topic 13 - secured & unsecured loans

Question 1

Secured lending

Answer 1

• is when the borrower gives the lender the right to take possession of a specific asset if they fail to keep up with repayments on a loan
• with commercial loans, the loan may be secured on a financial asset such as shares or other investments.

Question 2

Mortgage indemnity guarantees (MIG)

Answer 2

an insurance policy that protects the lender in situations where the loan has a high LTV ratio

Question 3

Covenants

Answer 3

• Borrowers have a covenant (promise under the terms of the mortgage deed) to maintain the property in good condition
• Also have a covenant to insure the property adequately

Question 4

Repayment mortgage

Answer 4

• Monthly payments consists partly of capital repayment and partly of interest
• The higher the interest rate the higher the monthly repayment

Question 5

Interest-only mortgage

Answer 5

• Monthly payments only pay interest on the loan
• Capital amount isn’t reduced at all
• The borrower still has to repay the original amount borrowed at the end of the term
• Can only be arranged if the borrower has a credible repayment strategy in place

Question 6

Pension mortgages

Answer 6

• The availability of a lump sum from normal minimum pension age means some pension plans (eg personal pension plans/stakeholder pensions) can be used as a mortgage repayment vehicle

Question 7

Individual savings accounts mortgages

Answer 7

• Benefits of using an ISA as a mortgage repayment vehicle

Question 8

Variable rate mortgage

Answer 8

• Monthly payments rise & fall in line with interest rate changes
• Can’t predict future payments

Question 9

Discounted rate mortgage

Answer 9

• Interest rate is a discount from the standard variable rate
• May be charges for early repayment

Question 10

Fixed rate mortgage

Answer 10

• Interest rate is fixed for a certain period then reverts to the standard variable rate
• Easier to budget
• May be a substantial arrangement fee

Question 11

Capped rate mortgage

Answer 11

• Interest rate is variable but capped a specified upper limit
• Can benefit from falls in interest rates

Question 12

Base-rate tracker mortgage

Answer 12

• Interest moves up and down in line with changes in Bank rate

Question 13

Flexible mortgage

Answer 13

• Facility to overpay, underpay and/or take payment holidays without incurring charges
• Interest calculated daily

Question 14

Cashback

Answer 14

A lump sum is paid to the borrower immediately after completion, either as a fixed amount or percentage of the advance. Usually the lower the LTV, the higher the cashback

Question 15

Equity release

Answer 15

Designed to help older homeowners with limited pension income who typically do not have a mortgage on their property to release some of the equity in order to provide capital or supplement their income

Question 16

Lifetime mortgage

Answer 16

• Usually only up to a maximum of 55% of the property value, depending on age.
• Typically, on a fixed-rate basis, term of loan is unknown
• Generally, no regular payments of capital or interest made. Instead, the interest is added to the loan (rolled up).
• When the borrower dies or moved into long-term care the property is sold and the loan is repaid to the lender.

Question 17

Home reversion plan

Answer 17

• Involves homeowner selling a % or all of their property to the scheme provider
• When person dies or moves into care. The property is sold, and the provider receives their share of the proceeds

Question 18

Second mortgages

Answer 18

• Created when borrower offers the property for a second time as security while the first lender still has a mortgage secured on the property.
• The new lender takes a second charge on the property, meaning the original lenders takes precedence over subsequent charges

Question 19

Bridging finance

Answer 19

• Short-term lending when someone when a borrower wishes to move house but has not managed to sell current property or funds from the sale will not be available on completion of the new purchase
• Then repaid when the original property is sold, and the owner is able to secure a mortgage on their new home

Question 20

Closed bridging

Answer 20

• Borrower has a feasible plan for repaying the loan with an agreed timescale
• Usually through sale of an existing property with a firm buyer in place

Question 21

Open bridging

Answer 21

• Borrower does not have a firm buyer for their existing property
• open bridging represents a higher risk, therefore higher interest rates

Question 22

Commercial loans

Answer 22

• Loans to businesses may be required to start up/expand businesses, to purchase shops, factories or hotels, or to refurbish premises
• Lending is usually secured on the company’s property or other assets

Question 23

mortgagor

Answer 23

the borrower

Question 24

mortgagee

Answer 24

the lender

Question 25

revolving credit

Answer 25

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