Topic 3 - Borrowing Products Flashcards
Mortgage definition
Loan taken out to pay for a property
Costs involved with taking out a mortgage
Stamp duty Mortgage application fee Survey of property Legal fees Furnishing property Insurance
2 ways to assess if borrower is a good candidate
Loan to income
Loan to value
Loan to value definition
Ratio of the size of the loan to the value of the property
Loan to income definition
Ratio of the size of the loan to the income of the property
2 types of payment made for mortgage
Capital
Interest
Capital definition
Total amount borrowed
2 main mortgage repayment schemes
Repayment mortgage
Interest only
How does repayment mortgage work?
Each payment pays off some capital and some interest
How does interest only mortgage work?
Only interest on capital is paid, capital has to be repaid at the end of the loan
How does fixed-rate mortgage work?
Fixes interest rate for stated number of years at the beginning of the mortgage
How does variable-rate mortgage work?
Rate changes irregularly as base rate changes
How does variable-rate tracker mortgage work?
Interest rate charged follows base rate by given margin
How does discounted-rate mortgage work?
Rate is less than normal variable rate for a set period (2-3 years) then reverts to variable rate
How does offset mortgage work?
Interest that would have been earned on borrower’s savings and current accounts is set against interest owed on mortgage so lower monthly repayment is made
What is forbidden under Sharia law?
To borrow or lend money for interest
Two sharia-compliant homebuying schemes
Ijara
Murabaha
How does ijara home-buying scheme work?
Customer chooses property, provider purchases property and sells to customer at the purchasing price. Customer makes repayments over an agreed number of years, pays rent to the provider for use of the property. Ownership is transferred to customer at end of term.
How does murabaha mortgage work?
The bank and customer participate in joint ownership of the property, which is divided into shares. Customers buy these shares over a number of years, gradually increasing their share in the ownership of the property.
Negative equity definition
The situation where a mortgage loan is bigger than the value of the property
Default definition
To fail to repay borrowing when the repayment is due
Loan forbearance definition
When a lender does not seek to repossess a property as soon as the borrower misses a few monthly payments, instead allowing the customer to stop paying or make reduced payments for a set period
Who are Help to Buy equity loans open to?
First-time buyers and home-movers on new-build homes worth up to £600,000
How to Help to Buy equity loans work?
The purchaser provides a deposit of 5% of the purchase price, the lender provides a mortgage of 75% and the government pays the remaining 20% via an equity loan. This means government owns 20% of property which borrower has to repay when they sell or at end of mortgage
Shared ownership schemes are provided through what?
Housing associations
How do shared ownership schemes work?
Borrower buys a share of their home (25-75%) for which they take out a mortgage, and pay rent on the remaining share.
How do you qualify for a shared ownership scheme?
Household must earn £80,000 a year or less
First time buyer
Renting a council or housing association property.
In London, it is £90,000
What does a NewBuy scheme allow?
Someone to buy a newly built home with a deposit of only 5% of purchase price
How do you qualify for a NewBuy scheme?
Home must be a new build with a value of £500,000 or less
Must be the person’s main home and owned fully by them.
How does a NewBuy scheme work?
House builder gets together with one or more mortgage lenders, who provide a mortgage for 90-95% of property to buyers.
