Topic 23 - Interest rate options Flashcards
With a lender’s standard variable-rate mortgage, the interest rate will change:
in line with Bank rate.
in line with the Sonia rate.
at the discretion of the lender
at the discretion of the lender - While there is a link between the lender’s rate and Bank of England base rate, it is up to the lender whether to reflect changes in Bank rate in its own rates.
The interest rate on a base-rate tracker mortgage could potentially change:
eight times a year.
12 times a year.
any number of times.
eight times a year - The interest rate on a base-rate tracker changes whenever the Monetary Policy Committee (MPC) changes the Bank rate. The MPC meets eight times a year, so the rate could change eight times a year.
Which of the following is true of a discounted-rate mortgage?
The discounted interest will be added to the loan at the end of the discount term.
It provides no protection against increases in the lender’s standard variable rate.
It provides a discount from the Bank of England base rate.
It provides no protection against increases in the lender’s standard variable rate. - The discount is a genuine discount from the lender’s standard variable rate and is not added to the loan at any point.
Sandra and Annie are interested in a five-year fixed-rate mortgage to buy their first flat. This is most likely to be because they want to:
redeem the mortgage early.
be able to budget in the early years of the mortgage.
be able to make large overpayments in the early years of the mortg
be able to budget in the early years of the mortgage. - Fixed-rate mortgages feature early repayment charges on redemption during the fixed-rate term, although many will allow limited overpayments.
One difference between a standard variable-rate mortgage and a fixed-rate mortgage is that:
variable-rate mortgages are less likely to feature early repayment charges.
fixed-rate mortgages charge a lower arrangement fee.
only fixed-rate mortgages offer a portability option.
variable-rate mortgages are less likely to feature early repayment charges -Lower arrangement fees are usually charged for variable-rate mortgages. Both variable-rate and fixed-rate mortgages can offer a portability option.
As a result of an increase of 0.5% in Bank rate, Sam’s lender has increased its standard variable rate by 1% but Sam’s mortgage has only increased by 0.3%. This is because Sam has a:
tracker mortgage.
discounted-rate mortgage.
capped-rate mortgage
capped-rate mortgage - A tracker mortgage moves in line with Bank rate, so would increase by 0.5%. A discounted-rate mortgage gives a discount from the lender’s standard variable rate, so the increase would be 1%. A capped-rate mortgage sets a cap to limit the maximum rate that would apply. In this case the cap is 0.3% above the rate Sam was paying, limiting his increase to 0.3%.
What tends to happen when fixed-rate mortgage rates are low?
Lenders tend not to offer capped-rate mortgages.
New capped-rate mortgages include a collar.
Arrangement fees on capped-rate mortgages reduce.
Lenders tend not to offer capped-rate mortgages. - When fixed-rate mortgage rates are low, there is little point taking out a capped-rate mortgage, so lenders tend not to offer them until rates increase.
Greg has an interest-only offset mortgage with his bank for £150,000 and currently has £30,000 in a linked savings account. The current mortgage interest rate is 4.2% and the bank’s standard savings interest rate is 2%. How much interest will Greg be charged this month?
£420.
£475.
£525.
£420 - Greg’s linked savings would be deducted from the mortgage to work out the interest payable this month. He would pay 4.2% on £120,000, which is £420.
The £475 answer assumes he would pay 4.2% on the whole £150,000 mortgage, and that 2% interest on £30,000 would then be deducted.
The £525 answer assumes 4.2% would be paid on the whole mortgage.
Karen and Darren have a flexible mortgage with their bank. Which of the following terms is most likely to apply?
Interest calculated on a monthly rest basis.
The right to draw down further amounts, up to an agreed limit, without a further affordability assessment.
The right to take payment holidays, subject to certain conditions.
C - Interest is calculated on a daily rest basis. MCOB responsible lending rules require an affordability assessment before withdrawal of any further funds. Payment holidays would be permitted, subject to the presence of past overpayments and sufficient credit in the account.
Trish has an offset mortgage on a capital repayment basis. Keeping a consistent level of savings in the linked account would:
reduce the term of her mortgage.
result in a lower interest rate on the mortgage account.
reduce the income tax payable on her savings.
Reduce the term of her mortgage.
As Trish’s monthly repayments would normally stay the same, the savings would reduce the amount of interest charged, which would in turn mean repayment of more capital each month. This would result in the capital being paid off more quickly and a shorter term. The savings would have no effect on the actual interest rate charged. No interest would be paid on her savings, so income tax would not be relevant.
Discounted‑mortgage interest rates are guaranteed not to change for a defined period. True or false?
False: discounted‑rate mortgages offer a discount from the lender’s SVR, so the interest rate will move up or down in line with the SVR.
Discounted‑rate mortgages usually have an early repayment charge. True or false?
True
Which of the following is true in relation to a base‑rate tracker mortgage?
The rate is linked to the lender’s standard variable rate.
Any change to the interest rate is at the lender’s discretion.
The initial rate is likely to be higher than the lender’s standard variable rate.
There may be arrangement application and early repayment fees.
There may be arrangement application and early repayment fees.
Which of the following is a feature of a typical capped‑rate mortgage but not a typical fixed‑rate mortgage?
An arrangement application fee.
Early repayment charge.
Variable monthly costs.
Overpayment facility.
Variable monthly costs.
One feature of flexible mortgages is that interest is calculated on a daily basis. True or false?
True: the benefit of the daily interest calculation is that any early payments or overpayments immediately reduce the interest charged.
