U1: T13 - SECURED AND UNSECURED LENDING

Question 1

Define a) a mortgagor and b) a mortgagee.

Answer 1

The mortgagor is the borrower and the mortgagee is the lender.

Question 2

Which of the following is not true in relation to a repayment mortgage?

a) The higher the interest rate, the higher the monthly repayment to the lender.

b) Life cover is built in.

c) The loan is guaranteed to be fully repaid at the end of the term, providing monthly repayments are maintained.

d) At the beginning of the term most of the monthly repayment is paying interest on the loan.

Answer 2

Answer is b)

Life cover is not built in, therefore a separate life assurance policy would be needed to ensure that the mortgage could be repaid if the borrower were to die before the end of the mortgage term.

Question 3

For what reason might an ISA not be suitable for someone who is arranging an interest‐only mortgage of £300,000 over a five‐year term?

Answer 3

An ISA has an annual investment limit which might make it difficult to fund a large mortgage and/or one arranged over a short term.

Question 4

It is not the responsibility of the lender to ensure that a borrower has a repayment vehicle in place for an interest‐only mortgage.

True or false?

Answer 4

False – MCOB rules require the lender to confirm at the outset that a credible repayment strategy is in place and then reconfirm this at least once during the mortgage term.

Question 5

Chris is 53 and is pleased to see from his annual personal pension statement that his pension pot has grown enough to enable him to take a tax‐free lump sum and pay off his interest‐only mortgage.

Will this be possible?

Answer 5

Not yet, because Chris cannot access his pension funds until he is at least 55.

Question 6

An advantage of a flexible mortgage is the ability to take further advances up to the lender’s prearranged limit.

True or false?

Answer 6

True

Question 7

What is the main advantage of a capped‐rate mortgage?

a) If interest rates go up, the mortgage interest rate will not exceed a prearranged limit.

b) The mortgage interest rate will never exceed Bank rate.

c) The amount payable is fixed for the duration of the capped rate.

d) There is a discount off the normal variable mortgage interest rate.

Answer 7

Answer is A)

If interest rates go up, the mortgage interest rate will not exceed a pre‐arranged limit, in other words, the ‘cap’.

Question 8

Describe how a home reversion plan works.

Answer 8

Home reversion plans involve the homeowner selling a percentage or all of their property to the scheme provider. The customer(s) retains the right to live in the house, rent‐free (or for a nominal rent), until their death(s) or until they move into permanent residential care. At that point the property is sold and the provider receives a share of the proceeds equivalent to their share of ownership.

Question 9

Which form of borrowing is likely to have the highest interest rate: a 25‐year repayment mortgage or a personal loan with a 5‐year term?

Answer 9

The personal loan – interest rates on unsecured borrowing are generally higher than on secured borrowing because it represents a greater risk to the lender.

Question 10

What is revolving credit?

Answer 10

A facility that allows you to borrow more before you have paid off the initial amount borrowed. Credit card borrowing is the most common example.

Question 11

Define ‘Bridging Finance’?

Answer 11

Can be used by those arranging a loan to finance a new purchase before they have sold their existing property in order to ‘bridge’ the finance gap

Question 12

Define ‘First Charge’?

Answer 12

A legal right to have ‘first call’ on a property if a borrower defaults on a repayment of the mortgage loan

Question 13

Define ‘Second Charge’?

Answer 13

A legal call on a property after all the liabilities to the holder of the first charge have been settled

Question 14

What is ‘Closed Bridging’?

A) The borrower has a feasible plan for repaying the loan within an agreed timescale. Typically, this is through the sale of the existing property and requires the borrower to. have a firm buyer.

B) The borrower needs finance to buy the new property, but does not yet have a firm buyer for their existing property?

Answer 14

A) The borrower has a feasible plan for repaying the loan within an agreed timescale. Typically, this is through the sale of the existing property and requires the borrower to. have a firm buyer.

Question 15

What is ‘Open Bridging’?

A) The borrower has a feasible plan for repaying the loan within an agreed timescale. Typically, this is through the sale of the existing property and requires the borrower to. have a firm buyer.

B) The borrower needs finance to buy the new property, but does not yet have a firm buyer for their existing property?

Answer 15

B) The borrower needs finance to buy the new property, but does not yet have a firm buyer for their existing property?

Question 16

What is ‘Realty’?

A) Property if a court will restore it to a disposed owner and not merely provide compensation for loss.

B) Sometimes referred as chattels (i.e. a moveable property)

Answer 16

A) Property if a court will restore it to a disposed owner and not merely provide compensation for loss.

Question 17

What is ‘Personalty’?

A) Property if a court will restore it to a disposed owner and not merely provide compensation for loss.

B) Sometimes referred as chattels (i.e. a moveable property)

Answer 17

B) Sometimes referred as chattels. Any property not classed as realty. (i.e. a moveable property)

Jewelry, Artwork etc

Question 18

What are ‘Joint Tenants’?

A) Each owner owns 100% of the property
B) The joint owners are treated as ONE PERSON because they are trustees of the land

Answer 18

A) Each owner owns 100% of the property

Question 19

What are ‘Tenants in Common’?

A) Each owner owns 100% of the property
B) The joint owners are treated as ONE PERSON because they are trustees of the land

Answer 19

B) The joint owners are treated as ONE PERSON because they are trustees of the land

Question 20

Secured lending can only be arranged on land or property.

a) True
b) False

Answer 20

b) False

Although property is the most common asset used, borrowing can be secured on a range of assets.

Question 21

What type of mortgage product interest rate can vary, but cannot rise above a pre-set limit?

a) Base-rate tracker.
b) Capped rate.
c) Fixed rate.
d) Discounted rate.

Answer 21

b) Capped rate.

Question 22

Brendon’s lender charged him a fee for an insurance policy because his new mortgage was more than a specified percentage of the property value. It is incorrect to say that:

a) Brendon’s mortgage will be more than 75-80% of the property value.
b) In the event of Brendon defaulting, the policy only protects the lender.
c) Brendon will have no further liability if a claim is made on the policy.
d) The fee could be added to Brendon’s mortgage.

Answer 22

c) Brendon will have no further liability if a claim is made on the policy

Question 23

Which of the following is true in relation to credit cards?

a) No additional charges apply to overseas credit card transactions.
b) Credit card companies make a small payment to the retailer for each transaction.
c) Credit card interest rates are higher than most other forms of borrowing.
d) The whole balance must be repaid each month, usually within 25 days of a statement.

Answer 23

c) Credit card interest rates are higher than most other forms of borrowing.

Question 24

Which of the following is incorrect for a discounted-rate mortgage?

a) There is usually a penalty if the loan is repaid before a specified date.
b) The payable rate is directly linked to the Bank of England base rate.
c) The monthly mortgage payment can vary.
d) The discount is from the lender’s standard variable rate

Answer 24

b) The payable rate is directly linked to the Bank of England base rate.

Question 25

Second charge loans:

a) do not require equity in the property.
b) become part of the existing mortgage.
c) are regulated under the Consumer Credit Act 2006.
d) are charged at a higher rate than first charge loans.

Answer 25

d) are charged at a higher rate than first charge loans.

Question 26

In relation to bridging finance:

a) closed bridging has a feasible repayment strategy.
b) open bridging is arranged on a long-term basis.
c) closed bridging interest rates are higher than for open bridging.
d) open bridging is less risky for the lender than closed bridging.

Answer 26

a) closed bridging has a feasible repayment strategy.

Question 27

Equity release is regulated by:

a) the Prudential Regulation Authority only.
b) the Financial Conduct Authority only.
c) the Equity Release Council only.
d) the Financial Conduct Authority and the Equity Release Council.

Answer 27

b) the Financial Conduct Authority only.

Question 28

Jeff and Alison have just bought a flat with a mortgage, but will also be required to pay rent to a housing association. This arrangement is referred to as:

a) shared ownership.
b) equity release.
c) home reversion.
d) equity share.

Answer 28

a) shared ownership.

Question 29

Barbara, aged 70, has heard she can use her property to provide some extra cash as and when she needs it. She would like to leave as much of the property’s value to her two children as possible. Which arrangement would best satisfy her needs?

a) A lifetime mortgage.
b) A home reversion plan.
c) A home income plan.
d) A drawdown lifetime mortgage.

Answer 29

d) A drawdown lifetime mortgage.

As Barbara doesn’t need a large lump sum immediately, a plan that would allow her to take money in stages would be best. A drawdown lifetime mortgage would allow her to do this, and as interest is only charged on the money withdrawn, the roll-up would be much lower than if she had taken a large initial lump sum from a standard lifetime mortgage. The slower roll-up of interest would mean more equity when the plan ended and so more left for her children. A home reversion plan would involve her selling all or part of the property to a provider, which could mean nothing would be left for the children.