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
LOAN‑TO‑VALUE (LTV) RATIO
The amount of the loan in relation to the value of the asset used for
security, expressed as a percentage. For a mortgage loan of £80,000 on a
property valued at £100,000, the LTV is 80 per cent.
LOAN‑TO‑VALUE (LTV) RATIO
CAT‑standard mortgages
The variable interest rate must be no more than 2 per cent above Bank
rate and must be adjusted within one calendar month when 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 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 (see
below).
All other fees must be disclosed in cash terms before the potential borrower
makes any commitment
MORTGAGE INDEMNITY GUARANTEES AND HIGHER
LENDING CHARGES
MORTGAGE INDEMNITY GUARANTEES AND HIGHER
LENDING CHARGES
A mortgage indemnity guarantee (MIG) is an insurance policy
that protects the lender in situations where the loan has a
high loan‑to‑value ratio (generally over 75–80 per cent). If the
borrower defaults on repayments and the property is sold,
the lender might not get back the full amount that it lent.
The insurance is designed to make up any shortfall in these
circumstances.
Although the lender is the beneficiary of the policy, it is the
borrower who pays the premium; it can either be a one‑off
payment when the loan is taken out or can be added to the
amount borrowed. Note that, even if the lender fully recoups
the money owed by claiming under the MIG, the insurance
company (MIG insurer) is still entitled to pursue the borrower
for the shortfall arising from the default.
MIGs are a form of higher lending charge (HLC) or mortgage
insurance. ‘Higher lending charge’ is the term the FCA requires
providers to use in explaining a MIG to a customer, but the
term is not exclusive to MIGs. Some lenders will, for example,
make a higher lending charge but, rather than arrange a MIG,
simply place the money into a fund that can be drawn upon if
required.
What is equity release?
In a mortgage context, ‘equity’ is the excess of the market value of a property
over the outstanding amount of any loan or loans secured against it.
EQUITY RELEASE COUNCIL
EQUITY RELEASE COUNCIL
The Equity Release Council represents all participants in the
equity release market including product providers, advisers,
lawyers and surveyors. Its Standards Board formerly existed
as a body called SHIP – Safe Home Incomes Plans, which was
incorporated into the Equity Release Council. The Council’s
role is to ensure that equity release products are safe and
reliable for customers. Members sign up to its Statement of
Principles, which sets out standards of conduct, particularly
in relation to product standards and the information provided
to customers, and to its Rules and Guidance
How does a lifetime mortgage work?
How does a lifetime mortgage work?
For a lifetime mortgage, a lender will usually be prepared to lend up to a
maximum of 55 per cent of the property value, depending on the borrower’s
age. The majority of lifetime mortgages are on a fixed‑rate basis and take into
account the fact that, unlike with a standard mortgage product, the term of
the loan is unknown.The benefit of this
type of loan over a standard lifetime mortgage is that interest only accrues on
the amount actually borrowed, so the borrower has a degree of control and
the debt will not increase as rapidly. It will allow the borrower to provide an
annual ‘income’ while maintaining control over the speed at which the debt
builds up
How does a home reversion plan work?
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(s) retains the right to
live in the house, rent‑free (or for a nominal rent), until their death(s) 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. Thus if they owned 40 per cent of the property, they would receive
40 per cent of the sale proceeds
How are equity release schemes regulated?
How are equity release schemes regulated?
Equity release schemes, defined as lifetime mortgages and home reversion
plans, are regulated by the FCA under the Mortgages and Home Finance:
Conduct of Business (MCOB) rules
BRIDGING FINANCE
BRIDGING FINANCE
Can be used by those arranging a loan to finance a new purchase before
they have sold their existing property in order to ‘bridge’ the finance gap
FIRST CHARGE
FIRST CHARGE
A legal right to have ‘first call’ on a property if a borrower defaults on
repayment of the mortgage loan
SECOND CHARGE
SECOND CHARGE
A legal call on a property after all the liabilities to the holder of the first
charge have been settled
Closed bridging
Closed bridging – the borrower has a feasible plan for repaying the loan
within an agreed timescale. Typically, this is through the sale of the existing
property and requires the borrower to have a firm buyer
Open bridging
Open bridging – the borrower needs finance to buy the new property, but
does not yet have a firm buyer for their existing property.
Open bridging represents a higher risk to the lender than closed bridging. Interest
rates for open bridging are therefore higher than those for closed bridging
Which of the following is not true in relation to a repayment
mortgage?
a) The higher the interest rate, the higher the monthly
repayment to the lender.
b) Life cover is built in.
c) The loan is guaranteed to be fully repaid at the end of the
term, providing monthly repayments are maintained.
d) At the beginning of the term most of the monthly repayment
is paying interest on the loan
b) Life cover is not built in, therefore a separate life assurance policy
would be needed to ensure that the mortgage could be repaid if the
borrower were to die before the end of the mortgage term
For what reason might an ISA not be suitable for someone
who is arranging an interest‑only mortgage of £300,000 over
a five‑year term?
An ISA has an annual investment limit which might make it difficult to
fund a large mortgage and/or one arranged over a short term
It is not the responsibility of the lender to ensure that a
borrower has a repayment vehicle in place for an interest‑only
mortgage. True or false?
False – MCOB rules require the lender to confirm at the outset that a
credible repayment strategy is in place and then reconfirm this at least
once during the mortgage term
Cris is 53 and is pleased to see from his annual personal
pension statement that his pension pot has grown enough
to enable him to take a tax‑free lump sum and pay off his
interest‑only mortgage. Will this be possible?
Not yet, because Chris cannot access his pension funds until he is at least 55
An advantage of a flexible mortgage is the ability to take further
advances up to the lender’s prearranged limit. True or false?
true
What is the main advantage of a capped‑rate mortgage?
a) If interest rates go up, the mortgage interest rate will not
exceed a prearranged limit.
b) The mortgage interest rate will never exceed Bank rate.
c) The amount payable is fixed for the duration of the capped
rate.
d) There is a discount off the normal variable mortgage
interest rate.
?
a) If interest rates go up, the mortgage interest rate will not exceed a
pre‑arranged limit, in other words, the ‘cap’
Describe how a home reversion plan works
Home reversion plans involve the homeowner selling a percentage or all
of their property to the scheme provider. The customer(s) retains the right
to live in the house, rent‑free (or for a nominal rent), until their death(s) 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
Which form of borrowing is likely to have the highest interest
rate: a 25‑year repayment mortgage or a personal loan with a
5‑year term?
The personal loan – interest rates on unsecured borrowing are generally
higher than on secured borrowing because it represents a greater risk to
the lender
What is revolving credit?
