Topic 9 Meeting customers’ needs: borrowing

Question 1

1. Which type of mortgage guarantees to repay the debt, assuming payments are made as required?

Answer 1

A capital repayment mortgage guarantees to repay the debt as long as payments are made in accordance with the lender’s requirements.

Question 2

2. What risks might face a borrower with a fixed rate mortgage?

Answer 2

The risks with a fixed-rate mortgage are as follows.
 Market rates might reduce, leaving the borrower paying more than they would with a variable rate; they cannot take advantage of the reductions.
 If rates have risen significantly during the fixed-rate term, the borrower will move to a much higher rate at the end of the agreement.
 Overall costs – set-up fees, early repayment charges and so on – could reduce the financial benefit of the arrangement.

Question 3

3. Why might a capped rate mortgage be better than a fixed rate mortgage?

Answer 3

A capped-rate mortgage might be better than a fixed-rate mortgage because, although the maximum rate payable is set, the lender will pay less if the variable rate drops below the capped rate.

Question 4

4. A lender with a second charge has priority of repayment if the borrower defaults. True or false?

Answer 4

False – the holder of a second charge is always behind the holder of the first charge in the event of default.