Chapter 10: Other Financial Products

Question 1

What’s an overdraft

Answer 1

When an individual draws out more money than they hold in their current account. If the amount overdrawn is within a limit previously agreed with the bank the overdraft is said to be authorised. Unauthorised for opposite.

Question 2

Credit cards

Answer 2

Interest rate is relatively high to other forms of borrowing

Question 3

Loans

Answer 3

1. Unsecured loans - used to purchase consumer goods.
2. Secured loans

Question 4

Commercial loans

Answer 4

Used to fund major capital expenditure by a company.

Question 5

Characteristics of property market

Answer 5

Second home is liable to CGT.

Question 6

Mortgages

Answer 6

A secured loan, with security taking the form of a property.

Applicants are assessed in terms of:
1. Income and security of employment
2. Existing outgoings
3. Future problems
4. Size of the loan

Question 7

Mortgage interest rates

Answer 7

1. Variable rate - borrower pays interest at a rate that varies with prevailing interest rates.
2. Fixed rate - borrowers interest rate is set for an initial period.
3. Capped rate - protect borrowers from rates rising above a certain point.
4. Tracker rate - linked to another rate such a BoE base rate

Question 8

Types of mortgages

Answer 8

1. Repayment mortgage
2. Interest only mortgage
3. Offset mortgage

Question 9

Repayment mortgage

Answer 9

Borrower will make monthly payments to lender. Advantage is that as long as the borrower meets the repayments each month, they are guaranteed to pay off the loan over the term of the mortgage.

Main risks for borrower:
- cost of servicing the loan could increase
- property can be repossessed if they don’t pay

Question 10

Interest only mortgage

Answer 10

Requires borrower to make interest payments to lender throughout the period of the loan. Borrower puts money aside each month into investment so that at the end of the mortgage the accumulated cash is sufficient to pay back capital borrowed.

Main risks for borrower:
- same as repayment risks
- investment may not grow sufficiently

Question 11

Offset mortgages

Answer 11

For the calculation and charging of interest, any mortgage is offset against, for example any savings you may hold.

Two benefits:
- a higher rate tax payer will not incur tax
- an interest is being paid on a slightly lower mortgage

Question 12

Whole of life assurance

Answer 12

Three types of whole of life policy:

1. Non profit
2. With profits
3. Unit linked policies

Question 13

Term assurance

Answer 13

Type of policy that pays out a lump sum in the event of death occurring within a specified period.

Ensures funds available to repay a mortgage in case someone dies or providing a lump sum that can be used to generate income for a surviving partner or to provide funds to put any tax that might become payable on death.