Topic 13: Secured and unsecured lending Flashcards
1) Define a) a mortgagor and b) a mortgagee.
The mortgagor is the borrower and the mortgagee is the lender.
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
Chris 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 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
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?
A facility that allows you to borrow more before you have paid off the initial amount borrowed. Credit card borrowing is the most common example
