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LIBF Unit 2 > Topic 3 - Borrowing products > Flashcards

Topic 3 - Borrowing products Flashcards

1
Q

What are examples of large expenditures? 5

A
  • house
  • car
  • consumer durable
  • study at university
  • an emergency life event
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2
Q

What are different groups of mortgage borrowers for residential purposes

A

For home purchases as:
- first time buyers
- existing customers moving home
- existing customers switching their mortgage
- existing customers increasing their mortgage

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3
Q

What is a mortgage?

A

Long term loan to finance the purchase of a property

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4
Q

What is a first time buyer?

A
  • Traditionally young people I’m early stages of working lives on relatively low incomes.
  • as house prices have increased, lenders imposed stricter conditions first time buyers are around 30 years old when joining the mortgage ladder
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5
Q

What is an existing customer moving home?

A

Customer who is selling their home and buying another.
- thus must pay off their existing mortgage from proceeds of the sale of their property and take out a new mortgage.

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6
Q

What is an existing customer switching their mortgage?

A

These people are not moving home but have found a better deal with a different provider

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7
Q

What are existing customers who are increasing their mortgage?

A

Borrowers who want to increase the amount they owe on their home because they need the money for another purpose.
- lenders only allow them to do this if there is a sufficient equity in the property

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8
Q

What is the mortgage process? 6

A
  • buyer approaches lender
  • lender works out how much it will lend based on affordability and amount of buys deposit
  • buyer decides the period over which they want to repay
  • legal process to buy property are carried out
  • buyer makes repayments every month for the period agreed
  • or buyer fails to keep up with this thus lender may reposses property and sell to recover money lent to buyer.
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9
Q

What are conditions of a mortgage? 4

A
  • taken out by an individual or by two or more people buying a home together
  • mortgages are not available to anyone under 18, must hav full legal capacity to borrow
  • must repay mortgages by their retirement date.
  • lenders may extend maximum age if they hav enough evidence of a stable income beyond retirement.
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10
Q

What costs are present at the time of a mortgage purchase? 6

A
  • survey of the property
  • legal fees
  • stamp duct if property is more than a certain value
  • mortgage application fee
  • insurance
  • cost of furnishing and fitting the property
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11
Q

What determines how much a provider will lend to a mortgage customer? 2

A
  • loan to income (LTI)
  • loan to value (LTV)
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12
Q

What effect did mortgages have to the financial crisis?

A

Banks allowed people to borrow more than they could repay thus people became over indebted.
- thus risking the loss of their property

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13
Q

What does LTI stand for

A

loan to income

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14
Q

What is LTI?

A

The ratio size of the loan to the income of the customer.
- thus the lower someone’s income the less they can borrow

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15
Q

How is a persons discretionary income calculates?

A

Basic annual salary + any extra annual income - monthly credit commitments

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16
Q

What are examples extra annual income? 6

A
  • Overtime
  • Bonus
  • Commission
  • Tax credits
  • child maintenance
  • child benefit
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17
Q

What are monthly credit commitments?

A
  • Loans
  • credit cards
  • store cards
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18
Q

How is the maximum amount someone that can borrow calculated by the provider?

A

Discretionary income x a figure determined by the lender

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19
Q

How is the figure used to calculate mXimum amount someone can borrow determined?

A

Reflects its assessments of the customers creditworthiness

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20
Q

Who’s responsibility is it to check if a borrow can afford to pay back a loan?

A

Lenders must have accurate information about the borrowers income

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21
Q

What is the maximum mortgage lenders can lend? Who does it apply to?

A
  • As of 1 October 2014, 4.5 times income to 15%of their total new residential mortgage applicants.
  • mortgage providers who lend more than £100 million per year
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22
Q

What does LTV stand for?

A

Loan to value

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23
Q

What is LTV?

A

Ratio of the size of the loan to the value of the property

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24
Q

Why is the LTV important?

A

Property is being held as security code the mortgage provider
- thus the provider must make sure there is a margin between the mount it lends and the value of the property if it has to be sold.

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25
Q

What is the equity of the owner?

A

Difference between the property value and the amount lent

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26
Q

What is a mortgage period?

A

The number of years over which the borrower will make repayments

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27
Q

How do mortgage terms work?

A

Ceteris paribus, the longer the mortgage period, the lower the amount of monthly repayment.
- the capital sum will always be the same but the total amount of interest paid will be higher

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28
Q

What is a typical mortgage period?

A

25 years

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29
Q

What 2 types of payments occur when borrowing money on a mortgage?

A

Capital
Interest

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30
Q

What is capital in terms of mortgages.

A

Total amount they borrowed and thus has to be paid back in full

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31
Q

What is interest in mortgages?

A

The borrowed must pay interest on the amount borrowed over the period of years of the mortgage

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32
Q

What are 3 main mortgage types?

A
  • repayment mortgages
  • interest only mortgages
  • combination of both
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33
Q

What are repayment mortgages? 5

A
  • most common type of mortgage
  • monthly repayment instalments calculated by the provider so that it includes some capital and interest
  • the proportion of these change over time but the customer is not aware
  • amount of the instalment does not change unless a variable rate mortgage
  • at the end of the mortgage period, all credit and interest is paid
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34
Q

What is an interest only mortgage?

A

Monthly repayment covers only the interest of the whole amount borrowed for the whole mortgage period.
- at the end the borrower still owes the full amount borrowed thus must have a financial plan in place to afford the repayment.
- monthly repayment low we than the repayment scheme

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35
Q

What are part interest only and part repayment mortgages?

A

Mixture of the two mortgages
- part of the monthly instalment represents capital but it is not the full amount of capital that would have been included in a repayment mortgage

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36
Q

What are the different types of mortgage interest charges? (7)

A
  • fixed rate mortgages
  • variable rate mortgages
  • discounted mortgages
  • offset mortgages
  • loyalty mortgages
  • mortgages to help first time buyers
  • the interest rate paid
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37
Q

What is the interest rate on a mortgage?

A

a significant proportion of the total monthly amount paid over the mortgage period
- borrower is exposed to interest rates rising causing instalments to increase which may not be affordablle

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38
Q

What is a fixed rate mortgage?

A

Interest rate for a stated number years at the beginning of the mortgage

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39
Q

What are advantages of a fixed rate mortgage?

A
  • if interest rates rise borrowers will continue to pay the lower fixed rate
  • Provides certainty for borrowers regarding how much they’re going to be paying.
40
Q

What are disadvantages of fixed rate mortgages?

A
  • borrowers will not benefit from decreases in the mortgage rates.
  • at the end of the fixed rate period the mortgage becomes variable for the remaining term.
41
Q

What is a Variable - rate mortgage?

A

when the borrower pays a rate of interest that Is subject to change from the outset and throughout the term of the mortgage

42
Q

What are variable rate mortgages link to?

A

the lenders basic mortgage rate

43
Q

What is the basic mortgage rate also known as?

A

Standard Variable rate

44
Q

When does the SVR change?

A

When the bank of England changes its bank rate

45
Q

How does a change in interest rate effect a variable rate mortgage?

A

through the term the borrower is exposed to interest rate risk
- if they rise monthly payment increases
- if they fall monthly payment decreases

46
Q

What are positives of variable-rate mortgages

A

the borrower does not risk coming to the end of a fixed rate period and being unable to pay the higher SVR

47
Q

What does SRV stand for?

A

Standard variable rate

48
Q

What is a tracker form of variable mortgage rates?

A

When the interest rate tracks changes in other specific interest rates such as the bank rate or lenders own base rate.
- this may apply for a specific number of years or for the liftime mortgage

49
Q

What is a discounted mortgage?

A

A variable rate mortgage that gives a set discount off the providers SVR for an agreed period.
- the rate charged can still rise or fall but the customer benefits from the initial lower monthly payments.

50
Q

Who would benefit form discounted mortgages and why?

A

Borrowers who are on moderate income but expect their income to rise over the few coming years

51
Q

What are disadvantages of discounted mortgages? 2

A
  • an early repayment fee
  • risk lower repayment over the first few years will give them unrealistic ideals of their ability to afford the mortgage. Thus finding themselves in difficulties when they have to step up to the higher payment in the later on the term
52
Q

What are offset mortgages?

A

in these mortgages interest that would have been earned on the borrowers savings and current accounts against the interest owing on the mortgage.
- so the they either make a lower monthly payment or continue to pay the same amount each month. it reduce the number of years of the mortgage term

53
Q

Why would people use offset mortgages?

A

paying less interest on the mortgage but to retain the flexibility provided by their savings, by giving upon the interest rate earned on them

54
Q

Who gets a loyalty mortgage?

A

Providers offer loyalty mortgages to customers who are loyal

55
Q

What is a loyalty mortgage?

A

A mortgage which the provider gives rewards or discounts for example on application fees

56
Q

Why are loyalty mortgages useful for lender?

A

The scheme encourages customers not to switch their current account and enables them to benefit from one one product because of their purchase of another

57
Q

How do banks encourage people to switch to loyalty mortgages?

A

if they agree a new mortgage deal with the banks if they meet certain requirements

58
Q

What are mortgages to help first time buyers?

A

House prices are high and young people are broke in terms of savings and provides thus are much more cautious in their background checks to determine how much young people can afford to repay.

59
Q

What is the interest rate paid dependent on?: 5

A
  • Whether the product is fixed rate or variable rate mortgage
  • in the case of a fixed rate mortgage, the number of years for which the rate is fixed
  • the LTV ratio, usually the larger the deposit paid the smaller the LTV ratio, the lower the interest rate, since the provider has a greater margin of security and therefore a lower risk of losing its money
  • whether the customer qualifies for a loyalty mortgage, if they of the rate or fee will be slightly lower
  • whether the customer is remortgaging the property, a provider might offer a lower rate to customers of another provider to encourage them to switch
60
Q

What is loan forbearance? 3

A

When the provider allows the customer to
- stop making repayments for a limited period of time.
- making reduced payments for a limited period
- extend the mortgage term in order to reduce monthly payments

61
Q

What are advantages of loan forebearance? 4

A
  • provides support to customers who are having financial difficulties and helps to maintain good relations between the customer and the provider
  • performs social function by preventing people from becoming homeless and placing a burden on local authorities and social services
  • enhances the providers reputation and reflects its citizenship and corporate social responsibility policy
  • May mean that the provider dies not have to write off the loan and absorb the loss in its accounts
62
Q

What are disadvantages of forbearance?

A
  • once a customers temporary financial difficulties have been resolved they will be faced with higher repayments to make up the shortfall that arose while they were making reduced or no repayments
  • The lender is keeping the loan on its books as an asset but it may have to write off part or all of the loan later. not recognising the weakness of the loan. it should make provisions against is forbearance policy.
63
Q

What effect did covid have on loan forebearance?

A

a rise in unemployment caused mortgage customers to face difficulties in paying their loans.
- the FCA set out guidelines to firms to follow on enhanced support they should offer customers in these times

64
Q

What are the 5 different government home ownership schemes?

A
  • Help to Buy equity loans
  • help to buy mortgage guarantees
  • lifetime ISAs
  • shared ownership schemes
  • criticisms
65
Q

What are government home ownership schemes?

A

A form of government intervention in the mortgage market with various home ownership schemes to help those who cannot afford to buy a home

66
Q

What is a help to buy equity loan?

A

-Open to first time buyers and home movers on new build homes worth up to £600k in London and lower amounts elsewhere.

67
Q

How do equity loans work outside of London?

A
  • purchaser provides a deposit of 5% of the purchase price, lender provides a mortgage of 75% and the government pays the remaining 20% via an equity loan
  • this means the government owns 20% of the property
68
Q

What is a help to buy mortgage garuntees?

A

Government pays 5% of the deposit for new buyers on a new home or existing property

69
Q

What is a Lifetime ISA?

A

Used to buy a first home or to save for retirement

70
Q

What is a shared ownership scheme?

A
  • provided through housing associations
  • the borrower buys a share of their home (between 10% and 75%), for which they take out a mortgage, and pay rent on the remaining share.
  • a household must £80k a year or less.
71
Q

What are criticisms regarding mortgage schemes?

A

Argued that people who are being helped to buy a home cannot afford to repay a mortgage thus more likely to default

72
Q

What is a buy-to-let mortgage?

A
  • secured loan taken out by a person who is buying a property with the intention of letting it to tenants.
  • the owner of the property becomes a landlord and is actually running a small business
  • the aim is to borrow the money to buy the property and then to cover the repayments with the rents received
73
Q

What research should occur when taking out a buy to let mortgage?

A
  • Location, Landlord should talk to letting agents find out about the level of demand in areas allowing them to choose a location accordingly.
  • People, should consider whom would be interested in staying in the property
  • prices, whether they’ll gain anything from it.
74
Q

What budgeting should occur when taking out a buy to let mortgage?

A

After finding a suitable property the landlord must ensure the project is feasible
- needs to draw up budget showing expected income and outgoings for the mortgage periods.

75
Q

What legal considerations should a landlord take?

A

Ensuring they have a valid tenancy agreement.
- legal rights and responsibilities

76
Q

What is a hire purchase?

A

A credit or consumer finance contract that is provided by a finance company to someone buying high-value consumer goods such as a vehicles or furniture

77
Q

Why are hire purchases useful?

A

Consumers are able to spread the cost of the items over an extended period of time, usually 25 years.

78
Q

How does a hire purchase work?

A

Lends all or part of the purchase price to the purchaser and the purchaser repays in instalments.
- the purchaser is hiring the goods and not owning the goods until the final payment has been made
- while they are still making payments the purchaser is not allowed to sell or dispose of the goods without the lenders permission

79
Q

What can the purchaser do if they find they can’t afford the payments? 3

A

they no longer need the goods and can terminate a hire-purchase agreement in writing and return the goods at any time.
- will still have to pay all instalments that are due up to the time the agreement is ended.
- if they have paid payments up to 50% then they don’t have to pay any more but they are not entitled to a refund

80
Q

What are higher purchase agreements regulated by?

A
  • The consumer rights act 2015
  • All companies that offer hire purchase agreements must be authorised by the financial conduct authority.
81
Q

What is a personal contract purchase?

A

flexible product that is offered by some finance companies for the purchase of a new or nearly new vehicle.
- in return they receive fixed-cost motoring for the term of the contract
- at the end of the term, they can either buy the car outright for an agreed lump sum or they give the car back to the lender and walk away with no obligation

82
Q

How does a contract purchase work?

A
  • the car being purchased is given a guaranteed future value
  • the GFV is calculate by the lender and set for the period of the contract
  • the GFV + the deposit made by the customer are added together and deducted from the cash price of the new car.
83
Q

How are the monthly payments calculated in a contract purchase?

A

on the basis of the outstanding balance, plus interest.
- In effect the purchase is financing the depreciation of the new car.

84
Q

What is a student loan?

A

A non profit government organisation set up to provide loans and a grants to students in universities and colleges in the UK.

85
Q

What are the main types of student loans?

A
  • tuition fee loans
  • maintenance loans
86
Q

What is a tuition fee loan?

A
  • A loan granted to the students to enable them to pay the tuition fees of their course.
  • is not financially assessed
  • Schools charge annual fees for different courses up to the government set maximum
87
Q

How are tuition fees paid?

A

in three instalments
- 25% at the beginning of term 1 and 2
- 50% at the beginning of term 3

88
Q

What are maintenance loans?

A

covers living expenses incurred by students on full-time course.
- can be reliant of financial circumstances of people
- the max amount of maintenance loan to which a student is entitled depends on where they live, the year of their course and entitlement to others financial support such as bursaries

89
Q

How do students repay loans?

A
  • not relayed until they have left university and their income exceeds the minimum threshold.
  • rules depend on the year studies began
90
Q

What are the 2 loan plans?

A
  • first for courses that began after 1 September 1998 and before sept 2012
  • second for courses that began after 1 September 2012
91
Q

What is the first plan?

A
  • must be earning more than a specified minimum threshold and 9% of their gross income above this level
92
Q

What is the second student loan repayment plan?

A

the earning thresholds is higher than plan 1 due to inflation
- loans are cancelled 30 years after the April where they first became eligible for repayment

93
Q

What are the risk of borrowing through insurance?

A
  • person might be unable to keep up with the repayments that they have agreed to make. May happen due to illness or unemployment or dying during the mortgage period
  • the property may loose it’d value over the long period.
94
Q

What happens when someone loses their home? 4

A
  • they lost their original deposit
  • made a number of repayments that are lost
  • find somewhere else to live and pay moving expenses as well as rent
  • face the stress and upheaval of losing their home.
95
Q

What is life insurance?

A

Usually taken out during a decreasing term basis. The amount insured decrease as the capital sum is repaid
- if someone dies in the mortgage term, the life policy pays out a lump sum that covers the amount of the outstanding debt.
- this means the family of the deceased are free of the debt and own the property outright

96
Q

What does PPI stand for?

A

Payment protection insurance

97
Q

What is PPI?

A
  • applies to a mortgage or to a personal loan or hire purchase agreements
  • covers loss of earnings due to accident, sickness or involuntary unemployment during the loan period.

LIBF Unit 2 (9 decks)

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