Topic 13 Flashcards
What is a secured loan and its key characteristics
A secured loan is a loan which is secured by an asset or bonds/stocks as a collateral if the payment is unable to fulfilled then the asset is the sold to cover the cost of the loan if the asset over-seeds the amount loaned the excess will be returned and if the amount does not cover the amount then the lender can pursue the shortfall from the borrower.
The advantages of this are that the interest loans are lower as they are secured and the lenders are able to offer larger loans due to the assets for defaults.
The disadvantages of this is that the risk of losing an asset is rather large as well as the vast complexity and costs of securing one of these loans.
What is a unsecured loan and its key characteristics
An unsecured loan is a loan which is not secured by anything and relies on the creditworthy and income of the borrower in order to facilitate the loan. This type of loan is common in credit card and overdrafts. The way it works is that the lender will check the credit history of the lender to assess if the loan is worth the risk as if they are unable to retrieve payment then the options are limited to legal or debt collection which is a lengthy process.
The advantages of this type of loan is that they have no risk as nothing is secured and the loans are simple to obtain.
The disadvantage is that interest is much higher due to the risk inhabited by the lender and there are smaller loans.
What is a repayment mortgage
A repayment mortgage is payments made monthly by a borrower that include the loan amount as well as interest payments. The early payments are mostly interest but as payments are made through time then the payments are mostly capital payments.
There is a loan to value ratio which is calculated as a percentage for example if the loan to value ratio is 80% which would be a £120,000 loan of £150,000 house. The higher this value is then the higher the interest is.
These higher percentages will need more protection such as an mortgage indemnity guarantee.
what is a mortgage indemnity guarantee
This is in case the mortgage is unable to be payed by the borrower this will help protect the lender while also being paid by the borrower in premiums. even if the lenders are cover the borrowers are still liable.
Whats an interest only mortgage
This is where the interest is only covered by the borrower and the capital of the loan is covered by the lender until the end of the term. This type of a mortgage is only suitable for those with a plan to pay the capital at the end by either bonds/stocks, pension funds or investment bonds and fund units.
The advantage to this is that it is affordable as well as flexible with payments and plans.
The disadvantage is that there is high long term costs and repayment uncertainty.
What is a pension mortgage
A pension mortgage is a pension plan taken out by the borrower under careful selection as some plans do not allow for 25% to be taken out. This mortgage is the access to the 25% of a pension plan to repay a mortgage as when the minimum age of the pension is reached then the lump sum tax free is taken out to put down to cover the capital.
the advantages are that it is tax free when the payment is taken as well as offering tax free growth as it is faster to grow.
The disadvantages are that this is very risky as the pension is used to pay the mortgage the borrower will not be able to have much as a pension income as well as a lump is set under a limit of £269,275.
what are the key characteristics of an ISA mortgage
An ISA saving account is for those who are after tax free savings which is capped at 20,000 annually, This type of account goes off the investment made in the account which is then used to pay off the mortgage at the end of the term this assumption will depend on the investment e.g. bonds stock ect.
the benefits of this type of mortgage is that it can en din early payment depending on the investment and the performance of the investment as well as being able to have tax free returns therefore the full value is benefiting.
The risks of this type of mortgage is that regular monitoring is needed in order to stay on steady growth and if the performance of the ISA is not as planned there is no back up therefore there might be a need for insurance to be taken out as well. This type of mortgage also has a limit therefore larger mortgages could take several years in order to gain a great enough investment in order to repay. Finally there is no cover for death in this type of mortgage therefore if the primary dies there could be no way to pay the loan so more insurance must be taken out to cover or other investments.
What are the three types of mortgage interest rates
The first interest rate is yearly- this type of interest is calculated annually and will not take into account any overpayments throughout the year.
The second is monthly- this is more borrower friendly as this will recalculate every month which will lower the charge of interest each month.
Finally is the daily rate- which is the most borrower friendly as this type of rate will adjust everyday therefore each payment and overpayment made each day will lower the amount of interest needed to pay.
name the common interest rates and their pros/cons
Variable rate- Changes with the market therefore payment fluctuate making them unpredictable but can be advantageous when low.
Discount rate- This is the standard variable but discounted in a fixed period (1-5 years) which will mean lower initial payments but can end up paying more in the future and early payments are penalised.
Fixed rate- This is rate which is fixed for the duration of the term, can be advantageous when rates are high in the market but also the opposite applies.
Capped rate- This rate is capped with a max and a min which will make payments more predictable but this can still losing out on greater rates.
Based rate tracker- this follows the basic rate of the bank of England with added margins but will increase with them even if initial rates are lower as well as transparent.
Flexible mortgages- this allows underpayments, overpayments and payment holidays agreed at the start of the term but will come with higher initial cots and fees.
Low start- this is where interest rates at the start are low but then increased later on which eases financial strain at the start but increases the later on.
Differed interest- this is when the interest which is accumulated at the start is differed until a later date as income growth is projected.This puts a lot of strain on later payments but can increase what is affordable with the knowledge of more income coming.
What is a cash back incentive
This is where lenders offer a lump sum to borrowers at completion of the loan usually as a loan to value percentage so the lower the loan to value the higher the lump sum. This incentivises new borrowers or retaining currents borrowers. Early repayments may require part or full repayment of cash back and is provided as financial support to help move in.
What are flexible mortgages and their key characteristics
This type of mortgages offer daily interest rates which will benefit the borrowers entirely as payments made will immediately reduce the expected value to pay as well as allowing overpayments with no added cost and underpayments with no drawback to help in financial prosper or difficulty. They can also offer holiday payments meaning time off from payment for a limited time to help in stressful financial time e.g. job less. finally they will allow drawbacks which is the access to the overpayments they made as a loan usually without new application.
The benefits are that costs are lower and spread where the borrower would like them to be as well as the adaptability of adjusting to the borrowers needs at the time. The downfall of these mortgages are that the lender may make the borrower purchase an insurance premium in order to take this mortgage out as well as higher initial costs.
How do lifetime mortgages work
A lifetime mortgage is usually offered for those older typically around 55 and above, this type of mortgage is a loan which does not have monthly repayments as it is repaid by the capital of the property when the homeowner dies or goes into long term care. The interest rates are fixed over time and the value of the loan is usually a loan to value percentage as well as the older the homeowner the more can be given as repayment is expected sooner.
This type of mortgage requires the house to be fully owned or have little left to pay on the mortgage. The borrowers are also protected by not having to pay more than the value of the property regardless of the interest accumulated. If the property is in joint ownership then the loan will continue until the death of the second owner or the admission into long term care.
There are also drawdown options to control the debt at a lump sum which is needed therefore no unnecessary debt is accumulated and it can be limited.
This type of mortgage is flexible with no monthly payments and protects the consumer however there are initial costs to be paid while also reducing the inheritance and compounding interest can rise very fast e.g. 5% fixed rate will reach double the loan in 14 years.
How does a home revision plan work
A home revision plan is for those in need of a lump sum or monthly income in exchange for the capital percentage of their home. This works as a percentage is sold to a provider which will pay the lump sum or income while the homeowner will live there under protection and cannot be evicted by the provider. This term will end once the homeowner enters a long term care or death and at the selling of the property the provider will get their full percentage that they have provided before anyone else.
This benefits those in need of cash immediately and are not bothered by the return of their house as they could make a loss on the property but there is no interest on the payments and guarantees residency.
How are equity realise schemes regulated
This is regulated by the FCA ensuring customer protection and transparency as those who advise must be specialists through qualification and abide by specific ules under the mortgage and house finance conduct of business.
This ensures there is no negative equity promise and comprehensive help navigating the market benefitting both advisors and those being advised.
What is a retirement interest only mortgage
This is for those who have a sustained income and can repay monthly payments aimed at those who are 55 and above which will help those in need of funds at this stage and benefit those as they do not lose the value of the property.
This type of mortgage will end at death or permanent relocation to care.
