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CeMAP Unit 1 > Topic 13 Secured & Unsecured Lending > Flashcards

Topic 13 Secured & Unsecured Lending Flashcards

1
Q

These are what?

  • Business Premises
  • Equipment
  • Shares
  • Other Assets
A

What a commercial loan may be secured against

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2
Q

What is a Mortgage Indemnity Guarantee (MIG)?

A

Any insurance policy designed to protect the lender in the event of a mortgage default

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3
Q

In what situation is a Mortgage Indemnity Guarantee (MIG) likely to be used?

A

When a mortgage has a LTV of over 75-80% LTV

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4
Q

Who is the beneficiary & who pays the premium of the Mortgage Indemnity Guarantee (MIG)?

A

Beneficiary The lender
Pays premium The Borrower

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5
Q

The insurance company can still chase the borrower if they default on the mortgage and the lender has recouped their money.

True or False

A

True

To chase any shortfall

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6
Q

What is the term the FCA uses to describe a Mortgage Indemnity Guarantee (MIG)?

A

Higher Lending Charge

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7
Q

Who is the Mortgagor?

A

The borrower (borrowor)

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8
Q

Who is the Mortgagee?

A

The Lender

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9
Q

What does Covenants mean?

A

The borrowers promise under the terms of the mortgage deed to keep the property in a good condition & insured

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10
Q

What is a lender permitted by law to do regarding a property mortgaged by them?

A
  • 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
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11
Q

What are they below in relation to an Interest Only Mortgage?

  • Stocks & Shares ISA
  • Pension
  • Investment Bond
  • Shares
  • Unit Trusts
  • Regular Savings
A

Types of acceptable repayment strategies

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12
Q

What must the lender do during term on an Interest Only Mortgage?

A

Contact the customer at least once to ensure the repayment strategy remains in place

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13
Q

What are the advantages of using a pension as a repayment strategy?

A
  • Contributions are not subject to tax
  • Fund is not subject to tax (grow faster)
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14
Q

What is a disadvantage of using a lump sum allowance as a interest only mortgage repayment strategy?

A

Lump Sum allowance is limited to £268,275 so any amount over this amount is subject to 25% tax

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15
Q

What is a disadvantage of using minimum pension age as a interest only mortgage repayment strategy?

A

Minimum age is 55 so the mortgage will incur more interest during the time before age 55

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16
Q

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?

A

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

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17
Q

What is a disadvantage of using a pension pot as a interest only mortgage repayment strategy?

A

Less funds available for retirement

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18
Q

What is a disadvantage of using a personal or stakeholder pension as a interest only mortgage repayment strategy?

A

Pension does not have any life assurance with it so a separate life assurance policy would be required to cover death during the term

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19
Q

What is a disadvantage of a pension not being assignable to a mortgage lender as a interest only mortgage repayment strategy?

A

They cannot legally take possession of the pension funds to use it a security

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20
Q

What are the benefits of using an ISA as a repayment strategy?

A
  • Funds grow tax free
  • Mortgage can be repaid early if growth rate is better than expected
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21
Q

What are the disadvantages of using an ISA as a repayment strategy?

A
  • 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
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22
Q

What is Discounted Rate mortgage?

A

Mortgage with a discounted rate from the Standard Variable Rate

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23
Q

What is a Capped Rate mortgage?

A

Variable mortgage that can’t rise above a set limit (the cap)

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24
Q

What is a Cap & Collar mortgage?

A

Mortgage with a specified higher limit (cap) & specified lower limit interest (collar) that can’t exceeded

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25
Q

What has a higher interest rate?

  • Variable rate mortgage
  • Base rate tracker mortgage
A

Variable rate set by lender

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26
Q

What is a Low Start Mortgage?

A

A mortgage with lower initial repayments that increase to cover the capital element by the end of the term

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27
Q

What is a Deferred Interest Mortgage?

A

Interest payments are deferred until later in the term

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28
Q

What is a Charges, Access, Terms (CAT) Standard Mortgage?

A

A mortgage that meets the standards set out by the government

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29
Q

What is a Green Mortgage?

A

Incentive to home buyers to by more energy efficient homes by providing more advantageous terms than standard mortgages

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30
Q

Why is cashback offered after the completion of a mortgage by lenders?

A

As an incentive to keep the lending with that bank rather than re-mortgaging

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31
Q

How is cashback good for someone with a low LTV?

A

They receive more cashback as risk of the lender losing money is less

32
Q

What is a Flexible Mortgage?

A

A mortgage that allows overpayments, underpayments and payment holiday’s without penalties

33
Q

A borrower with a flexible mortgage can drawdown further funds when required up to the lender limit of borrowing

True or False

A

True

34
Q

What happens to funds withdrawn on a Flexible Mortgage?

A

The charges take priority over any charges registered against the property

35
Q

What is a Current Account Mortgage in relation to a Flexible Mortgage?

A

A single account that enables customer to carry out all of their financial transactions within the mortgage account

36
Q

What can having a Current Account Mortgage in relation to a Flexible Mortgage do to the mortgage?

A

Salary is paid into the account which reduces interest payable which reduces mortgage term

37
Q

What is an Offset Mortgage?

A

Enables interest generated in other accounts held with a lender to be offset against mortgage interest to reduce interest payable

38
Q

What is Staircasing is relation to a shared ownership scheme?

A

When a person buys an additional stake in the property increasing their ownership of the property

39
Q

Is it possible for somebody to “Staircase” their way to 100% property ownership in a shared ownership scheme?

A

Eventually they are able to gain 100% ownership

40
Q

What is Equity Release (Lifetime Mortgage)?

A

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

41
Q

What age does somebody have to be to qualify for equity release?

A

55 and over

42
Q

What is the Equity Release Council?

A

Represents all participants in the Equity Release market and it’s role is to ensure all Equity Release products are safe & reliable for customers

43
Q

How much of an equity release percentage is a lender prepared to agree to?

A

55% of the property’s value

44
Q

What is different about a Lifetime Mortgage compared to a repayment mortgage?

A

It has no monthly repayment instead interest is “rolled up” & added to the loan balance

45
Q

What happens when a borrower of an equity release mortgage dies or moves into care?

A

The property is sold & the loan plus interest is repaid. Excess is sent to customer or estate

46
Q

What is a “no-negative equity” promise provided by a lender?

A

That the borrower cannot owe more than the property value when the loan is repaid

47
Q

What is the advantage of a equity release arranged on a drawdown basis for a borrower?

A
  • Can drawdown in amounts that suit them typically £2k or £5k
  • Interest accures on the amount actually borrowed
  • Debt is not accrued as quickly
48
Q

What is a Home Reversion Plan?

A

When a home owner sells all or part of their property to equity release scheme provider in exchange for an equity release

49
Q

What happens when a borrower in a Home Reversion Plan dies or moves into a home?

A

The property is sold & they or their estate receive an amount equivalent to the percentage of the property they own

50
Q

Who regulates Equity Release Schemes?

A

The FCA

51
Q

To be able to advice on Equity Release you don’t need to be specially qualified.

True or False

A

False

You must hold a specialist qualification

52
Q

What is a Retirement Interest-Only Mortgage?

A

A retirement mortgage that only pays the interest during the mortgage term

53
Q

How are Retirement Interest-Only Mortgages & Equity Releases similar?

A

They both are repaid with the sale of the property

54
Q

A Home Owner Loan is also called a?

A

Futher Advance

55
Q

What is a Second Mortgage?

A

Is when a borrower offers their property as security for a second time to a new lender

56
Q

What is Bridging Finance?

A

Is short term borrowing when a customer requires funds to buy a new property before their current property is sold

57
Q

What are the 2 types of Bridging Finance?

A
  1. Closed Bridging
  2. Open Bridging
58
Q

What is Closed Bridging?

A

Is when borrower has an agreed plan for the repaying the bridging loan

59
Q

What is Open Bridging?

A

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

60
Q

What is a Commercial Loan?

A

Borrowing that is intended for the use of Businesses

61
Q

How are Commercial Loans normally secured?

A

Against the businesses assets

62
Q

Commercial lending is normally set at a rate above the lender base rate.

True or False

A

True

63
Q

What is Unsecured Borrowing?

A

Borrowing that relies on a personal promise or Covenant to repay funds

64
Q

What are common features of Unsecured Borrowing?

A
  • High Interest Rates
  • Shorter Terms

Than secured borrowing

65
Q

What is a Personal Loan

A

Loan of 1-5 years with a fixed interest rate offered by banks and building societies

66
Q

How are Personal Loans assessed?

A

Via Credit Scoring

67
Q

What is an Overdraft?

A

Short term facility that allows customer to spend on their account even though the customer has no funds in the account

68
Q

What are overdrafts that have been agreed in advance?

A

Arranged Overdrafts

69
Q

What is a Credit Card?

A

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

70
Q

How does a Credit Card work?

A
  • 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
71
Q
  • 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
A

Advantages of retailers allowing the use of Credit Cards

72
Q

What is Revolving Credit?

A

Arrangement that allows a customer to borrow more funds while repaying existing debt

73
Q

What is a Charge Card?

A

Card similar to a credit card but must be repaid in full each month

74
Q

What is the name of the transaction on a debit card to the retailer?

A

Electronic Fund Transfer at Point of Sale (EFTPOS)

75
Q

True or False

Credit Card companies charge retailers for their services?

A

True

Around 3%

76
Q

True or False

Secured borrowing is only done against property?

A

False

It can be secured against various assets

77
Q

Second Charge Loans offer a higher risk to a lender so this means what?

A

The interest rate is higher than first charge loans

CeMAP Unit 1 (18 decks)

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