Topic 1 Property and Mortgage Markets

Question 1

What is the name for mortgages that enable people on low incomes and poor credit history to take out mortgages?

Answer 1

Subprime mortgage

Question 2

What is Securitisation?

Answer 2

When lenders package/bundle together mortgages to sell them to other lenders so they can borrow more

Question 3

How did the credit crunch affect the property market?

Answer 3

1. Lenders relaxed lending criteria
2. Low interest rates
3. Lenders went bust
4. Banks cut back on their lending and stopped lending to each other
5. Borrowing became difficult and companies failed through cash flow problems which led to a worldwide recession
6. Increase in the price of goods

Question 4

When Interest rates are high what 3 things happen?

Answer 4

1. House Prices fall
2. Homeowners struggle to pay repayments
3. First time buyers can’t get on the ladder

Question 5

When Interest rates are low what 3 things happen?

Answer 5

1. Homeowners find repayments affordable and usually commit to higher mortgages
2. Increases demand for houses
3. Property prices increase

Question 6

Who changes interest rates?

Answer 6

Bank of England’s Monetary Policy Committee (MPC) role is to set interest rates or BofE’s base rate to meet Government’s inflation target. MPC can change interest rates on a monthly basis.

Question 7

What is difference between interbank and bank rate?

Answer 7

Interbank rate is the rate banks lend to one another. (SONIA - sterling overnight index average).
Bank rate or Base rate is the rate the Bank of England lends to other institutions.

Question 8

What is the Basis Point?

Answer 8

One hundredth of one percent

Question 9

What are the economic factors that influence Interest rates?

Answer 9

1. Level of Government borrowing - rates rise
2. Higher levels of individual borrowing - rates rise
3. Monetary policy
4. Foreign Investment rates

Question 10

What happens if interest rates increase dramatically?

Answer 10

Many people will be financially overstretched (unable to pay mortgages, bills etc…)

Question 11

What are the two elements of inflation in the property market?

Answer 11

1 - General inflation (decrease in the spending power of money over time)

2. House price inflation - generally house price inflation runs ahead of general inflation

Question 12

How does Bank of England reduce inflation?

Answer 12

Increases interest rates >
People’s disposable income decreases >
Prices become lower

Question 13

How does Bank of England increase inflation?

Answer 13

Lower interest rates > people’s disposable income and their spending increases>
Prices increase

Question 14

What is Negative Equity?

Answer 14

When the market value of a property falls below the outstanding amount of mortgage loan secured on it.

Question 15

Summarise the different types of mortgage provider?

Answer 15

• Banks
• Building Societies
• Specialist Mortgage providers
• Challenger Banks
• Mortgage Packagers