Unit 3: Loans and Other Products Flashcards
What is an overdraft?
An extension of credit on a transactional account allowing the account to become overdrawn without dishonour fee and associated charges.
Why do businesses use overdrafts?
Expenses often need to be paid before income has been received.
What are the two types of overdraft?
- Authorised - customer has set limit prearranged with the bank. Usually includes interest or fee.
- Unauthorised - no agreement in advance. Usually subject to charges and fees and can be expensive.
What would personal loans be used for?
Major assets like cars, holidays, domestic appliances, home improvements, and technology.
What is a mortgage?
A loan that is generally secured by a property, and generally for the purpose of buying a home.
What security is taken for a home loan?
Generally the property, meaning the bank has a right to sell the house if the loan repayments are not made.
How does loan restructuring work?
At the end of the interest-only period, a new application is considered with the debt being transferred to a principal and interest loan (subject to approval).
Why would an investment property loan have higher interest than a residential mortgage?
To reflect the greater risk involved.
When paying off a mortgage, what is relationship between the interest and principal paid off over the loan?
At first in the early stages, the interest element makes up a larger part of the repayment.
This ratio gradually reverses over the loan term as the debt reduces.
In the context of property, what is equity?
The difference in value between the market value of a property and the total value of the mortgage and other loans secured on the property.
What does equity release do?
It allows a customer to borrow some portion of their equity (freeing up funds that would otherwise be ‘locked in’ until the property is sold).
What are the two categories of equity release?
- Conventional mortgage or remortgage
- Reverse mortgage
In terms of equity release, what is a conventional mortgage or remortgage?
Customer makes a conventional application for the amount required (must be assessed against lending criteria and affordability/suitability for the customer).
In terms of equity release, what is a reverse mortgage?
Type of home loan that allows a homeowner to borrow money using the equity in their home as security. Can be lump sum, regular income stream, or other.
Interest is charged like any other loan, but borrower does not have to make repayments while they live in the home (interest compounds and is added to the loan balance).
What is a bridging loan?
Short-term loan used to cover situations where a customer has to pay for a major purchase before receiving the proceeds of a major sale.
Example: customer is involved in the purchase and sale of property, and the purchase occurs prior to the sale of the existing property.
