U3: T1 - PROPERTY AND MORTGAGE MARKETS

Question 1

What is a recession?

Answer 1

A significant decline in economic activity, usually defined as a decline in gross domestic product (GDP – the value of all the goods and services produced within a country) for two successive quarters, ie six months.

Question 2

What is the interbank rate?

Answer 2

The rate at which banks lend to each other. The measure has transitioned from the London interbank offered rate (Libor), to the sterling overnight index average (Sonia) for all lenders.

Question 3

What is the bank rate?

Answer 3

The rate at which the Bank of England lends to other financial institutions. You might also see it referred to as base rate.

Question 3

Which of the following is not a factor that affects interest rates?

A) Level of government borrowing
B) Higher levels of individual borrowing
C) Monetary policy
D) Demand to purchase properties
E) Foreign interest rates

Answer 3

D) Demand to purchase properties

Is not a factor

Question 4

What is Negative Equity?

Answer 4

A situation in which the market value of a property falls below the outstanding amount of the mortgage loan secured on it.

Question 5

Define Prime Lending?

Answer 5

Lending to borrowers who meet the lender’s standard criteria and present a normal risk.

Question 6

Define Sub-Prime Lending?

Answer 6

Lending to borrowers who represent a higher risk than normal.

Question 7

What factors hampered the recovery of the property market following the 2007–09 financial crisis?

Answer 7

Recession;
reluctance of sellers to put properties on the market or buyers to commit to purchases at a time of falling or static property prices;
financial institutions concentrating on building up reserves rather than lending;
tighter affordability criteria making it more difficult for people to obtain mortgages.

Question 8

What factors are contributing to the difficulties experienced by people seeking to buy their first home?

Answer 8

A combination of more stringent affordability criteria, a requirement for larger deposits and rising property prices.

Question 9

When interest rates are low for a prolonged period, what is likely to happen to property prices?

Answer 9

They are likely to increase: people feel confident that they can afford to borrow more, which drives demand and, in turn, leads to rising prices.

Question 10

The level of government borrowing has no influence on interest rates in the UK.

True or false?

Answer 10

False: the level of government borrowing does have an influence on interest rates. When government borrowing increases, interest rates generally increase.

Question 11

Inflation can be reduced by reducing interest rates.

True or false?

Answer 11

False: inflation usually increases when interest rates are reduced.

Question 12

What percentage of a building society’s total lending activities must be related to residential mortgages?

a) 25 per cent.
b) 50 per cent.
c) 75 per cent.
d) 90 per cent.

Answer 12

c) Building societies must devote a minimum of 75 per cent of their total lending activities to residential mortgages.

Question 13

What is meant by ‘securitised lending’?

Answer 13

Securitised lending involves bundling together a number of mortgage loans and selling them to another business.

The seller receives a capital sum that they can use to offer further mortgage loans. The buyer receives the regular income stream from borrowers’ repayments on the bundled mortgages.

Question 14

Lending to people who have county court judgments against them is referred to as ‘sub‐prime’ lending.

True or false?

Answer 14

True: sub‐prime lending is lending to those with poor credit histories.

Question 15

Lending to customers classified as ‘sub‐prime’ is always an irresponsible decision.

True or false?

Answer 15

False.

A sub‐prime customer is not necessarily a customer who cannot afford a mortgage loan or a bad risk for the lender.

Additional assessment is needed to confirm affordability and the interest rate can be set at a level that reflects any additional risk to the lender.

Question 16

How does the interbank lending rate usually compare to the Bank of England base rate?

Answer 16

The Interbank lending rate is usually slightly higher than the Bank base rate.

Question 17

The process of packaging a number of mortgages into ‘bundles’ and selling them to other institutions is known as:

A) consolidation.
B) securitisation.
C) leveraging.

Answer 17

B) securitisation.

Mortgage providers package mortgage loans they hold into bundles and sell them to other institutions all over the world. This process, known as securitisation, removes the loans from the lenders’ balance sheets, and the proceeds of the sale gives them more capital to invest. The institutions that buy the mortgage bundles receive the stream of income from mortgage interest payments, together with capital repayments.

Question 18

A recession is usually defined as a decline in gross domestic product (GDP) over:

A) a quarter.
B) two successive quarters.
C) three successive quarters.

Answer 18

B) two successive quarters.

A recession is a significant decline in economic activity, usually defined as a decline in GDP (the value of all the goods and services produced within a country) for two successive quarters, ie six months.

Question 19

Which of the following actions has the UK government taken to encourage first-time buyers?

A) Relaxing MCOB rules on affordability for first-time buyers.
B) Introducing measures to make buy-to-let investment more attractive.
C) Requiring new developments to include affordable housing.

Answer 19

C) Requiring new developments to include affordable housing.

Question 20

Which bank rate is most directly linked to mortgage interest rates?

A) Bank of England base rate.
B) One-month London interbank offered rate (Libor).
C) Three-month Libor.

Answer 20

C) Three-month Libor.

Although mortgage interest rates are broadly linked to Bank rate, they are more directly affected by the three-month Libor, ultimately replaced by Sonia.

Question 21

Which of the following is true in relation to interest rates?

A) A significant increase in government borrowing would place downward pressure on interest rates.

B) Increased demand for borrowing tends to lead to a decrease in interest rates.

C) When UK interest rates are higher than those abroad, the value of sterling increases.

Answer 21

C) When UK interest rates are higher than those abroad, the value of sterling increases.

The value of sterling against foreign currencies is affected by interest rates. When UK interest rates are higher than those abroad, the pound is popular and the exchange rate increases. This can have a negative effect on industry, because UK goods become expensive abroad and sales may be affected.

Question 22

In relation to inflation:

A) the Monetary Policy Committee’s inflation target is based on the Consumer Prices Index.

B) any level of inflation is considered to be bad for the economy.

C) general inflation tends to run at a higher rate than house-price inflation.

Answer 22

A) the Monetary Policy Committee’s inflation target is based on the Consumer Prices Index.

The government has set the Bank of England a target for inflation of 2%, as measured by the Consumer Prices Index. It is accepted that a small (2–2.5%) amount of inflation is good for the economy. In general, house-price inflation runs well ahead of general inflation.

Question 23

What is the maximum percentage of total lending activities that a building society can allocate to lending not for residential mortgages?

A) 25%.

B) 50%.

C) 75%.

Answer 23

A) 25%.

Until 1986, building societies were legally restricted to lending on property in the form of freehold and leasehold estate (or its equivalent) in the UK. The Building Societies Act 1986 allowed building societies to diversify into new areas, including unsecured lending and banking services. Building societies must still devote a minimum of 75% of their total lending activities to residential mortgages, although they can convert to plc status if they wish to enjoy the same freedom as banks.

Question 24

Specialised (centralised) mortgage lenders raise funds for mortgage lending:

A) on the retail market.

B) from depositors.

C) on the wholesale market.

Answer 24

C) on the wholesale market.

Specialised mortgage houses are funded from the wholesale market and lend on a centralised basis.

Question 25

George has a generally poor credit record, with two county court judgments in recent years. He is seeking a mortgage. Which of the following is true?

A) A sub-prime lender may offer George a mortgage, with an interest rate based on an assessment of the risk George poses.

B) A mainstream lender is likely to offer George a mortgage but at a rate higher than its standard offering.

C) George is unlikely to secure a mortgage until he has been debt-free for at least three years.

Answer 25

A) A sub-prime lender may offer George a mortgage, with an interest rate based on an assessment of the risk George poses.

Borrowers with a poor credit history struggle to find a mainstream lender prepared to lend to them, even several years after their debts have been settled. A potential borrower who does not meet the lender’s standard criteria is not necessarily a poor business proposition – it just means that they require different and more specialised assessments.

Question 26

Sale and rent back arrangements involve a company buying a property from its owner:

A) usually at market value, then renting it back to them.

B) usually below market value, then renting it back to them.

C) usually below market value, then renting it to a separate person.

Answer 26

B) usually below market value, then renting it back to them.

With sale and rent back, although the former owner loses ownership, they are able to stay in their home.

Question 27

What of the following factors hampered the recovery of the property market following the 2007–09 financial crisis?

Select all that apply.

A) Reluctance of sellers to put properties on the market.
B) A requirement for lower deposits.
C) Tighter affordability criteria.
D) Recession.
E) Looser affordability criteria.

Answer 27

A) Reluctance of sellers to put properties on the market.
C) Tighter affordability criteria.
D) Recession.

Question 28

What of the following factors hampered the recovery of the property market following the 2007–09 financial crisis?

Select all that apply.

A) Reluctance of sellers to put properties on the market.
B) A requirement for lower deposits.
C) Tighter affordability criteria.
D) Recession.
E) Looser affordability criteria.

Answer 28

A) Reluctance of sellers to put properties on the market.
C) Tighter affordability criteria.
D) Recession.

Question 29

Which of the following is a contributing factor to the difficulties experienced by people seeking to buy their first home?

A) Rising property prices.
B) Falling property prices.
C) A growing economy.

Answer 29

A) Rising property prices.

Question 30

When interest rates are low for a prolonged period, what is likely to happen to property prices?

A) They are likely to stay the same.
B) They are likely to increase.
C) They are likely to fall.

Answer 30

B) They are likely to increase.

They are likely to increase: people feel confident that they can afford to borrow more, which drives demand and, in turn, leads to rising prices.

Question 31

Interest rates on mortgage loans are closely linked to which interbank lending rate?

A) Three-month Libor.

B) Six-month Libor.

C) Nine-month Libor.

Answer 31

A) Three-month Libor.

Question 32

The level of government borrowing has no influence on interest rates in the UK. True or false?

A)True
B) False

Answer 32

False: the level of government borrowing does have an influence on interest rates. When government borrowing increases, interest rates generally increase.

Question 33

Inflation can be reduced by reducing interest rates. True or false?

Answer 33

False

Question 34

What percentage of a building society’s total lending activities must be related to residential mortgages?

A) 25%.
B) 50%.
C) 75%.
D) 90%.

Answer 34

C) 75%.

Question 35

What is meant by ‘securitised lending’?

A) Selling one mortgage loan to another business.
B) Bundling together a number of mortgage loans and selling them to another business.
C) Retaining all mortgage loans but increasing the security required from borrowers.

Answer 35

B) Bundling together a number of mortgage loans and selling them to another business.

Securitised lending involves bundling together a number of mortgage loans and selling them to another business. The seller receives a capital sum that they can use to offer further mortgage loans.

The buyer receives the regular income stream from borrowers’ repayments on the bundled mortgages.

Question 36

Lending to people who have county court judgments against them is referred to as ‘sub‑prime’ lending. True or false?

Answer 36

True: sub‑prime lending is lending to those with poor credit histories.

Question 37

Lending to customers classified as sub‑prime is always an irresponsible decision. True or false?

Answer 37

False.

False. A sub‑prime customer is not necessarily a customer who cannot afford a mortgage loan or a bad risk for the lender. Additional assessment is needed to confirm affordability and the interest rate can be set at a level that reflects any additional risk to the lender.

Question 38

Are mortgage rates more affected by the Bank Rate or Interbank rate?

Answer 38

Interbank Rate.

Although mortgage interest rates are broadly linked to Bank rate, they are more directly affected by interbank lending rates. Historically the interbank rate has been between 10 and 20 basis points above the Bank rate. For example, if the Bank rate is 2 per cent, the interbank rate is normally expected to be between 2.1 per cent and 2.2 per cent. This means that, in normal conditions, mortgage rates move broadly in line with the Bank rate. However, in difficult market conditions the differential can be wider.

Question 39

What minimum percentage of lending do building societies need to devote to residential mortgages?

A) 50%
B) 75%
C) 80%

Answer 39

B) 75%

Building societies must still devote a minimum of 75 per cent of their total lending activities to residential mortgages, although they can convert to plc status if they wish to enjoy the same freedom as banks.

Question 40

Under what conditions can building societies devote more than 75% of total lending to residential mortgages?

Answer 40

They can convert to plc status if they wish to enjoy the same freedom as banks.

Question 41

What are challenger banks?

Answer 41

Challenger banks and specialist mortgage lenders have increased their mortgage lending at a higher rate than more traditional lenders, and some of the original challenger banks, such as TSB and Virgin Money have grown to the point where they are now seen as part of mainstream banking.

Such as Monzo, Revolut etc

Question 42

In a ‘sale and rent back’ arrangement what is the minimum fixed tenancy agreement term made between the owner and company?

Answer 42

Minimum 5 years fixed tenancy.

‘Sale and rent back’ arrangements involve a company buying a property from its owner, usually at below market value, and then renting it back to them. Although the former owner loses ownership, they are able to stay in their home, and must be given a fixed tenancy agreement of at least five years.