Topic 13 Flashcards
what is secured lending
When a borrower gives the lender the right to take possession of a specific asset if they fail to keep up repayments.
What is unsecured lending
The lender does not have an asset to sell to recoup the laon. they have to rely on the agreement to repay. Thus interest rates are higher.
What is a repayment mortgage?
Part interest and part capital of loan being paid.
what a covenant for a mortgage?
A promise under terms of the mortgage to maintain property in good condition.
when can an interest only mortage be arranged?
When the lender has obtained evidence that the borrorower has a credible repayment strategy/
What are the two main issues to be addressed when taking out an interest only mortagage?
Putting in place a funding machanism to repay the debt at teh end of the term.
Ensuring there is sufficient to pay the debt on any death etc before end of contract.
What are some popular methods of funding interest only mortagages?
Endownments, ISA, Pensions.
what percentage can be taken from a pension tax free and how does it help mortagages?
25% and can be used as a vehicle to pay off mortgages.
what is a stakeholder pension?
Simple low cost meeting government standards on charges and contributions.
what are two financial benefits of a pension mortgage to an endownment?
Pension contributions wualify for tax relief/endowments do not
contributions invested are not subject to tax on income or capitol gains where as endowments are on both.
why is lifetime allowance a problem with pension mortgages?
limits you to 25% tax free. e.g 1 million pound limit means you can only get 250k
minimum pension age payment vehicle problem.
mortgage cannot be paid before retirement age
name the 6 issues with using pension mortgages
lifetime allowance, min pension age, provider restrictions, impact on income in retirement, separate life assurance, assignment
what is the difference with assignment between pension mortgages and endowment policies
pension mortgages the lender cannot take possession of the plan. endowment you can take possession and receive benefits directly
two main benefits using isa as mortgage repayment vehicle.
- tax free on capital gains
- can be repaid early if funds grow quickly
draw backs of using an ISA as a repayment vehicle
if growth rates are not aligning then adjustments need to be made regularly.
should the borrower die then the amount will likely be insufficient and a need for further life assurance.
the limits on annual contributions can make it hard to acrue the needed amount.
what are the 9 types mortgages?
variable
capped
flexi
discounted
fixed
base rate tracker
low start
deferred interest
CAT standard
variable rate mortgage
rise and all inline with interest rate
hard to predict future payments
discounted rate mortgage
interest rate is a discount from standard variable rate
maybe penalties for early repayment
fixed rate mortgages
interest fixed for a specific period
easier to budget
substantial arrangment fee and penalties/restrictions on switching
capped rate mortgages
variable but cannot above the cap
allows to budget within parameters
can benefit from falls in interest rates
base-rate tracker mortgage
interest moves up and down with changes in bank rate
flexible rate mortgage
facility to under pay, over pay, take payment holidays
interest calculated on daily basis
low start mortgage
repayment mortgage with lower initial payments during which capital is not repaid
higher payment required after initial period to achieve repayment of capital.
suits borrowers keen to keep outgoings low in early years
Deferred interest mortgage
interest payments deferred until ater in the term
suits borrowers who expect their income to increase over the term
Not suitable for those who borrow a high proportion of the property value because of increased risk of negative equity.
CAT Standard
Charges Access and Terms
Meets standards set by government.
Likely to appeal to borrowers who want clear stated limits on charges.
what are the basic features a flexible mortgage should have?
Interest daily basis
Overpayments whenever without charges.
a facility to underpay
A facility to take a payment holiday.
