Topic 13 (Secured and unsecured lending) Flashcards
What is the most well-known secured lending?
Mortgage loan to finance the purchase of property
What is the most well-know un-secured lending?
Overdrafts and credit loans
What are the 2 basic types of mortgage?
- Repayment mortgage
2. Interest-only mortgage
What are equity release schemes?
What people use to release the value that is ‘locked up’ in their homes
How does secured lending differ to un-secured lending?
Secured
- the borrower gives the lender the right to take possession of a specific asset if they fail to keep up repayments on the loan.
- If repayments are missed the lender can sell the asset to recoup the money owed
Un-secured
- the lender doesn’t have the reassurance of the asset that they can sell to recoup the loan if the borrower fails to repay
- has a greater risk to the lender and interest rates are higher
What is a repayment mortgage?
Monthly repayments are made to the lender which consisted of capital repayment and interest on the amount borrowed
What happens to the proportions of capital in a repayment mortgage throughout the term?
Decreases slowly in the early years but then quickly until loan is fully repaid
What is designed to protect a repayment mortgage?
Decreasing term assurance
What is a Covenant?
A promise under the terms of a mortgage deed to maintain the property in good condition
Who is known as the ‘Mortgagor’?
The borrower
Who is known as the ‘Mortgagee’?
The lender
What is an Interest-only mortgage?
- only interest payments are made to the lender
- loan capital outstanding doesn’t reduce during the term
- loan payments are lower
How does the borrower repay the amount borrowed on an interest-only mortgage?
By making regular payments into an appropriate savings scheme such as an ISA
What is a credible repayment strategy?
It includes a savings vehicle with a pre-determined benefit (it is needed to have an interest-only mortgage)
What are the 2 main issues that need to be addressed when taking out an interest-only mortgage?
- putting in place a funding mechanism to repay the debt at the end of the term
- ensuring their is sufficient protection to enable the debt to be repaid
What are popular methods of funding interest-only mortgages?
- endowments
- ISA’s
- Pensions
How is protection provided on an interest-only mortgage?
Level-term assurance
How is a pension mortgage loan repaid?
By using the 25% tax-free cash sum from the pension fund
What is a personal pension?
A pension product arranged on an individual basis. The benefits received depend on the performance of the funds
What is a a Stakeholder pension?
A simple low-cost pension product
What is an individual savings account mortgage?
- Where investment is made on a regular, monthly basis provided that all the overall annual limits are not exceeded
- ISA managers calculate investment required to produce lump sum at the end of the mortgage term
What is a ‘Variable rate’ Mortgage product?
> basic method- monthly payments vary without limit as interest rate changes
borrowers cannot budget for future payments
borrowers can benefit from reductions in interest rates
What is a ‘Discounted rate’ Mortgage product?
> genuine discount off the variable rate
payments increase at the end of discount period
penalties applied for full or part redemption
What is a ‘Fixed-rate’ Mortgage product?
> rate reverts to variable rate at the end
arrangement fee is payable
penalties payable on switching to another lender
popular with first-time buyers
What is a ‘Capped-rate’ Mortgage product?
> variable interest rate with a ‘cap’ (upper limit)
suitable for people who think interest rate might rise
allows borrowers to budget within set perimeters
can benefit from falls in interest
What is a ‘Basic-rate’ Mortgage product?
> linked to BOE base rate
rate is reviewed each month
lenders charge a premium above base rate
premiums rise/fall in line with base rate
What are the key features of a flexible mortgage?
- daily interest
- overpayment facility with no early repayment charge
- underpayment facility (specified by lender)
- payment holiday
What are the 2 main benefits of a flexible mortgage?
> the combo of daily interest and occasional/regular overpayments will result in less interest being paid overall and mortgage terming reduced
the ability to reduce monthly payments or suspend them early
What is a current mortgage account?
A popular version of the flexible mortgage where all personal, financial transactions are within a single account
What is an offset mortgage?
Requires the borrower to have savings or other accounts with the lender and enable the interest payable on such accounts to be offset against the mortgage interest charged
What are cashbacks?
> a common incentive offered by lenders
lump sum is paid to the borrower immediately after completion of mortgage
the lower the loan-to-value ratio the higher the cashback
What is the LTV ratio?
The amount of the loan in relation to the value of the asset used for security
What are CAT standard mortgages? (charges, access and terms)
> appeals to borrowers who want a clearly stated limit on interest and charges
variable rate must be no more than 2% about BOE base rate
interest must be calculated daily
What is a Mortgage Indemnity guarantee? (MIG)
> an insurance policy that protects the lender in situations where the loan has a high LTV ratio
MIG’s are a form of higher lending charge or mortgage insurance
Why was shared ownership designed?
Designed to help people on low incomes to become owner occupiers, even though they can’t afford a conventional mortgage
(they buy a stake in the property and pay rent on the remainder)
What is meant by ‘stair casing’?
The process of increasing the mortgage element
What is mortgage protection insurance?
provides a lump sum that can be used to repay the outstanding mortgage loan if the life assured dies
What is mortgage indemnity guarantee?
Covers the difference between the sale proceeds after a property has been repossessed and amount outstanding on the loan
What is equity? and what are equity release plans designed to do?
> ‘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 plans are designed to enable homeowners who don’t have a mortgage on their property to release some of the equity in order to provide capital or supplement their home
How does Lifetime mortgage work?
are on a fixed-rate basis and the capital release can be used to buy annuity, be invested to provide income or used to meet borrowers needs
How does a home reversion plan work?
Involves the homeowner selling a % of all their property to a schema provider. Th e customer retains the right to stay in their home rent-free until death/residential care
How are equity release schemes regulated?
> regulated by FCA under mortgage conduct of business rules
>anyone advising/arranging equity release schemes must hold a specialist qualification
What is the major form of secured personal lending?
The mortgage loan for house purchase
When property value increases it is common for people to borrow against the increased equity, how is this done?
> a further advance from their existing lender
a second mortgage from a different lender
by re-mortgaging for a larger amount
What is meant by ‘bridging finance’?
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
What is meant by ‘first charge’?
a legal right to have first call on a property if a borrower defaults on repayment of the mortgage loan
What is meant by ‘second charge’?
a legal call on a property after all the liabilities to the holder on first charge have been settled
What are the 2 types of bridging finance?
- Closed bridging (borrower has a feasible plan for repaying the loan within an agreed timescale)
- Open Bridging (borrower needs finance to buy the new property)
What are commercial loans?
They are loans to businesses of all sizes from sole traders to multinational traders
What is unsecured borrowing?
Unsecured loans rely on the personal promise of the borrower to repay. These loans are higher risk and subject to higher interest rates. Are available for a shorter period of time
Unsecured lending takes on a number of forms… one of which is personal loans?
> offered by banks/building societies and some finance houses
>the term is usually between 1 and 5 years and the interest rate is fixed
Unsecured lending takes on a number of forms… one of which is Overdrafts?
> a current account facility offered by all retail banks and some building societies
banks set a limit to the amount by which the account can be overdrawn
is a short term facility, it must be renegotiated or repaid
Unsecured lending takes on a number of forms… one of which is Credit cards?
> a source of revolving credit
has a credit limit that is repaid each month
interest is high
allows people to shop without using cash
What is revolving credit?
arrangements where the customer can continue to borrow further amounts while still repaying existing debt
(most common form of revolving credit is credit cards)
How are charge cards used and the well-known examples?
- used in the same way as a credit card where outstanding balance must be paid in full
- best known example is American express
What is a debit card?
- used to make payments for goods/services and to withdraw cash from ATM’s
- not a credit facility
