topic 13 - secured & unsecured loans Flashcards
Secured lending
- 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.
Mortgage indemnity guarantees (MIG)
an insurance policy that protects the lender in situations where the loan has a high LTV ratio
Covenants
- 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
Repayment mortgage
- Monthly payments consists partly of capital repayment and partly of interest
- The higher the interest rate the higher the monthly repayment
Interest-only mortgage
- 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
Pension mortgages
- 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
Individual savings accounts mortgages
- Benefits of using an ISA as a mortgage repayment vehicle
Variable rate mortgage
- Monthly payments rise & fall in line with interest rate changes
- Can’t predict future payments
Discounted rate mortgage
- Interest rate is a discount from the standard variable rate
- May be charges for early repayment
Fixed rate mortgage
- Interest rate is fixed for a certain period then reverts to the standard variable rate
- Easier to budget
- May be a substantial arrangement fee
Capped rate mortgage
- Interest rate is variable but capped a specified upper limit
- Can benefit from falls in interest rates
Base-rate tracker mortgage
- Interest moves up and down in line with changes in Bank rate
Flexible mortgage
- Facility to overpay, underpay and/or take payment holidays without incurring charges
- Interest calculated daily
Cashback
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
Equity release
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
Lifetime mortgage
- 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.
Home reversion plan
- 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
Second mortgages
- 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
Bridging finance
- 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
Closed bridging
- 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
Open bridging
- Borrower does not have a firm buyer for their existing property
- open bridging represents a higher risk, therefore higher interest rates
Commercial loans
- 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
mortgagor
the borrower
mortgagee
the lender
revolving credit
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
