U4: T12 - SUITABILITY Flashcards
Think back to Topic 10. If the term of the mortgage will extend beyond the customer’s expected retirement date (or state pension age if that date is unknown), what should the adviser consider?
How affordable the repayments will be once the customer is dependent on pension income.
For customers nearing retirement the adviser may need to see a pension statement; for younger borrowers it may be enough to confirm that they have some pension provision. A prudent approach must be taken.
We looked at the interest rate stress test in Topic 10. Can you remember:
a) the minimum period over which lenders must consider the impact on affordability of potential interest‐rate increases?
b) what the calculations of potential interest‐rate increases are based on?
a) Five years from the start of the mortgage, unless the mortgage is on a fixed rate for at least five years or the mortgage term is less than five years.
b) The rate in place when the mortgage started.
If there is no contract suitable for the customer’s needs and circumstances within the range available to the firm, it should not make a recommendation. True or false?
True
John is 55 and is seeking a 20‐year repayment mortgage. The lender’s affordability assessment must only take into account his financial position at the time of the application. True or false?
False. It is very likely that John will retire before the end of the mortgage term, so the lender will need to consider whether his income in retirement would support the payments.
Duncan is keen to accrue as little interest as possible on his mortgage and is pressing the adviser to arrange as short a term as possible. Of what should the adviser make him aware?
A short mortgage term means that monthly repayments will be higher if he has a capital‐and‐interest mortgage.
If he opts for an interest‐only mortgage, he will have to make larger payments into a repayment vehicle than if he chose a longer term, and his choice of repayment vehicle may be limited (for instance, limits on savings into an ISA might rule that out as an option).
It is not necessary to establish the customer’s attitude to risk when advising on mortgages because there is no investment exposure. True or false?
False. Interest‐only mortgages carry the risk that the repayment strategy may not provide enough funds to repay the mortgage, and there are other risks, such as interest‐rate risk, to consider.
Which of the following would be most likely to be considered a credible repayment strategy for an interest‐only mortgage?
a) Planning to use a promised inheritance from a relative.
b) Relying on the increase in value of the property to provide equity that can be released to pay off the loan.
c) Using the proceeds from the sale of another property owned by the borrower.
d) Using a pension commencement lump sum to pay off the loan.
c) Providing the value of the other property is equal to or greater than the sum needed to pay off the loan, this is most likely to be considered a credible repayment strategy. Using a pension commencement lump sum (PCLS) might also be a credible approach but only if the pension pot is large enough to provide a PCLS equivalent to the loan. Relying on an inheritance or a substantial increase in the value of the property are both too uncertain.
For an interest‐only mortgage, how often must the lender carry out a review of the borrower’s repayment strategy?
a) At least once during the term.
b) Whenever the borrower requests it.
c) At least once every five years.
d) Halfway through the term.
A) At least once during the term.
You covered three points that the adviser should consider if the purpose of the mortgage is to consolidate debts. Can you recall what they are?
1) The cost of increasing the period of the debt;
2) Whether it is appropriate to secure a previously unsecured loan;
3) And whether, if the customer has known payment difficulties, it would be better for them to negotiate an arrangement with their creditors.
Should an adviser always make a recommendation?
No.
If there is no contract suitable for the customer’s needs and circumstances within the range available to the firm, it should not make a recommendation.
If a customer has a good credit score, under what circumstances can an advisor recommend a sub prime lender?
If the advisor can demonstrate:
The costs & T&Cs
Will not disadvantage the customer
For interest only mortgages, the lender is required to carry out an affordability review how many times during the mortgage term?
At least once
Sale of the property is an acceptable repayment strategy for standard interest only mortgages?
False.
Unlike a standard interest‐only mortgage, sale of the property would be an acceptable repayment strategy.
How long must the lender keep records for each interest- only mortgage?
For the length of the mortgage term.
These details include:
1) the reasons for the decision to offer an interest‐only mortgage;
2) evidence of the customer’s repayment strategy and, where applicable, its cost;
3) details of the firm’s attempts to contact the customer for reviews;
4) the outcome of each review.
An underlying basic principle of mortgage advice is that:
A) the recommended mortgage term should be as short as is affordable.
B) a 25-year mortgage term should be seen as the norm.
C) mortgages should never run past the borrower’s retirement age.
A) the recommended mortgage term should be as short as is affordable.
While 25 years is the most common term, the recommended mortgage term should be as short as is affordable. If it is intended to run past the borrower’s retirement age, the lender should take steps to ensure it will continue to be affordable.
