Unit 6 – Topic 20 Flashcards
Mortgage Repayment Methods
Keir has a 25-year repayment mortgage for £155,000 on an annual rest basis. If the interest rate remains at 3% for the first year and monthly repayments are £735, how much capital will Keir repay in year one ? (20.1)
A. £4,170
B. £4,650
C. £8,820
D. £7,784
A. £4,170
Which of the following might be regarded as a disadvantage of an interest-only mortgage? (20.2.2)
A. The interest rate charged is usually higher than for a repayment mortgage.
B. The outstanding capital remains constant throughout the mortgage term.
C. The mortgage cannot be arranged on a monthly or a daily rest basis.
D. The mortgage term cannot be longer than that of any repayment vehicle.
B. The outstanding capital remains constant throughout the mortgage term.
No capital is paid off during the term, which means the debt does not reduce.
Gordon wishes to arrange an interest-only mortgage to buy his new property. Which of the
following repayment strategies would be most unlikely to be acceptable to the lender? (20.2.1)
A. Monthly contributions to a unit trust savings plan
B. Allocating his quarterly bonus payments to reduce the capital balance.
C. Potential increase in the future value of his property, allowing for house price inflation
D. Monthly premiums to a unit-linked endowment policy.
C. Potential increase in the future value of his property, allowing for house price inflation
Speculative strategies such as relying on house price inflation, potential inheritance,
windfalls or ad-hoc investments are not considered to be acceptable approaches.
Jack is considering a mortgage loan of £110,000 over a 25-year term at a rate of 2.5 % p.a. On a capital and interest basis the monthly repayment would be £494.00. If Jack chose an
interest-only option instead, his monthly payments would reduce by : (20.2)
A. £229.17
B. £167.09
C. £264.83
D. £274.06
C. £264.83
Step 1 : The capital and interest payments are : 12 x £494 = £5,928
Step 2 : The interest on the loan : £110,000 x 2.5% = £2,750
Step 3 : Jack will reduce his outgoings by the difference=(£5,928 less £2,750)÷12 = £264.83
Which of the following is not one of the assumptions which must be made by a lender when the APRC is calculated? (20.4)
A. The borrower will make all payments on the due date
B. The interest rate charged initially will not change.
C. The loan will not be redeemed early and will run for its full term
D. The cost of any life assurance premiums is included
D. The cost of any life assurance premiums is included
No life assurance premiums are included in calculating APRC
Under the MCOB rules on interest-only mortgages, lenders must review any repayment vehicle which is linked to an interest-only mortgage, to ensure that the vehicle is still in place and it still has the potential to repay the loan. A review must be carried out: (20.2.1) (MCOB 11.6.4.9)
A. if it is clear that a shortfall is likely.
B. every three years.
C. once during the term of the mortgage.
D. once during the last five years of the mortgage term.
C. once during the term of the mortgage.
Lenders must carry out at least one review during the term of the mortgage, where the
borrower is contacted to check that the repayment strategy is still in place, and that it still has the potential to repay the capital borrowed.
Roy can afford to make regular overpayments on his repayment mortgage. Which method of calculating mortgage interest would be of most benefit to him ? (20.3.3)
A. Quarterly rest
B. Daily rest
C. Monthly rest
D. Annual rest
B. Daily rest
Daily rest means daily interest, which benefits borrowers like Roy who can make overpayments, because the additional payment automatically reduces the balance
immediately
Assuming the interest rate stays the same, what would normally be expected to increase over the mortgage term under an interest-only mortgage ? (20.2)
A. The amount of capital repaid
B. The proportion of interest in the monthly payment
C. The value of the repayment vehicle
D. The amount of life cover required
C. The value of the repayment vehicle
The borrower usually arranges an investment vehicle to build up the capital needed to repay
the mortgage at the end of the term. Two monthly payments are therefore usually needed – one which pays the interest to the lender and the other which pays a premium or
contribution to the product provider.
With a capital and interest mortgage, how are the payments calculated over the term ? (20.1)
A. The mortgage payment gradually increases over the term
B. More interest is paid in year one than year two
C. No interest is paid in the final three years
D. More capital than interest is repaid during the first five years
B. More interest is paid in year one than year two
Because the capital outstanding is being reduced each year, the interest element reduces and the capital element increases. More interest is paid in year one than year two.
What do the monthly repayments under a capital and interest mortgage comprise in the first year ? (20.1)
A. Interest only
B. Mainly interest
C. Mainly capital
D. Capital only
B. Mainly interest
At the beginning of the mortgage term the monthly payment comprises mostly interest, so capital repayment is slow in the early years.
