Topic 12: Suitability (unit 4) Flashcards
When assessing suitability if there is a repayment vehicle to support an interest only mortgage, does its cost need to be included in the affordability
assessment as committed expenditure, like personal loans etc do
Yes it does
How often must the lender carry out a review of the borrowers’ interest-only mortgage?
The lender must carry out a review for interest only mortgages at least once during the mortgage term (MCOB 11.6.49).
The review checks
that the customer’s repayment strategy is still in place, and that it still has the potential to repay the mortgage at the end of the term.
It must be carried out leaving the borrower enough time to resolve the issue
What are retirement interest only mortgages?
Retirement interest only mortgages are available to those over a certain age who wish to extend their mortgage into retirement, but are not seeking a lifetime mortgage.
Interest payments are made in the same way as a standard interest‑only mortgage, but the mortgage would only be repaid on the borrower’s (or surviving borrower’s)
death, move into residential care or sale of the property.
Because of this, the lender doesn’t need to assess and review the repayment vehicle like it does with a standard interest only mortgage because the property is the repayment vehicle
What is the difference between a lifetime mortgage and a retirement interest only mortgage?
Retirement interest only mortgages are available to those over a certain age who wish to extend their mortgage into retirement. Interest payments are made in the same way as a standard interest‑only mortgage, but the mortgage would only be repaid on the borrower’s (or surviving borrower’s)
death, move into residential care or sale of the property
Lifetime mortgages are a type of equity release, where homeowners can borrow against the value of their property while retaining ownership. The loan is repaid along with the rolled over interest when the homeowner dies or moves into care. It provides a way for older individuals to access the equity tied up without being required to sell
How long do records of an interest only mortgage need to be retained?
What info should it include?
The lender must keep records of each interest‑only mortgage for the term of the mortgage contract.
- 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 (when assessing the repayment vehicle. Must be done once during the term )
Which of the following would be most likely to be considered a credible repayment strategy for an interest‑only mortgage?
Planning to use a promised inheritance from a relative.
Relying on the increase in value of the property to provide equity that can be released to pay off the loan.
Using a pension commencement lump sum (PCLS) to pay off the loan.
Using the proceeds from the sale of another property owned by the borrower.
Answer = Using the proceeds from the sale of another property owned by the borrower
Explained = Providing the value of the other property is equal to or greater than the sum needed to pay off the loan, this is most likely to be considered a credible repayment strategy.
Using a PCLS might also be a credible approach but only if the pension pot is large enough to provide a PCLS equivalent to the loan.
John is 55 and is seeking a 20‑year repayment mortgage. The lender’s affordability assessment must only take into account his financial position at the time of the application. True or false?
False
It is very likely that John will retire before the end of the mortgage term, so the lender will need to consider whether his income in retirement would support the payments
For which of the following interest-only mortgages is the lender not required to check during the term that a repayment strategy is in place and likely to meet its target?
Lifetime mortgage
Endowment linked
Fixed rate
Life time mortgages
For interest-only mortgages other than lifetime mortgages and bridging loans, the lender must carry out a review at least once during the mortgage term
Which of the following would not be a potentially acceptable repayment strategy for an interest-only mortgage?
The use of quarterly bonuses and commission payments to reduce the balance.
The sale of a buy-to-let property also owned by the customer to repay the mortgage at the end of the term.
Reliance on growth in the property value so that it can be sold to repay the mortgage at the end of the term
Answer = Reliance on growth in the property value so that it can be sold to repay the mortgage at the end of the term
The use of additional irregular income to reduce the balance over time, or the sale of another asset owned by the borrower, would be acceptable as potential repayment strategies.
Reliance on property growth to repay a mortgage would not be acceptable.
MCOB 4.7a and MCOB 11.6 require lenders to make sure the customer demonstrates that they have arranged a clearly understood and ‘credible’ repayment strategy for interest-only mortgages. Which of the following is true?
The lender must ensure the customer receives advice on the strategy.
There are no specific rules about what a ‘credible’ strategy would be.
The lender must carry out annual checks during the mortgage term to ensure the strategy is still on target.
Explained = There are no specific rules about what a ‘credible’ strategy would be.
Answer = The lender is not required to provide advice on the strategy, and MCOB is not prescriptive about what is meant by a ‘credible’ strategy, although MCOB 11.6 provides some examples of strategies likely to be acceptable or unacceptable. For interest-only mortgages other than lifetime mortgages and bridging loans, the lender must carry out a review at least once during the mortgage term
Psychometric profiling is a process whereby the adviser uses software tools to:
assess the client’s psychological attitude to risk in general.
assess the level of risk in the client’s chosen mortgage.
decide the most appropriate investment vehicle to run alongside an interest-only mortgage
assess the client’s psychological attitude to risk in general.
Psychometric profiling is a process whereby the adviser uses software tools to assess the client’s psychological attitude to risk in general. It considers how they would react to several ‘what if’ scenarios, both positive and negative, and their feelings about hypothetical situations.
