TOPIC 20 Flashcards
With a capital repayment mortgage, the amount of interest charged each month:
increases during the term.
reduces during the term.
is constant throughout the term.
reduces during the term.
Assuming no changes to interest rates, monthly repayments on a capital repayment mortgage will:
remain constant throughout the term.
increase each month during the term.
reduce each month during the term.
remain constant throughout the term.
At the start of the mortgage, the lender calculates a level monthly repayment that will repay the capital by the end of the term and pay the monthly interest due, assuming the interest rate does not change.
An advantage of a capital repayment mortgage over an interest-only mortgage is that:
it features built-in life cover.
monthly payments are lower.
equity in the property increases with each payment.
equity in the property increases with each payment.
Neither mortgage method has built-in life cover, unless an interest-only mortgage is supported by an endowment. Monthly payments on a capital repayment mortgage will be higher than the mortgage payments on an interest-only mortgage. As some capital is repaid each month, a capital repayment mortgage will gradually increase the equity in the property over time.
A ‘pure’ interest-only mortgage:
is a conventional method for repaying residential mortgages.
costs less per month than a capital repayment mortgage.
contains built-in life cover.
costs less per month than a capital repayment mortgage.
‘Pure’ interest-only would cost considerably less than a repayment mortgage because no capital is being repaid and no investment vehicle is being funded. However, it is uncommon, particularly for residential mortgages.
Which of the following is true of an interest-only mortgage?
Lenders are required to carry out annual reviews to check that any associated repayment strategy is still in place.
A potential inheritance would be regarded as a credible repayment strategy.
Lenders can adopt a more flexible approach when assessing an interest-only mortgage for a high-net-worth customer.
Lenders can adopt a more flexible approach when assessing an interest-only mortgage for a high-net-worth customer.
The most common investment to support new interest-only mortgages is:
a stocks and shares individual savings account (ISA).
a pension.
an endowment.
Stocks and shares ISAs are the most common investment to support interest-only mortgages, although pension freedom has increased the flexibility they offer as repayment vehicles. Endowments were the most common investment vehicle until evidence arose of poor performance and mis-selling.
Which method of calculating mortgage interest would result in the lowest total interest payable over the mortgage term, assuming the borrower paid on time and made additional ad hoc payments?
Annual rest.
Monthly rest.
Daily rest.
Daily rest.
With daily rest, interest is calculated daily and payments are credited immediately. If only the scheduled payments are made, this method will not cost less than monthly rest. However, if additional payments are made, this will reduce the total interest payable.
Which of the following is an assumption the lender must make when calculating the annual percentage rate of charge (APRC)?
The initial rate of interest will apply throughout the term.
The mortgage may be redeemed before the end of the term.
Life assurance premiums are included in the monthly cost.
The initial rate of interest will apply throughout the term.
The lender must assume the mortgage will run until the end of the agreed term, so no early repayment charges would be included, and life assurance premiums are specifically excluded from the calculation.
A second annual percentage rate of charge (APRC) is not required for which of the following MCD regulated mortgages?
Variable rate.
Capped rate.
Fixed rate.
Fixed rate.
The second APRC is required for MCD regulated mortgages where the rate of interest is variable. This includes capped-rate mortgages.
Capital repayment Mortgages offer borrowers the possibility of a capital surplus at the end of the term. True or false?
True False
False. Repayment mortgages simply repay the borrowed capital over the term.
Greg has a capital repayment mortgage on which the interest rate has just increased. Greg’s lender has agreed that he can maintain his monthly repayments at the level prior to the rate increase. What effect will this have?
The mortgage term will decrease.
The mortgage term will increase.
The mortgage term will not be affected.
Greg’s lender will require him to make overpayments later in the term.
The mortgage term will increase.
One advantage of an interest‑only mortgage is that the capital is guaranteed to be repaid at the end of the term. True or false?
True False
False.
The availability of funds to repay the mortgage depends entirely on the performance of the investments chosen as the repayment vehicle or sufficient funds being available from other sources.
Gordon wishes to arrange an interest‑only mortgage to buy his new property. Which of the following repayment strategies would be most unlikely to be acceptable to the lender?
An ISA funded monthly.
Allocating his quarterly bonus payments to reduce the capital balance.
A potential inheritance as the beneficiary of his 65‑year‑old aunt’s will.
A unit‑linked endowment policy.
A potential inheritance as the beneficiary of his 65‑year‑old aunt’s will.
Retirement interest-only mortgages require the lender to review the repayment vehicle at least once during the mortgage term. True or false?
True False
False. Retirement interest-only mortgages are pure interest-only mortgages and do not require a repayment vehicle.
The daily rest basis of calculating interest is advantageous to people who are often late with their mortgage repayments. True or false?
True False
False. The daily rest calculation of interest benefits early payers, because their total interest is reduced.
