Topic 13 Flashcards
Brendon’s lender charged him a fee for an insurance policy because his new mortgage was more than a specified percentage of the property value. It is incorrect to say that:
Question 1 options:
a)
Brendon’s mortgage will be more than 75-80% of the property value.
b)
Brendon will have no further liability if a claim is made on the policy.
c)
The fee could be added to Brendon’s mortgage.
d)
In the event of Brendon defaulting, the policy only protects the lender.
b)
Brendon will have no further liability if a claim is made on the policy.
Barbara, aged 70, has heard she can use her property to provide some extra cash as and when she needs it. She would like to leave as much of the property’s value to her two children as possible. Which arrangement would best satisfy her needs?
Question 2 options:
a)
A home income plan.
b)
A home reversion plan.
c)
A drawdown lifetime mortgage.
d)
A lifetime mortgage.
c)
A drawdown lifetime mortgage.
In relation to bridging finance:
Question 3 options:
a)
open bridging is less risky for the lender than closed bridging.
b)
open bridging is arranged on a long-term basis.
c)
closed bridging interest rates are higher than for open bridging.
d)
closed bridging has a feasible repayment strategy.
d)
closed bridging has a feasible repayment strategy
Which of the following is true in relation to credit cards?
Question 4 options:
a)
Credit card interest rates are higher than most other forms of borrowing.
b)
No additional charges apply to overseas credit card transactions.
c)
Credit card companies make a small payment to the retailer for each transaction.
d)
The whole balance must be repaid each month, usually within 25 days of a statement.
a)
Credit card interest rates are higher than most other forms of borrowing.
What type of mortgage product interest rate can vary, but cannot rise above a pre-set limit?
Question 5 options:
a)
Fixed rate.
b)
Discounted rate.
c)
Base-rate tracker.
d)
Capped rate.
d)
Capped rate
Secured lending can only be arranged on land or property.
Question 6 options:
a) True
b) False
False
Although property is the most common asset used, borrowing can be secured on a range of assets
Jeff and Alison have just bought a flat with a mortgage, but will also be required to pay rent to a housing association. This arrangement is referred to as:
Question 7 options:
a)
equity share.
b)
home reversion.
c)
equity release.
d)
shared ownership.
D
Equity release is regulated by:
Question 8 options:
a)
the Financial Conduct Authority and the Equity Release Council.
b)
the Prudential Regulation Authority only.
c)
the Equity Release Council only.
d)
the Financial Conduct Authority only.
D
Which of the following is incorrect for a discounted-rate mortgage?
Question 9 options:
a)
The monthly mortgage payment can vary.
b)
The payable rate is directly linked to the Bank of England base rate.
c)
The discount is from the lender’s standard variable rate.
d)
There is usually a penalty if the loan is repaid before a specified date.
B
Second charge loans:
Question 10 options:
a)
are charged at a higher rate than first charge loans.
b)
are regulated under the Consumer Credit Act 2006.
c)
do not require equity in the property.
d)
become part of the existing mortgage.
A
repayment mortgage
The relative proportions of capital and interest vary throughout the term. At
the beginning, when most of the original amount borrowed has yet to be repaid,
most of the monthly repayment is just paying the interest on the loan. Later
in the term, when more of the capital has been repaid, the interest proportion
of the repayment decreases and a larger proportion of the repayment goes
towards repaying the capital.
Providing that all the repayments have been made when due, and that the
repayments have been adjusted to reflect changes in the interest rate, the
mortgage will be repaid at the end of the term.
If the borrower dies before the end of the mortgage term, the repayments still
have to be made or the loan has to be repaid in full. Borrowers need to take out
life assurance cover to make sure these conditions can be met
Pension mortgages
The availability of a lump sum from normal
minimum pension age means that these pension plans have the potential to be
used as mortgage repayment vehicles.
Pension mortgages
Assignment – as with all pension contracts, personal pensions and
stakeholder pensions cannot be assigned to a third 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 but
has not, in practice, prevented the majority of them from moving into the
pension mortgages market
Mortgage interest rate options
For both repayment and interest‑only mortgages, there is a variety of ways in
which interest can be charged to the mortgage account. For instance, some
lenders charge interest on an annual basis, some on a monthly basis, and
some on a daily basis. Generally, it is the lender who decides how interest is
charged, although this may vary between different mortgage products
Variable rate
Monthly payments rise and
fall in line with interest rate
changes
Hard to predict what future
payments will be, making
budgeting difficult
Discounted
rate
Interest rate is a discount
from the standard variable
rate
May be penalties for early
repayment
Fixed rate Interest rate
Fixed rate Interest rate is fixed for
a specific period (usually
between one and five years),
then reverts to the standard
variable rate (SVR)
Makes it easier for
borrowers to budget
May be a substantial
arrangement fee and
penalties or restrictions on
switching to another lende
Capped rate
Capped rate Interest rate is variable but
cannot rise above a specified
upper limit (the cap)
Products that also have a
specified lower limit are ‘cap
and collar’ mortgages
Allows borrowers to budget
within set parameters
Borrowers can benefit from
falls in interest rates down
as far as any collar limit set
Base‑rate
tracker
Base‑rate
tracker
Interest moves up and down
in line with (ie ‘tracks’)
changes in Bank rate
Note that a tracker mortgage
rate is not the same as Bank
rate – the lender’s rate will
be slightly higher
Flexible Facility
Flexible Facility to overpay, underpay
and/or take payment holidays
without incurring penalties
Interest calculated on daily
basis
Options include current
account and offset
mortgage
Low start
Low start Repayment mortgage with
lower initial payments
during which capital is not
repaid
Higher payments required
after the initial period
to achieve repayment of
capital
Suits borrowers keen to keep
outgoings low in the early
years
Deferred
interest
Deferred
interest
Interest payments deferred
until later in the term
Suits borrowers who
expect their income to
increase over the term of
the mortgage
Not suitable for those who
borrow a high proportion
of the property value
because of the increased
risk of negative equity
CAT‑standard Charges, Access and Terms
(CAT)
CAT‑standard Charges, Access and Terms
(CAT) meet standards set out
by government
Likely to appeal to borrowers
who want clearly stated
limits on charges
Flexible Mortgages
Many lenders now offer flexible mortgages with a fixed, discounted or capped
rate for an initial period. Early repayment charges do not normally apply to
these products but an arrangement fee may be payable and, in some cases, it
may be a condition of the loan that a particular insurance product is purchased
from the lender
