Topic 13 Secured & Unsecured Lending Flashcards
These are what?
- Business Premises
- Equipment
- Shares
- Other Assets
What a commercial loan may be secured against
What is a Mortgage Indemnity Guarantee (MIG)?
Any insurance policy designed to protect the lender in the event of a mortgage default
In what situation is a Mortgage Indemnity Guarantee (MIG) likely to be used?
When a mortgage has a LTV of over 75-80% LTV
Who is the beneficiary & who pays the premium of the Mortgage Indemnity Guarantee (MIG)?
Beneficiary The lender
Pays premium The Borrower
The insurance company can still chase the borrower if they default on the mortgage and the lender has recouped their money.
True or False
True
To chase any shortfall
What is the term the FCA uses to describe a Mortgage Indemnity Guarantee (MIG)?
Higher Lending Charge
Who is the Mortgagor?
The borrower (borrowor)
Who is the Mortgagee?
The Lender
What does Covenants mean?
The borrowers promise under the terms of the mortgage deed to keep the property in a good condition & insured
What is a lender permitted by law to do regarding a property mortgaged by them?
- Insist that the property is continuously insured
- Noted on policy it is mortgagee
- Secured a right of proceeds of any claim & insists proceeds applied to claim or mortgage debt
What are they below in relation to an Interest Only Mortgage?
- Stocks & Shares ISA
- Pension
- Investment Bond
- Shares
- Unit Trusts
- Regular Savings
Types of acceptable repayment strategies
What must the lender do during term on an Interest Only Mortgage?
Contact the customer at least once to ensure the repayment strategy remains in place
What are the advantages of using a pension as a repayment strategy?
- Contributions are not subject to tax
- Fund is not subject to tax (grow faster)
What is a disadvantage of using a lump sum allowance as a interest only mortgage repayment strategy?
Lump Sum allowance is limited to £268,275 so any amount over this amount is subject to 25% tax
What is a disadvantage of using minimum pension age as a interest only mortgage repayment strategy?
Minimum age is 55 so the mortgage will incur more interest during the time before age 55
What is a disadvantage of using a pension that does not allow withdrawals over the 25% Pension Commencement Lump Sum as a interest only mortgage repayment strategy?
The fund would need to be 4 times the size which means that contributions may not be affordable for the customer. Or not allowed by the scheme
What is a disadvantage of using a pension pot as a interest only mortgage repayment strategy?
Less funds available for retirement
What is a disadvantage of using a personal or stakeholder pension as a interest only mortgage repayment strategy?
Pension does not have any life assurance with it so a separate life assurance policy would be required to cover death during the term
What is a disadvantage of a pension not being assignable to a mortgage lender as a interest only mortgage repayment strategy?
They cannot legally take possession of the pension funds to use it a security
What are the benefits of using an ISA as a repayment strategy?
- Funds grow tax free
- Mortgage can be repaid early if growth rate is better than expected
What are the disadvantages of using an ISA as a repayment strategy?
- Fund may not grow as expected leaving the mortgage short
- ISA may not be large enough to repay the mortgage in the event of the ISA holder death (additional life cover required)
- Small subscription limits make repaying large loans & short term mortgages difficult
What is Discounted Rate mortgage?
Mortgage with a discounted rate from the Standard Variable Rate
What is a Capped Rate mortgage?
Variable mortgage that can’t rise above a set limit (the cap)
What is a Cap & Collar mortgage?
Mortgage with a specified higher limit (cap) & specified lower limit interest (collar) that can’t exceeded
What has a higher interest rate?
- Variable rate mortgage
- Base rate tracker mortgage
Variable rate set by lender
What is a Low Start Mortgage?
A mortgage with lower initial repayments that increase to cover the capital element by the end of the term
What is a Deferred Interest Mortgage?
Interest payments are deferred until later in the term
What is a Charges, Access, Terms (CAT) Standard Mortgage?
A mortgage that meets the standards set out by the government
What is a Green Mortgage?
Incentive to home buyers to by more energy efficient homes by providing more advantageous terms than standard mortgages
Why is cashback offered after the completion of a mortgage by lenders?
As an incentive to keep the lending with that bank rather than re-mortgaging
How is cashback good for someone with a low LTV?
They receive more cashback as risk of the lender losing money is less
What is a Flexible Mortgage?
A mortgage that allows overpayments, underpayments and payment holiday’s without penalties
A borrower with a flexible mortgage can drawdown further funds when required up to the lender limit of borrowing
True or False
True
What happens to funds withdrawn on a Flexible Mortgage?
The charges take priority over any charges registered against the property
What is a Current Account Mortgage in relation to a Flexible Mortgage?
A single account that enables customer to carry out all of their financial transactions within the mortgage account
What can having a Current Account Mortgage in relation to a Flexible Mortgage do to the mortgage?
Salary is paid into the account which reduces interest payable which reduces mortgage term
What is an Offset Mortgage?
Enables interest generated in other accounts held with a lender to be offset against mortgage interest to reduce interest payable
What is Staircasing is relation to a shared ownership scheme?
When a person buys an additional stake in the property increasing their ownership of the property
Is it possible for somebody to “Staircase” their way to 100% property ownership in a shared ownership scheme?
Eventually they are able to gain 100% ownership
What is Equity Release (Lifetime Mortgage)?
A release of funds from the value of the home of an older person with a limited pension to enable them to supplement their income or provide capital
What age does somebody have to be to qualify for equity release?
55 and over
What is the Equity Release Council?
Represents all participants in the Equity Release market and it’s role is to ensure all Equity Release products are safe & reliable for customers
How much of an equity release percentage is a lender prepared to agree to?
55% of the property’s value
What is different about a Lifetime Mortgage compared to a repayment mortgage?
It has no monthly repayment instead interest is “rolled up” & added to the loan balance
What happens when a borrower of an equity release mortgage dies or moves into care?
The property is sold & the loan plus interest is repaid. Excess is sent to customer or estate
What is a “no-negative equity” promise provided by a lender?
That the borrower cannot owe more than the property value when the loan is repaid
What is the advantage of a equity release arranged on a drawdown basis for a borrower?
- Can drawdown in amounts that suit them typically £2k or £5k
- Interest accures on the amount actually borrowed
- Debt is not accrued as quickly
What is a Home Reversion Plan?
When a home owner sells all or part of their property to equity release scheme provider in exchange for an equity release
What happens when a borrower in a Home Reversion Plan dies or moves into a home?
The property is sold & they or their estate receive an amount equivalent to the percentage of the property they own
Who regulates Equity Release Schemes?
The FCA
To be able to advice on Equity Release you don’t need to be specially qualified.
True or False
False
You must hold a specialist qualification
What is a Retirement Interest-Only Mortgage?
A retirement mortgage that only pays the interest during the mortgage term
A Home Owner Loan is also called a?
Futher Advance
What is a Second Mortgage?
Is when a borrower offers their property as security for a second time to a new lender
What is Bridging Finance?
Is short term borrowing when a customer requires funds to buy a new property before their current property is sold
What are the 2 types of Bridging Finance?
- Closed Bridging
- Open Bridging
What is Closed Bridging?
Is when borrower has an agreed plan for the repaying the bridging loan
What is Open Bridging?
Is when the borrower does not have a buyer set up for the purchase of their home.
Risker for lender so higher interest rates are likely
What is a Commercial Loan?
Borrowing that is intended for the use of Businesses
How are Commercial Loans normally secured?
Against the businesses assets
Commercial lending is normally set at a rate above the lender base rate.
True or False
True
What is Unsecured Borrowing?
Borrowing that relies on a personal promise or Covenant to repay funds
What are common features of Unsecured Borrowing?
- High Interest Rates
- Shorter Terms
Than secured borrowing
What is a Personal Loan
Loan of 1-5 years with a fixed interest rate offered by banks and building societies
How are Personal Loans assessed?
Via Credit Scoring
What is an Overdraft?
Short term facility that allows customer to spend on their account even though the customer has no funds in the account
What are overdrafts that have been agreed in advance?
Arranged Overdrafts
What is a Credit Card?
Card that enables a person to shop without using cash or a debit card in places that are part of the CC company’s scheme
How does a Credit Card work?
- Customer has a limit which can be spent up to
- 3% minimum must be repaid each month
- If balance is repaid each month no interest is charged
- Might achieve more sales if Credit Card facilities are available
- Payment is guaranteed if card is accepted with CC company’s rules
- Can reduce their own bank charges as CC vouchers are treated as cash
Advantages of retailers allowing the use of Credit Cards
What is Revolving Credit?
Arrangement that allows a customer to borrow more funds while repaying existing debt
What is a Charge Card?
Card similar to a credit card but must be repaid in full each month
What is the name of the transaction on a debit card to the retailer?
Electronic Fund Transfer at Point of Sale (EFTPOS)
True or False
Credit Card companies charge retailers for their services?
True
Around 3%
True or False
Secured borrowing is only done against property?
False
It can be secured against various assets
Second Charge Loans offer a higher risk to a lender so this means what?
The interest rate is higher than first charge loans
