Topic 12: Suitability Flashcards
What is Suitability?
The requirement for an adviser to recommend a suitable product to meet the customer’s needs, circumstances and affordability. If there is no suitable product in the range offered by the adviser, no recommendation should be made.
What are overpayments?
Most lenders allow borrowers to make additional payments over and above their monthly instalment. Early repayment charges are usually waived for overpayments of up to 10% of the outstanding balance in any year.
What is an expected retirement date?
When the borrower expects to retire, based on when they have to, or want to, stop working, and when their pension funds are available.
What is a state pension age?
The age at which an individual becomes entitled to their state pension.
What is attitude to risk?
The customer’s attitude towards various risks relating to mortgages, such as the risk of not being able to repay a mortgage by the end of the term. This helps the adviser to identify the most suitable type of mortgage for the risks the customer is, or is not, prepared to take.
What is repayment risk?
The risk that a mortgage may not be repaid at or by the end of the term.
What is Interest rate risk?
The risk that interest rates will increase, making monthly repayments higher and putting pressure on affordability.
What is fixed rate risk?
The risk that variable rates may fall below a selected fixed rate during the term, resulting in the borrower paying more than they would have had they chosen a variable-rate mortgage.
What is Psychometric profiling?
Software used to assess a customer’s attitude to risk in general. It assesses their knowledge, experience and personality by asking questions about previous decisions, and their reaction to ‘what if’ hypothetical scenarios.
What are the three customer risk categories for mortgage repayment?
- Cautious
- Balanced
- Adventurous
What are some examples of potentially acceptable repayment strategies?
- Regular deposits into a savings or investment product
- Periodic repayment of
capital from irregular
sources of income (such as
bonuses or some sources of
self‑employment income) - Sale of assets such as another property or other land owned by the customer
- The sale of the property for a shared equity or retirement interest‑only mortgage
What are some examples of strategies that are likely to contravene the repayment rules?
- Expectation that the value of the mortgaged
property will increase sufficiently over the
mortgage term to enable the customer to sell the property and repay the mortgage - Intention to use an expected, but uncertain,
inheritance to repay the mortgage - Sale of the mortgaged property, where it is
the customer’s main residence (unless the
lender has considered whether it will have
the potential to provide enough for the
customer to repay the mortgage and allow
them to buy another property to live in or
execute another strategy)
Explain the record keeping for Interest only mortgages?
The lender must keep records of each interest‑only mortgage for
the term of the mortgage contract. The record should include:
- the reasons for the decision to offer an interest‑only mortgage;
- evidence of the customer’s repayment strategy and, where applicable, its cost;
- details of the firm’s attempts to contact the customer for
reviews;
- the outcome of each review.
