME LENDING
Lending to borrowers who meet the lender’s standard criteria and present a normal risk.
SUB‑PRIME LENDING
Lending to borrowers who represent a higher risk than normal
How does the term ‘setting the rate for risk’ relate to subprime lending?
Subprime lending is where a lender lends to riskier borrowers
In this situation a lender may choose to charge a higher interest rate to compensate for the increased risk (hence, setting the rate for risk)
