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CeMAP 1 (Unit one) > Topic 13 (Secured and unsecured lending) > Flashcards

Topic 13 (Secured and unsecured lending) Flashcards

1
Q

What is the most well-known secured lending?

A

Mortgage loan to finance the purchase of property

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2
Q

What is the most well-know un-secured lending?

A

Overdrafts and credit loans

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3
Q

What are the 2 basic types of mortgage?

A
  1. Repayment mortgage

2. Interest-only mortgage

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4
Q

What are equity release schemes?

A

What people use to release the value that is ‘locked up’ in their homes

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5
Q

How does secured lending differ to un-secured lending?

A

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
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6
Q

What is a repayment mortgage?

A

Monthly repayments are made to the lender which consisted of capital repayment and interest on the amount borrowed

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7
Q

What happens to the proportions of capital in a repayment mortgage throughout the term?

A

Decreases slowly in the early years but then quickly until loan is fully repaid

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8
Q

What is designed to protect a repayment mortgage?

A

Decreasing term assurance

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9
Q

What is a Covenant?

A

A promise under the terms of a mortgage deed to maintain the property in good condition

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10
Q

Who is known as the ‘Mortgagor’?

A

The borrower

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11
Q

Who is known as the ‘Mortgagee’?

A

The lender

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12
Q

What is an Interest-only mortgage?

A
  • only interest payments are made to the lender
  • loan capital outstanding doesn’t reduce during the term
  • loan payments are lower
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13
Q

How does the borrower repay the amount borrowed on an interest-only mortgage?

A

By making regular payments into an appropriate savings scheme such as an ISA

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14
Q

What is a credible repayment strategy?

A

It includes a savings vehicle with a pre-determined benefit (it is needed to have an interest-only mortgage)

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15
Q

What are the 2 main issues that need to be addressed when taking out an interest-only mortgage?

A
  1. putting in place a funding mechanism to repay the debt at the end of the term
  2. ensuring their is sufficient protection to enable the debt to be repaid
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16
Q

What are popular methods of funding interest-only mortgages?

A
  • endowments
  • ISA’s
  • Pensions
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17
Q

How is protection provided on an interest-only mortgage?

A

Level-term assurance

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18
Q

How is a pension mortgage loan repaid?

A

By using the 25% tax-free cash sum from the pension fund

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19
Q

What is a personal pension?

A

A pension product arranged on an individual basis. The benefits received depend on the performance of the funds

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20
Q

What is a a Stakeholder pension?

A

A simple low-cost pension product

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21
Q

What is an individual savings account mortgage?

A
  • 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
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22
Q

What is a ‘Variable rate’ Mortgage product?

A

> 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

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23
Q

What is a ‘Discounted rate’ Mortgage product?

A

> genuine discount off the variable rate
payments increase at the end of discount period
penalties applied for full or part redemption

24
Q

What is a ‘Fixed-rate’ Mortgage product?

A

> rate reverts to variable rate at the end
arrangement fee is payable
penalties payable on switching to another lender
popular with first-time buyers

25
Q

What is a ‘Capped-rate’ Mortgage product?

A

> 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

26
Q

What is a ‘Basic-rate’ Mortgage product?

A

> 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

27
Q

What are the key features of a flexible mortgage?

A
  • daily interest
  • overpayment facility with no early repayment charge
  • underpayment facility (specified by lender)
  • payment holiday
28
Q

What are the 2 main benefits of a flexible mortgage?

A

> 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

29
Q

What is a current mortgage account?

A

A popular version of the flexible mortgage where all personal, financial transactions are within a single account

30
Q

What is an offset mortgage?

A

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

31
Q

What are cashbacks?

A

> 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

32
Q

What is the LTV ratio?

A

The amount of the loan in relation to the value of the asset used for security

33
Q

What are CAT standard mortgages? (charges, access and terms)

A

> 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

34
Q

What is a Mortgage Indemnity guarantee? (MIG)

A

> 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

35
Q

Why was shared ownership designed?

A

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)

36
Q

What is meant by ‘stair casing’?

A

The process of increasing the mortgage element

37
Q

What is mortgage protection insurance?

A

provides a lump sum that can be used to repay the outstanding mortgage loan if the life assured dies

38
Q

What is mortgage indemnity guarantee?

A

Covers the difference between the sale proceeds after a property has been repossessed and amount outstanding on the loan

39
Q

What is equity? and what are equity release plans designed to do?

A

> ‘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

40
Q

How does Lifetime mortgage work?

A

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

41
Q

How does a home reversion plan work?

A

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

42
Q

How are equity release schemes regulated?

A

> regulated by FCA under mortgage conduct of business rules

>anyone advising/arranging equity release schemes must hold a specialist qualification

43
Q

What is the major form of secured personal lending?

A

The mortgage loan for house purchase

44
Q

When property value increases it is common for people to borrow against the increased equity, how is this done?

A

> a further advance from their existing lender
a second mortgage from a different lender
by re-mortgaging for a larger amount

45
Q

What is meant by ‘bridging finance’?

A

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

46
Q

What is meant by ‘first charge’?

A

a legal right to have first call on a property if a borrower defaults on repayment of the mortgage loan

47
Q

What is meant by ‘second charge’?

A

a legal call on a property after all the liabilities to the holder on first charge have been settled

48
Q

What are the 2 types of bridging finance?

A
  1. Closed bridging (borrower has a feasible plan for repaying the loan within an agreed timescale)
  2. Open Bridging (borrower needs finance to buy the new property)
49
Q

What are commercial loans?

A

They are loans to businesses of all sizes from sole traders to multinational traders

50
Q

What is unsecured borrowing?

A

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

51
Q

Unsecured lending takes on a number of forms… one of which is personal loans?

A

> offered by banks/building societies and some finance houses

>the term is usually between 1 and 5 years and the interest rate is fixed

52
Q

Unsecured lending takes on a number of forms… one of which is Overdrafts?

A

> 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

53
Q

Unsecured lending takes on a number of forms… one of which is Credit cards?

A

> a source of revolving credit
has a credit limit that is repaid each month
interest is high
allows people to shop without using cash

54
Q

What is revolving credit?

A

arrangements where the customer can continue to borrow further amounts while still repaying existing debt
(most common form of revolving credit is credit cards)

55
Q

How are charge cards used and the well-known examples?

A
  • used in the same way as a credit card where outstanding balance must be paid in full
  • best known example is American express
56
Q

What is a debit card?

A
  • used to make payments for goods/services and to withdraw cash from ATM’s
  • not a credit facility

CeMAP 1 (Unit one) (16 decks)

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