Topic 13 Flashcards
What is covenants
Covenant is ‘a promise under the terms of the mortgage deed’ to maintain the property in good condition
What is a lender permitted by law to request the borrower to have
Insist that a property subject to a mortgage is continuously insured by means of a policy that is acceptable to the lender
Have its interest as mortgagee noted on the policy
Secure a right over the proceeds of any claim and to insist that the proceeds be applied to remedy the subject of the claim or to reduce the mortgage debt.
When can an intrest only mortgage be arranged
If the lender has obtained evidence that the borrower has a credible repayment strategy in place
A credible repayment strategy would be for instance a savings scheme guaranteed to provide the borrower with the sum needed to repay the mortgage at the end of the term
What must a lender do at least once in an intrest only mortgage term
They must contact the borrower at least once during the term of of the mortgage to establish whether the repayment strategy remains in place and still has the potential to repay the capital
What are the 2 main issues to be addressed when an interest only mortgage is taken out
Putting in place a funding mechanism to repay the debt at the end of the term
Ensuring there is sufficient protection to enable the debt to be repaid should the mortgagor die before the end of the term
What are popular methods of funding interest only mortgages
Endowments
ISA’s and pensions
Level term assurance is a popular way of providing protection in the event that a borrower dies during the mortgage term
What is a pension mortgage
The availability of a lump sum from the normal pension age means that these pension plans have the potential to be used as mortgage repayment vehicles
For example a 25% tax free cash lump some can be taken from the pension fund to clear the mortgage at the end of the mortgage term
What are the financial benefits of a pension mortgage in comparison with endowment policies
Pension contributions qualify for tax relief at a person’s highest rate of tax up to the annual maximum contribution limit there is no tax relief on endowment policy premiums
The fund in which the contributions are invested is not subject to tax on income or capital gains meaning they should grow faster than an equivalent endowment policy fund which is taxed on both income and capital gains
What are possible drawbacks in the use of a pension plan for mortgage repayment purposes
Lifetime allowance - This is the maximum tax privilege pension investments and individual is able to accrue during the lifetime it effectively limits the amount of tax free cash that can be taken to 25% of the lifetime allowance
For example if the lifetime allowance was one million pound the maximum tax free cash that could be taken would be 250000 pounds
Minimum pension age - In most cases the minimum age at which benefits can be taken from a pension is 55 but this is expected to increase in the future
This means that the term of the mortgage must run until the mortgagor Reach his pension age and the mortgage cannot be paid off earlier even if the fund has grown to a sufficient value
A longer mortgage term will add to the total cost of the mortgage as a result of the additional interest payments incurred
Provider restrictions - Not all providers offer the facility to take a tax free lump sum in excess of the tax free amount.
If only 25% of the fund can be taken as a tax free cash sum a fund of 4 times the loan value must be built up
This may mean that the total contributions are more than the borrower can afford or more than they’re permitted by the pension scheme regulations
Impact on income in retirement - Using a portion of the pension fund to repay a mortgage means there is less money available to provide an income in retirement
Need for separate life assurance - A personal pension or stakeholder pension Unlike an endowment assurance does not automatically carry with it any life assurance so a separate policy will be required to cover the repayment of the loan in the event of death during the term
Assignment - As with all pension contracts personal pensions and yet no pensions and stakeholder pensions cannot be assigned to a 3rd party as security for a loan or for any other purpose
The lender cannot therefore take possession of the plan or become entitled to receive benefits directly from it as it can with an endowment policy
This is a potential disadvantage to a lender that has not in practice prevented the majority of them from moving into the pension mortgages market
Individual savings accounts mortgages (ISA)
In order to use an isa as a mortgage repayment vehicle issue managers calculate the amount of regular investment that would be required to produce the necessary lump sum at the end of the mortgage term based on an assumed growth rate and on specified levels of costs and charges
All managers allow investments to be made on a regular monthly basis provided of course that the overall annual limits are not exceeded
What are the main benefits of using an Isa as a mortgage repayment vehicle
Funds grow free of tax on capital gains thus reducing the cost of repaying the mortgage
Mortgage can be repaid early if the funds rate of growth exceeds that assumed in the initial calculations
What happens if the Isa growth rate does not match the initial assumptions on a isa mortgage
Performance needs to be monitored and adjustments made to the amount of regular investments if necessary
What is a flexible mortgage
This gives the borrower some scope to alter their monthly payments to suit their ability to pay as well as the opportunity to pay off the loan more quickly
What basic features should a flexible mortgage have
Interest calculated on a daily basis
The facility to make overpayments at any time without incurring an early repayment charge
The facility to underpay but only within certain parameters set out by the lender when the mortgage was arranged
The facility to take a payment holiday again within certain parameters laid down at the outset
What are 2 key benefits of the features of a flexible mortgage
The combination of a daily interest calculation and occasional and or regular overpayments will result in considerably less interest being paid overall and the mortgage term being reduced
The ability to reduce monthly payments or suspend them entirely for a limited period Will benefit a borrower who is experiencing temporary financial difficulties. If required a borrower in this situation can borrow back over payments made earlier in the term
What is a Charges access and terms (CAT) mortgage
The government introduced specified cat standards that can be applied to mortgage products although lenders do not have to offer cat standard mortgages and there is no guarantee by either the government or the lender that a cat standard mortgage will be the most suitable product for a particular borrower
What are the key details of a CAT standard mortgage
The variable interest rate must be no more than 2% above the bank rate and must be adjusted within one calendar month when the bank rate is reduced
Interest must be calculated on a daily basis
No arrangement fees can be charged on variable rate loans and no more than 150 pound can be charged for fixed rate or capped rate loans
Maximum early redemption charges apply to fixed rate and capped rate loans
No separate charge can be made for mortgage indemnity guarantees
All other fees must be disclosed in cash terms before the potential borrower makes any commitment
Other rules telling to access and terms include the following
Normal lending criteria must apply
The borrower can choose on which day of the month to pay
All advertising and paperwork must be clear and straightforward
Borrowers cannot be required to buy associated products from the lender in order to receive a mortgage offer
What is a mortgage indemnity guarantee (MIG)
This is an insurance policy that protects the lender in situations where the loan has a high loan to value ratio generally over 75% to 80%
If the borrower defaults on repayments and the property is sold the lender might not get back the full amount that it lent this insurance is designed to make up any shortfall in these circumstances
What happens if a lender fully recoups the money owed by claiming under a under a mortgage indemnity guarantee (MIG)
The insurance company (MIG insurer) Is still entitled to pursue the borrower for the shortfall arising from the default
What form of lending is a mortgage indemnity guarantee (MIG)
They are a form of higher lending charge
In general how old do you have to be to qualify for equity release
Most schemes are available only to property owners over the age of 60 and many have a minimum age of 70
How does a lifetime mortgage work
A lender will usually be prepared to lend up to a maximum up to a maximum of 55% of the property value depending on the borrower’s age
The majority of lifetime mortgages are on a fixed rate basis and take into the Account the fact that unlike with a standard mortgage product the term of the loan is unknown
Interest is charged at the lender’s lifetime mortgage rate but generally no regular payments of capital or interest are made
Instead the interest is added to the loan
When the borrower dies or moves the property is sold and the mortgage loan plus rolled up interest is repaid to the lender
If the property is owned jointly the mortgage continues until the 2nd death or vacation of the property
Most lenders provide a no negative equity promise which means that the borrower cannot owe more than the value of the property when the loan is due to be repaid
Explain a lifetime mortgage arranged on a drawdown basis
The lender agrees a maximum lending limit and the borrower can borrow an initial minimum loan and subsequently draw down lump sums as they wish subject to a minimum withdrawal typically typically 2000 - 5000 pound
Interest is charged on the amount outstanding but is rolled up rather than paid each month
The benefit of this type alone over a standard lifetime mortgage is that interest only occurs on the amount actually borrowed so the borrower has a degree of control and the debt will not increase as rapidly
How does a home reversion plan work
Home reversion plans involve the homeowner selling a percentage or all of their property to the scheme provider
The customer retains the right to live in the house rent free or for a nominal rent until their deaths or until they move into permanent residential care
At that point the property is sold and the provider receives a share of the proceeds equivalent to their share of ownership
