Topic 20 - Mortgage Repayment 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 - Part of each monthly payment reduces the capital outstanding and, as the capital reduces, less interest is charged on the reducing balance.
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.
Alfie’s lender has announced a reduction in the interest rate on his capital repayment mortgage, and a reduction in his monthly payment from next month. If Alfie decides to maintain his current monthly payments, this should:
increase the mortgage term.
reduce the mortgage term.
have no effect on the mortgage term
reduce the mortgage term - Paying more than the required amount will result in more capital being repaid each month. This, in turn, will reduce the interest charged each month, and the combination of quicker capital repayment and less interest will result in the mortgage being repaid over a shorter time. However, the reduction may have a temporary effect, because a future rate rise will eliminate the benefits unless Alfie continues to pay more than is required.
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. - A review must be carried out at least once during the mortgage term. A potential inheritance would not be regarded by the FCA as a credible strategy.
The most common investment to support new interest-only mortgages is:
a stocks and shares individual savings account (ISA).
a pension.
an endowment.
a stocks and shares individual savings account (ISA). - 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 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.
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.
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.
In the first year of a capital repayment mortgage, repayments are mainly interest. True or false?
True. The proportion of capital repaid gradually increases as the term of a capital repayment mortgage progresses.
Capital repayment mortgages offer borrowers the possibility of a capital surplus at the end of the term. True or false?
False. Repayment mortgages simply repay the borrowed capital over the term.
Cathy has a capital repayment mortgage of £150,000 over a 25‑year term. The interest rate is 3% on an annual rest basis and her monthly repayment is £711 (to the nearest whole pound). Calculate how much of the capital she will repay in the first year.
£4032
Annual interest paid = £150,000 ÷ 100 x 3 = £4,500
Monthly interest paid = £4,500 ÷ 12 = £375
Monthly repayment less monthly interest = £711 – £375
Monthly capital repayment = £336
Annual capital repayment = £336 x 12 = £4,032
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. - The increase in the interest rate means that more of Greg’s monthly repayment than originally planned will be used up paying interest. The capital will reduce more slowly and so the mortgage term will have to increase to pay off the full loan.
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?
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.
