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Financial Studies - Unit Two > Topic 3 > Flashcards

Topic 3 Flashcards

1
Q

What are some reasons why people borrow over a prolonged period of time?

A

A car
A house
To study at university
A consumer durable
An emergency life event

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2
Q

FSPs of loan products for medium & long term

A

Banks
Building societies
Friendly societies
Finance companies
Insurance companies

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3
Q

What is a mortgage?

A

A very long term loan to finance the purchase of a property

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4
Q

What are the four groups of mortgage borrowers?

A

First time buyers - Young people who are in the early stages of their working lives, and living on relatively low income

Existing customers moving home - These customers are selling their current home and buying another

Existing customers switching their mortgage - These people are NOT moving home, but they have found a better deal with a different provider

Existing customers increasing their mortgage - These borrowers want to increase the amount they owe on their home, usually because they need money for another purpose

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5
Q

What is the mortgage process?

A

1) Buyer approaches lender

2) Lender works out how much they’ll lend
which is based on:
• the affordability criteria
• the amount of buyers deposit

3) Buyer decided the period over which they want to repay

4) Legal processes to buy the property are carried out

5) Buyer makes repayments every month for the period agreed, and at the end of the payment period, the buyer owns the property outright

OR
5) Buyer fails to keep up with the payments for the period agreed, the lender may repossess the property and sell it to recover the money they lent to the buyer

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6
Q

What are some costs to include when obtaining a mortgage?

A

A survey of the property
Legal fees
Mortgage applications
Insurance
Costs of furnishing

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7
Q

What are the two main aspects that will determine how much a provider will lend to a mortgage customer?

A

Loan to income
Loan to value

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8
Q

What is Loan to income? (LTI)

A

The ratio of the size of the loan to the income of the customer
(the lower someone’s income, the less they can borrow)

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9
Q

How do you calculate LTI?

A

Basic annual salary + Any extra annual income = Monthly credit commitments

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10
Q

What is Loan to value? (LTV)

A

The ratio of the size of the loan to the value of the property

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11
Q

What is the relation of the mortgage period to the monthly repayments?

A

The longer the mortgage period, the lower the amount of the monthly repayment

The capital sun will always remain the same, no matter how many years the mortgage runs for, but the total amount of interest paid will be higher

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12
Q

What are the two types of mortgage payment?

A

Capital
Interest

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13
Q

What is the Capital?

A

The total borrowed, and this needs to be paid back in full

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14
Q

What is Interest?

A

What the borrower must pay on the amount borrowed over the period of the mortgage

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15
Q

How does repayment mortgages work?

A

The monthly repayment instalment is calculated by the provider in a way that it includes some interest and some capital
(The proportions of capital and interest change overtime, the customer is NOT aware of this)

When the last instalment has been made at the end of the mortgage period, the customer has repaid all of the capital and the interest accruing & has completely settled their debt

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16
Q

How does the interest only mortgage work?

A

The monthly repayment only covers the interest for the whole amount borrowed for the entire mortgage period

At the end of the mortgage period, the borrowers still owe the full amount and must repay the capital sum in one payment

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17
Q

What does the borrower have to do in order to repay the capital sum?

A

They must have a financial plan in place to afford the repayment & it is the lenders responsibility to make sure this plan will succeed

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18
Q

What is a fixed rate mortgage?

A

It fixes the interest rate for a stated number of years at the beginning of the mortgage

It also provides a certainty that the monthly repayment will not change over the agreed period

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19
Q

Why is the fixed rate mortgage beneficial?

A

If the interest rates rise during the fixed period, the borrower will continue to pay the lower fixed rate

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20
Q

What is a disadvantage of the fixed rate mortgage?

A

A fall in interest rates will not be beneficial, since they’re contracted to pay the fixed rate to the agreed period

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21
Q

What happens at the end of the fixed rate period?

A

The interest becomes variable for the remaining term of the mortgage

22
Q

Do you have to pay a fee for a fixed rate mortgage?

A

Yes, majority of fixed rate mortgages charge an early repayment fee

If the borrower decides to repay or switch the mortgage during the fixed rate period, they will pay a fee to the provider

23
Q

What is a variable rate mortgage?

A

It is where the borrower pays a rate of interest that is subject to change from the outset and throughout the term of the mortgage

24
Q

What is the variable rate mortgage linked to?

A

It is linked directly with to the lenders basic mortgage rate, which is known as the standard variable rate

25
Q

What happens throughout the term of the mortgage?

A

The borrower is exposed to the interest rate risk

(If the interest rate rises, the monthly repayment increases, but if it falls, the monthly repayment decreases)

26
Q

What is the most common form of the variable rate mortgage?

A

The Tracker

27
Q

What is a discounted mortgage?

A

A variable rate mortgage that gives the customer a set discount off the providers SVR (standard variable rate) for an agreed period

28
Q

Who is the discounted mortgage most suitable for?

A

For borrowers on a moderate income, but they expect it to rise over the next few years

29
Q

What risk do customers have to take for the discounted mortgage?

A

The lower repayment over the first few years will give them an unrealistic idea of their ability to afford the mortgage

30
Q

What is the Offset mortgage?

A

Sets the interest (that would have been earned on the borrowers savings and current accounts) AGAINST the interest owing on the mortgage

Interest earned against interest owed

31
Q

What are the factors that influence the rate of interest paid?

A

• Whether the product is a fixed rate or a variable rate mortgage

• The number of years for which the rate is fixed

• If the customer qualifies for a loyalty mortgage (if they do, the rate or fee will be lower)

• If the customer is remortgaging the property

32
Q

How does the Ijara method work?

A

1) The provider buys the client’s selected property

2) The provider then sells the property to client for the same price under a promise to purchase agreement

33
Q

How long is the repayment term?

A

It can be up to 25 years

34
Q

What does the client do during the payment term?

A

They occupy the property under a lease, paying a monthly amount that combines both capital repayment and rent for free

35
Q

How long is the monthly repayment fixed for in the Ijara method?

A

It is fixed for 12 months at a time
(it is then reviewed to allow any adjustments)

36
Q

How does the Murabaha method work?

A

1) The provider buys the property at an agreed price

2) They then sell it immediately to the client at a higher price

37
Q

How long does the Murabaha term last for?

A

Up to 15 years

38
Q

What do the clients do in the Murabaha method?

A

They make monthly fixed payments to the provider during the term

39
Q

What percentage of the property value is required during first payment for the Murabaha method?

A

20%

40
Q

What is a loan forebearance?

A

Temporary postponement of loan payments

41
Q

What are some advantages of loan forbearance?

A

• Provides support to customers who are having financial difficulties

• Performs a social function in that it prevents people from becoming homelessness

42
Q

A disadvantage of loan forbearance??

A

Once a customers financial difficulty is resolved, they’ll be faced with higher repayments

(to make up for the shortfall that arose while they were making reduced, or no repayments)

43
Q

What is repossession of property?

A

When lenders repossess the property and then sell it to repay the loan

44
Q

What is Negative Equity?

A

When the value of the property could fall below the amount owing if market prices fall

45
Q

Examples of a government home ownership scheme

A

• Help to Buy equity loans
• Lifetime ISAs
• Shared ownership schemes

46
Q

What is a buy to let mortgage?

A

A secured loan taken out by a person who is buying a property with the intention of letting it to tenants

47
Q

What is Hire purchase?

A

A credit or consumer finance contract that is provided to someone buying high value consumer goods

48
Q

What are some features of a student loan?

A

Tuition fee loans (enables them to pay the tuition fee)

Maintenance loans (covers living expenses)

49
Q

When does a student begin repaying their student loan? And what does it depend on?

A

They don’t begin to repay until they’ve left university and their income exceeds the minimum threshold

(it depends on the year the studies began)

50
Q

Types of insurance that may be used by long term borrowers?

A

Life insurance
Payment protection insurance

Financial Studies - Unit Two (9 decks)

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