Unit 6:24 Mortgage Products

Question 1

Foreign currency mortgage

Answer 1

• Mortgage in one currency while borrower’s income is in a different currency
• Originally designed for those with large mortgages to potentially reduce monthly payments
• Involves significant currency exchange risk as value of repayments can fluctuate considerably
• Min loan £250,000
• Interest rate is applicable to that currency
• Capital owed is denominated in that currency

Question 2

Foreign currency mortgage - ESIS warnings

Answer 2

• Lenders must include specific warnings about exchange rate fluctuation risks in the ESIS
• Warnings particularly emphasize scenarios with potential adverse effects on borrowers
• Required consumer protection measure due to significant financial risks involved
• Payment could change to the pound weakens, example 20%

Question 3

Sub-prime mortgage

Answer 3

• Designed for “credit impaired” borrowers who have experienced past credit problems
• Interest rates significantly higher than standard mortgages, reflecting increased lender risk
• Rates often structured in broad bands based on borrower’s credit history severity
• Regulated by FCA with specific consumer protection requirements

Question 4

Guarantor mortgage

Answer 4

• Permits higher borrowing with guarantor’s financial backing; primary applicants initially responsible for payments
• Guarantor becomes responsible if borrowers default; some lenders secure lending against guarantor’s property
• Helps borrowers with limited credit history or insufficient income access housing market

Question 5

Assigned savings

Answer 5

• Special schemes offered by major lenders like Halifax, Barclays, and Family Building Society
• Allows family members to provide security for mortgage without becoming legal guarantors
• Enables borrowers to secure larger mortgages than they could qualify for independently

Question 6

Ijara Method

Answer 6

• Bank buys the clients property and the customer makes monthly payments to bank paying off capital repayment and rent
• Bank owns property till you can pay it back fully

Question 7

Murabaha Method

Answer 7

• Bank purchases it; bank immediately sells to customer at higher price
• Customer becomes legal owner immediately while making initial deposit (typically 20%)
• Remainder paid through fixed monthly capital payments over repayment term
• Cant be a Right to Buy customer
• Term usually 15 years

Question 8

Self-build project

Answer 8

• Special mortgage that helps you buy land and fund building your own home
• Money released in stages as construction progresses (foundation, roof, etc.)
• Offered by building societies and specialized lenders rather than all standard banks

Question 9

Business buy-to-let mortgages

Answer 9

• Designed for property investors rather than residential homebuyers
• Available with various interest options similar to conventional mortgages
• Can be arranged on interest-only or repayment basis
• Allows purchasers to use property as investment for rental income
• -PRA regulated
• Rent must be 125-140% of mortgage payment

Question 10

Buy-to-let mortgage definition (PRA)

Answer 10

• Secured by UK property in pounds sterling with at least 40% of land used as/for dwelling
• Cannot be occupied by borrower or related persons; must be let under rental agreement
• Rental income typically required to be 125-145% of mortgage payment to ensure sufficient coverage
• Rental agreements must be for at least one month to qualify

Question 11

Special Purpose Vehicle (SPV)

Answer 11

• Limited company specifically set up for buy-to-let property investment
• Can claim full mortgage interest as business expense, unlike individual landlords
• Potential tax advantage when selling: disposal often achieved by selling company shares rather than property itself
• Stamp Duty Land Tax (SDLT) must be paid upon initial property purchase
• you pay CGT on property transfers

Question 12

Bridging finance types

Answer 12

• Open bridging: No fixed end date or exit strategy; typically higher interest rates due to increased risk; provides maximum flexibility
• Closed bridging: Fixed end date with defined exit strategy (like property sale); usually lower interest rates; lender has greater certainty
• Both types provide short-term financing to “bridge” funding gaps when purchasing property
• Can be secured against existing property or the property being purchased

Question 13

Cash back Mortgages

Answer 13

• A lump sum is paid upon completion
• Typically have higher interest rates than standard mortgages
• Often include a clawback clause if paid early
• Cashback percentage is usually for Higher LTV ratios
• Lower LTV higher cashback