Topic 16: Mortgage Repayment Methods

Question 1

Main advantages of a repayment mortgage:

Answer 1

• Flexibility
• Debt reduction
• Guaranteed repayment
• No investment link

Question 2

In an interest-only mortgage, the capital outstanding is repaid when?

Answer 2

In one lump sum at the end of the term. A repayment vehicle is needed for this.

Question 3

Unacceptable repayment methods for an interest-only mortgage:

Answer 3

Anything speculative such as:

• Relying on house price inflation
• Potential inheritance, windfalls
• Ad-hoc investments

Question 4

How is mortgage interest calculated?

Answer 4

• On an annual rest basis
• On a monthly rest basis
• On a daily rest basis (most common nowadays) - the interest charged is based on the outstanding balance at the start of each day so it is useful for borrowers who make additional payments whenever possible.

Question 5

What assumptions must the lender make in calculating the APRC?

Answer 5

• The interest rate at the start will apply throughout
• The borrower will make all payments on the due dates
• No life assurance premiums are included
• The loan will run for its full term

Question 6

What is the TCC?

Answer 6

‘Total Charge for Credit’. This is converted into the APRC. It includes many costs and charges but excludes early repayment charges, endowment and other life assurance premiums, charges levied in respect of any default by the borrower.

Question 7

For MCD-regulated mortgages there is an additional requirement for a second APRC. What is this for?

Answer 7

It is when the rate of interest applied to the mortgage is variable. The figure provides a warning about the possibility of an increase in interest rates and the effect they may have.

Where the interest rate is capped, the second APRC must assume the rate rises to the capped limit at the earliest point.