Unit 6- Topic 23 Flashcards
Interest rate options
Richi paid a reservation fee of £225 when he applied for his 3-year fixed-rate mortgage. Which of the following statements is true ? (23.4)
A. The mortgage will be switched automatically to a new fixed rate after three years.
B. Although not usually refunded, it is possible that the reservation fee could be refunded if the mortgage didn’t go ahead.
C. Richi will not be able to make overpayments during the 3-year fixed period.
D. If Richi redeemed some or all of his mortgage during the fixed-rate period, it’s common for an early repayment charge to be made, but this charge would never extend beyond the fixed-rate period.
B. Although not usually refunded, it is possible that the reservation fee could be refunded if the mortgage didn’t go ahead.
An arrangement or reservation fee may be payable at the time the application is made – this may be as low as £100 or as high as £2,000 or more, or it may be a set percentage of the
advance. The purpose of the fee is simply to boost the profit margins of the lender on fixed-rate mortgages. It is not usually refundable if the application is subsequently cancelled.
A mortgage with a standard variable rate: (23.1)
A. changes at the discretion of the lender
B. is reviewed every 3 months
C. is linked to LIBOR
D. must change when the Bank of England base rate changes
A. changes at the discretion of the lender
It is up to the lender whether to increase or reduce the SVR when Bank rate changes.
What action, if any, does a lender take to recoup the interest that has been unpaid during the discount period of a discounted rate mortgage? (23.2)
A. The unpaid interest is added to the outstanding capital at the end of the discount period.
B. The interest is recouped in equal amounts over the remaining term.
C. The interest is raised by the amount of the earlier discount for a period equal to the discount period.
D. No action is taken, because it is a true discount .
D. No action is taken, because it is a true discount.
The discount is genuine, because the interest saved isn’t added to the loan.
Which of the following could be considered as an advantage of a Base Rate Tracker mortgage over a standard variable rate mortgage, both offered by the same lender? (23.3.1)
A. An arrangement fee is unlikely to be payable
B. An early repayment charge is unlikely to apply
C. The interest rate charged is likely to be substantially lower.
D. The interest rate will not exceed a pre-determined level
C. The interest rate charged is likely to be substantially lower.
The interest rate charged is usually substantially lower than the lender’s SVR because the Bank of England base rate is usually quite a bit lower than the average lender’s SVR.
What advantage does a typical capped-rate mortgage have over a fixed-rate mortgage ? (23.5)
A. Allows the borrower to benefit from interest rate reductions
B. The rate will always be lower
C. No application or product fee
D. No early repayment charges
A. Allows the borrower to benefit from interest rate reductions
Unlike a fixed-rate mortgage, if the lenders’ standard variable rate (SVR) is reduced, the rate on a capped-rate mortgage also reduces.
Which one of the following would be most suited to a capped rate mortgage ? (23.5)
A. Julia, who believes rates have peaked
B. Jane, who believes interest rates are unlikely to change from their current level for some time.
C. Jean, who believes interest rates are likely to rise over the next 1-3 years
D. Jack, who believes interest rates are likely to fall in the near future.
C. Jean, who believes interest rates are likely to rise over the next 1-3 years
A capped-rate mortgage is suitable for somebody who feels that interest rates are about to rise and wants the security of knowing the maximum they will have to pay each month, but would like to benefit if rates drop.
To be classed as a flexible mortgage, interest should be calculated on what basis ? (23.6)
A. Daily
B. Weekly
C. Monthly
D. Annually
A. Daily
With a flexible mortgage, one of the basic features will be that interest is calculated daily
Sylvia is considering a £150,000 interest-only offset mortgage with a variable rate of 6.5%. After meeting costs of the mortgage she will have £15,000 in a deposit account, earning 4% interest. How much will she pay her lender each year, if she offsets her savings ? (23.7)
A. £8,775
B. £9,150
C. £9,270
D. £9,750
A. £8,775
Here are the steps to this solution :
1) Sylvia currently pays 6.5% x £150,000 = £9,750
2) If she offsets £15,000, she will pay 6.5% x £135,000 = £8,775 The 4% interest she currently earns is not relevant.
With a cashback mortgage, the cashback element is : (23.8)
A. a repayment of a percentage of the annual mortgage interest.
B. a higher amount for high loan-to-value mortgages than low loan-to-value
C. paid as a fixed amount or a percentage of the advance
D. paid to the borrower immediately after exchange of contracts
C. paid as a fixed amount or a percentage of the advance
A cashback is a tax-free lump sum paid to the borrower when the mortgage is completed. The cash sum could either be a percentage of the amount borrowed, or a fixed sum.
Which one of the following types of mortgage may be most attractive for those who want a straightforward mortgage, that is easy to understand? (23.1)
A. Fixed rate
B. Discounted
C. Variable rate
D. Capped
C. Variable rate
Someone who wants a straightforward mortgage that is easy to understand may well still opt for this product, whether on a capital repayment or interest-only basis.
With an offset mortgage, which one of the following features is correct? (23.7)
A. A lower amount of interest is charged
B. A lower mortgage interest rate
C. A higher amount of interest is charged
D. A higher mortgage interest rate
A. A lower amount of interest is charged
With an offset mortgage, the rate of interest is not reduced, but the amount of interest charged is reduced, because the rate is based on a lower balance.
Which of the following mortgage interest rate options usually offers the cheapest set-up cost? (23.1)
A. Capped-rate mortgage
B. Fixed-rate mortgage
C. Base-rate tracker mortgage
D. Standard variable-rate mortgage
D. Standard variable-rate mortgage
Standard variable rate mortgages tend to have lower arrangement fees than fixed or cappedrate alternatives and whilst not offering the cheapest interest rates, are usually seen as the option that provides the lowest set-up costs.
