3. Borrowing Products Flashcards
(107 cards)
1
Q
What is the main reason people borrow over a long period?
A
- to fund large expenditure
- e.g. house, car, university
2
Q
Why are repayments over a long period?
A
- the monthly repayments need to be small enough to be affordable
- to fit into their personal budget, they need to repay over a long period of time
3
Q
Why is using a short term borrowing product for a long term purpose bad?
A
- this can be done by the process of ‘rolling over’ a credit card or an overdraft - on a credit card the holder might pay back thus months balance + then borrow again immediately so that they can reach the same debt level by the end of the month
- this process can easily escalate + get out of hands - the product may then be withdrawn
- the length of the loan should reflect the type + size of expenditure and should be related to affordability of mostly repayments
4
Q
Why is owning a home important?
A
- gives a sense of security + belonging - and an incentive to maintain the property in a good condition
- good way of saving for retirement - once a person pays of their mortgage they own the property + no longer have to pay to live in it - don’t have to pay rent in their old age
5
Q
What is a mortgage?
A
- very long-term loan to finance the purchase of a property
- the loan is secured on the property being bought - this means the person buying the property signs a document (deed) to agree that
- if they can not continue meeting the repayments, the lender can claim the property back + sell it to pay off the remaining debt
6
Q
What are the different groups of mortgage borrowers?
A
- first-time buyers
- existing customers moving home
- existing customers switching mortgages
- existing customers increasing mortgages
7
Q
Who are first-time buyers?
A
- traditionally young people in the early stages of their working lives + on relatively low incomes
- as house prices have risen in relation to earnings + lenders have imposed stricter conditions - many people have to save for several years to build up a deposit + cannot afford to buy until they are in their 30s
8
Q
Who are existing customers moving home?
A
- these customers are selling their home + buying another
- they may be moving into a new area, buying a large home because their family has grown or downsizing because they cannot afford the cost of their present one
- they have to pay of their existing mortgage from proceeds of the sale of their property + take out a new mortgage
9
Q
Who are existing customers switching mortgages?
A
These are people are not moving home but have found a better deal with a different provider
10
Q
Who are existing customers increasing their mortgage?
A
- these borrowers want to increase the amount they owe on their home, usually because they need the money for some other purpose - e.g. building an extension, or paying for a life event
- the lender will allow them to do this only if their is sufficient equity in the property (difference between the amount of new increased mortgage and the value of the property) + if the person can afford the repayments of the new mortgage
11
Q
Process of arranging a mortgage
A
- buyer approaches lender
- lender works out how much it will lend based on - affordability criteria + amount of buyers deposit
- buyer decides the period over which they want to repay
- legal processes to buy property are carried out
- buyer makes repayments every month for the period agreed - at the end the buyer owns the property OR buyer fails to keep up with repayments + the lender may repossess the property + sell it to recover the money lent to borrower
12
Q
Who can take out a mortgage?
A
- can be taken out by an individual or by two or more buying a home together
- not available to anyone below the age of 18 as customer must have full legal capacity to borrow
13
Q
When must the mortgage be repaid in full?
A
- by their retirement date
- lenders may extend the mortgage term beyond the maximum age if there is evidence that the customer will have enough income beyond retirement
14
Q
Costs to a person buying a home?
A
- survey of the property
- legal fees
- stamp duty if the property is more than a certain value
- a mortgage application fee
- insurance
- cost of furnishing + fitting the property
15
Q
How is the amount of the mortgage loan determined?
A
- how much they can afford to repay
- in the boom led up to the financial crisis (2007-8) banks allowed many people to borrow too much, - such customers became over-indebted, they risk losing their property if they cannot keep up with the repayments
- affordability is crucial + providers now have to be careful before offering a mortgage loan
- providers now ask more detailed questions about mortgage applicants than in the past - especially in relation to their income + expenditure
16
Q
What two aspects decide how much a provider will lend to a mortgage provider?
A
- loan to income (LTI)
- loan to value (LVI)
17
Q
What is loan to income (LTI)?
A
- loan to income (LTI) is the ratio of the size of the loan to the income of the customer
- the lower someone’s income = the less they can borrow
18
Q
How is LTI calculated?
A
- basic annual salary + any extra annual income (e.g. overtime, bonus, child benefits) - monthly commitments (e.g. loans, credit cards, store cards)
- the provider is calculating the persons discretionary income - the amount of money left over after making necessary payments
- the provider then multiples the discretionary income by a figure (e.g. 3 or 4) that reflects its assessment of the customer’s creditworthiness
19
Q
How much are mortgage lenders allowed to lend?
A
- since 1 October 2014 - mortgage lenders can only lend more than 4.5 times income to 15% of their total new residential mortgage applicants
- the restriction mainly affects buyers in London where house prices are Hugh
- it only applies to mortgage providers who lend more than £100,000 million per year
20
Q
What is loan to value (LTV)?
A
- the ratio of the size of the loan to the value of the property
- since the property is being held as security for the mortgage provider, it is important for the provider to make sure that there is a margin between the amount it lends and the value of the property if it has to be sold
21
Q
What is the equity of the owner?
A
- the difference between the property value and the amount lent
- a provider might lend between 60% to 90% of the value of its home being bought, depending on the type of mortgage, and sometimes with a minimum + maximum amount
22
Q
How does the mortgage term affect the repayments?
A
- other things being equal, the longer the mortgage period, the lower the amount of monthly repayments
- no matter how many years the mortgage runs, the capital sum will remain the same but the total amount of interest paid will be higher
23
Q
What is a typical mortgage period?
A
- 25 years but a customer may choose a longer one or shorter one
- repaying over 30 or more years could be the only option for those on low income + only a small deposit to keep up with the monthly repayments + to buy the home they want
- someone with a higher income + a large deposit may want to pay the mortgage off over a shorter period such as 15 years
24
Q
How does the age of the borrower affect the mortgage term?
A
- the bank will want to know that the borrower will be of working age throughout the period of the mortgage
- a young person or couple in their 20s could get a mortgage repayable over 30 years or perhaps longer
- someone aged 50 who expects to retire at 65 would normally get a 15 year loan
25
What are the types of mortgage payments?
- capital - the total amount they borrowed + this has to be payed back in full
- interest - the borrower must pay interest on the amount borrowed over the period of years of the mortgage
26
What are the two main mortgage repayment schemes?
- repayment mortgages
- interest only mortgages
27
What are repayment mortgages?
- most common type
- monthly repayment instalments calculated by provider in a way that included some capital + some interest
- the proportions of capital + interest changes in each instalment change but the customer is not aware of this
- the amount of the instalment does not change, unless it is a variable rate mortgage + the interest rate changes
- at the end of the mortgage period, the customer has repaid all the capital + interest - completely settled their debt
28
What are interest-only mortgages?
- the monthly repayment covers only the interest on the whole amount borrowed for the whole mortgage period
- at the end of the period the borrower still owes the full amount borrowed + must repay this capital sum in one payment
- in order to do this, the borrower must have a financial plan in place to afford the repayment + it is the lender’s responsibility to check that this plan will succeed
29
A way to pay off the capital sum at the end of an interest-only mortgage?
- endowment insurance policy
- the borrower aims to build up the capital sum in an insurance policy that matured at the end of the mortgage period
- it includes life insurance so that the mortgage will be paid off if the borrower died before the end of the term
30
What are the monthly repayment for an interest-only mortgage?
- lower than a repayment mortgage
- but the customer also has to be pay into the repayment investment plan + the total amount spent each month may not be very different from a repayment mortgage
31
Why are interest-only mortgages less common?
- during the 1980s + 90s they were very popular + providers made a lot of money selling not only mortgages but also insurance policies that people had to buy as repayment plans
- but interest rates fell + the return on the insurance policies fell - after a few years it was clear the maturity value of the policies would not be enough to cover the capital sum
- people would have to settle the difference out of their funds or by borrowing from somewhere else
- this was classed as a mis-selling + some customers have made claims for compensation
32
What are part interest-only and part repayment mortgages?
- a mixture of the two mortgage types
- part of the monthly instalment represents capital but it is not the full amount of capital that would have been included in a repayment mortgage
- therefore the borrower must have a repayment plan in place to be able to pay the capital shortfall at the end of the term
33
What are the risks with interest rates on mortgages?
- interest paid on a mortgage is a significant proportion of the total amount paid back over the mortgage period + is a large part of the monthly repayments
- the borrower is exposed to risk that interest rate might rise - this would make their instalments more expensive + they may be able to afford to pay them
34
How should people approach the risk of interest rates on mortgages?
- mortgage borrowers are always advised not to borrow to the limit of what they can afford
- instead they should leave themselves a margin of safety so that they can continue to repay their mortgage even if e.g. interest rates rise and the monthly repayments increase
35
Can you switch mortgages?
- there’s a lot of flexibility in the mortgage market these days - customers are expected to ‘shop around’
- they can either switch to a different mortgage with the same provider (although they may have to pay an early repayment fee) or they can move to a different provider
36
What is a fixed rate mortgage?
- fixes the interest rates for a stated number of years at the beginning of the mortgage
- this benefits the customer if interest rates rise during the fixed period as they continue paying the lower fixed rate
- but they can not benefit from a fall in interest rates as they are contracted to continue paying the fixed rate
37
Why do people choose fixed rate mortgages?
- depends partly on how they expect interest rates to move over the next few years - however it is hard even for experts to predict future interest rates + customers usually take advice from their provider
- a fixed rate mortgage also provides certainty that they monthly repayments will not change over the agreed period + it helps customers to draw up their budget
38
What happens at the end of a fixed rate mortgage period?
- the interest rate becomes variable for the remaining term of the mortgage
- e.g. a provider might offer a ‘two-year fixed’ mortgage which charges the fixed rate for the first two years and then charges a variable rate for the remaining term
- there is a danger that interest rates may have risen across the whole market during the fixed rate period + the customer is suddenly faced with a significant rise in monthly instalments
- therefore, borrowers are advised to note interest rate movements + budget for any rise
39
What fee do fixed rate mortgages charge?
- most change an early repayment fee
- this means that if the borrower decides to repay or switch the mortgage during the fixed-rate period, they will have pay a fee to the provider
- e.g. 3% on the balance repaid
40
What is a variable rate mortgage?
- the borrower pays a rate of interest that is subject to change from the outset and throughout the term of the mortgage
- some variable rate mortgages are linked directly to the lenders basic mortgage rate - standard variable rate (SVR)
- although some providers use their own term for it, and it often changes when the Bank of England changes the Bank rate
41
What is the interest rate risk with variable rate mortgages?
- if the interest rate rises, the monthly repayments increase
- but if interest rates falls, the repayments decrease
42
Advantages to variable rate mortgages?
- the borrower does not risk coming to the end of a fixed-rate period + then not being able to pay the higher SVR or having to pay the costs of switching to a different product
- it is easier to absorb a higher monthly repayment if small increases happen gradually rather than facing a large increase overnight
43
What is the tracker?
- common form of variable rate mortgage
- the interest rates charge ‘tracks’ changes in some other specific interest rate
- usually either the Bank of England bank rate or the lenders own ‘base rate’ which is connected to Bank rate but not always immediately mirrors all changes by the Bank of England
- for business and competition reasons sometimes lenders may delay changing their mortgage rates or may change them by a different amount to the Bank rate changes
44
How long does the tracker rate apply for?
may apply for a specific number of years or for the lifetime of the mortgage
45
What is a discounted mortgage?
- a variable rate mortgage that gives the customer a set discount off the provider’s SVR (or what ever name the individual provider gives to this) for an agreed period e.g. 2 years
- the rate charged can still rise or fall but the customer benefits from lower initial monthly payments
46
Who are discount mortgages suitable for?
- for borrowers who are on a moderate income but expect their income to rise over the next few years
47
Disadvantages of discounted mortgages?
- there is an early repayment fee
- customers also take the risk that the lower repayment over the first few years will give them an unrealistic idea of their ability to afford the mortgage
- they may find themselves in difficulties when they have to step up to the higher payment later in the term
48
What are offset mortgages?
- sets the interest that would have been earned on the borrowers savings and current accounts against the interest owing on the mortgage
- so they either make lower monthly repayments or continue to pay the same amount each month but reduce the number of years of the mortgage term
- they can still withdraw their savings although doing this will reduce the benefit of the offset
49
Why do people use offset mortgages?
- some people would prefer to use the savings to reduce the amount borrowed + so have a lower loan-to-value ratio - this could enable them to secure a lower interest rate - but they would lose access to their savings
- the offset mortgage allows them to pay less interest on the mortgage but to retain the flexibility provided by their savings by giving up interest rate earned on them
- the customer then has ready money in case of a financial emergency
50
How an offset mortgage works?
- £150,000 mortgage
- £20,000 savings -> no interest is earned on savings - as no interest is earned there is no tax on savings interest to pay
- £130,000 net balance -> interest is paid on net balance only
51
What are loyalty mortgages?
- some providers offer loyalty mortgages to reward their loyal customers
- e.g. discount on application fee
- loyalty rates are becoming popular way to retain mortgage customers at the end of fixed term deals as well - banks offer existing mortgage customers lower rate if they agree a new mortgage deal with the bank if they meet certain requirements
52
What are mortgages to help first time buyers?
- house prices are high, young people do not have much money in savings and providers are much more cautious in their assessment of affordability than they were before the financial crisis
- some providers have introduced schemes whereby the savings of a family member can be linked to a mortgage loan for a first time buyer
- e.g. the family member pays 10% of the purchase price of the home into a specific savings account for these years - the home buyer then only needs a minimum 5% deposit
53
What decides the interest rate charges on mortgages?
- whether the product is fixed rate or variable rate mortgage
- in the case of a fixed rate mortgage, the number of years for which the rate is fixed
- the loan to value (LTV) ratio - usually the larger the deposit paid + the smaller the LTV ratio, the lower the interest rate since the provider has a greater margin of security + therefore a lower risk of losing its money
- whether the customer qualifies for a loyalty mortgage - if they do, the rate will be slightly lower
- whether the customer is remortgaging the property - a provider might offer a lower rate to customer of another provider to encourage them to switch
54
What is the application fee?
- majority of mortgage products have a one off application fee
- the cost varies depending on the product or provider
- usually somewhere in the range between £500 to £1000
55
What are home purchase plans?
products that allow Muslims to finance the purchase of property + comply with Islamic religious law (Sharia law)
56
What does sharia law forbid?
- The payment or receipt of interest
- this is because one party would gain at the expense of another without regard to the value of the goods traded
- a concept that conflicts with the Islamic principle of equality
57
What does sharia law allow?
the sharing of risk and profit
58
What is the Ijara method?
- the provider buys the clients selected property
- the provider then sells the property to the client for the same price under a promise to purchase agreement
- repayments are spread over a term of up to 25 years
- the provider is registered of the property over the repayment term - paying a monthly amount that combines both capital repayment and+ rent for the lease
59
Repayments under Ijara method?
- monthly payments fixed for 12 years at a time
- it is then reviewed to allow for any adjustment to the rental element, these changes will usually reflect changes in external interest rates
- under sharia law the rent is even as a fair price for using the property and so there is no conflict of principle
- at the end of the payment term the property is transferred to the client - early repayment is possible in this period
- the monthly payments tend to be higher than conventional mortgages - rent paid is the providers profit
60
What is ‘diminishing musharaka’
- a variation of the Ijara method
- means during the term of the finance, ownership of the property is gradually transferred from the lender to the purchaser rather than this taking place at the end of the agreement
61
What is the Murabaha method?
- the provider buys the property at and agreed price + then sells it immediately to the client at a higher price
- the exact price depends on the repayment term, which can be up to 15 years
- the higher price charged reflects the profit element for the provider
- first payment of 20% of the property value is usually required
- the property is registered in their name rather than the providers
62
What schemes do not qualify for the Murabaha method?
Properties purchased under local authority ‘Right-to-buy’ schemes
63
Why is the Murabaha method less popular?
- more expensive overall
- less flexible in terms of early repayment
64
What is loan forbearance?
- the FCA Mortgages and Home Finance: Conduct of Business source book (MCOB) states that providers must treat customers fairly + exercise forbearance (patience)
- this includes considering all the options that will help the borrower, setting up a payment plan that is practical for them + not putting pressure on the borrower through to many phone calls or letters
- another example is the provider allowing the customer to stop making repayments for a limited time (payment holiday) if the period if unemployment or sickness is likely to be short
- they may also allow reduced payments for a limited time or to extend the mortgage term in order to reduce monthly repayments
65
What should borrowers do if they are having difficulties meeting mortgage repayments?
Contact their lender as soon as possible
66
Advantages of loan forbearance?
- provides support to customers who are have financial difficulties + helps to maintain good relations between the customer and provider
- it performs a social function in that it prevents people from becoming homeless + placing a burden on local authorities + social services
- it enhances the providers reputation + reflects its citizenship/ corporate social responsibility policy
- it may mean the provider does not have to write off the loan + absorb the loss in its accounts
67
Disadvantages of loan forbearance?
- once a customers temporary financial difficulties have been resolved (e.g. they have a new job or recover from illness + can earn an income again), they will be faced with higher repayments to make up the shortfall from making reduced payments or no payments
- the lender is keeping the loan its books as an asset but it may have to write off part of of all of the loan later - it is not recognising weakness of the loan - it should make provisions against its forbearance policy
68
How has covid affected loan forbearance?
- economic activity fell dramatically - unemployment rose
- quite a lot mortgage customers therefore will experience difficulties repaying their loans
- the FCA has set out guidelines to firms to enhance support they should offer customers in these difficult times
69
What is credit risk?
- risk that the borrower will default (be unable to repay loan)
- mortgages are secured on the property they are used to purchase, so as a last result lenders can repossess the property + sell it to repay the loan
- repossessions could mean the lender will still have to write off some of debt however - the value of the property could fall below the amount owed if market prices fell - **negative equity** - therefore there isn’t a sufficient amount to clear the debt when the property is reposessed
-
70
What are government home ownership schemes?
- the ability of people to buy and own homes depends on the availability of mortgages
- the government intervenes in the mortgage market with various home ownership schemes to help those who cannot afford to buy a home
71
Help to Buy equity loans
- open to first time buyers + home movers on new build homes worth up to £600,000 in London and lower amounts elsewhere
- outside London, the purchaser provides 5% of purchase price, the lender provides a mortgage of 75% and the government pays the remains 20% via an equity loan
- this means the govt. ‘owns’ 20% of the property
- the home is in the borrowers name + can sell it at anytime but they have to repay the equity loan either when they sell or at the end of mortgage repayments - they can also pay the equity without selling
72
When did the help to buy scheme end?
31 December 2022
73
Lifetime ISAs
- available from April 2017 + can be used to buy a first home or save for retirement
74
Shared ownership schemes
- provided through housing associations
- the borrower buys a share of their home (between 10% and 75%) for which they take out a mortgage + pay rent on the remaining share
- the borrower can buy more shares in their home later
75
How to qualify for a shared ownership scheme?
- household must earn £80,000 a year or less - £90,000 in London
- must be first time buyer
- be renting a council or housing association property
- parallel schemes available for older people and people with disabilities
76
Criticism for government home ownership schemes?
- people argue that the people who are being helped to buy a home cannot really afford to repay a mortgage + are more likely to default
- critics say the schemes will destabilise the mortgage market + warn they should not be permanent
77
What are buy to let mortgages?
- long term secured loan taken out by a person who is buying a property with the intention of letting it to tenants
- the owner becomes of the property becomes the landlord + is actually running a small business
- the aim is to borrow the money to buy the property + then to cover the repayments with the rents received
78
How are buy to let mortgage amounts determined?
- the rent available
- the borrower must show that the rental income will be sufficient to cover the mortgage repayments
79
Risks of buy to let mortgages?
- the value of the property might fall
- there may be vacant periods when a tenant can’t be found
- the tenant may fail to pay the rent or cause damage
80
What research should prospective landlords do?
- the level of demand in various areas + choose a location accordingly
- consider the type of people (families, professional singles, elderly couples etc.) they would rent their property to + choose a property that would suit those tenants
- consider the prices of the property in their chosen area + how that might change in the future - if prices rise they might benefit from a capital gain
- appointing a letting agent to find tenants, collect rent + deal with routine problems - unless they know what they are doing + have enough time to spare
81
Budgeting of prospective landlords?
- there will be a number of costs in addition to mortgage repayments - e.g. stamp duty, legal fees, insurance, furniture + fittings, service charges, maintenance + repairs
- the landlord needs to draw up a budget to show the expected income + outgoings for the period of the mortgage, or at least several years ahead
- they need to rake into account possible interest rate increases
- consider how their budget will be effected by vacant periods - no rent, have to absorb costs themselves
- it’s a business so they need to consider their tax position - income tax on any profit made + draw up proper accounts, also might have capital gains tax if they sell after a period
82
Legal considerations for prospective landlords?
- should ensure they have a valid tenancy agreement - a legally binding document that sets out legal rights + responsibilities of both the landlord + tenant
- the landlord has a ‘duty of care’ to make sure that the property + its utilities are safe -e.g. safety checks on gas + electricity instalments, properties must adhere to fire regulations
83
What is a hire purchase?
- a credit or ‘consumer finance’ contract that is provided by a finance company to someone buying high value consumer goods such as vehicles or furniture
- it allows the customer to spread the cost of the items over an extended period of time, usually 2-5 years
84
How does a hire purchase work?
- the company lends all or part of the purchase price to the purchaser + the purchaser repays in instalments
- the purchaser is hiring the goods and does not actually own the goods until the final payment has been made
- this means while they are still making payments, the purchaser is not allowed to sell or dispose of the goods without the lenders permission
85
What happens if the purchaser can’t afford hire purchase payments?
- if the purchaser can’t afford the payments or no longer needs the good, they can terminate a hire purchase agreement in writing + return the goods at any time
- they will have to pay all the instalments that are due up to the time the agreement ended
- if the payments they have made come to less than 50% of the total price of the goods, they may have to make a payment so that 50% has been paid
- if they have paid more than 50%, they will not have to pay anymore but they are not entitled to a refund
86
How are hire purchases regulated?
- regulated by the Consumer Rights Act 2015 + all companies that offer them must be authorised by the FCA to do so
- hire purchase contracts are secured - lender can repossess the goods without a court order if the purchaser falls behind with their repayments or has paid less than 1/3 of the total payment
- if the purchaser has paid more than 1/3 the company must get a court order in order to repossess goods
87
What can lenders do with repossessed goods?
- sell the repossessed goods at auction + use proceeds to repay the outstanding debt
- if this is not sufficient to settle the debt completely, the purchaser will be liable for the difference + for court costs
88
Who are hire purchase agreements with?
- not with trader or retailer where the goods are bought but with a separate finance company with which the trader has an agreement
- the finance company owns the good until the final instalment + purchase fee is paid
89
Examples of finance companies that do hire purchases?
- finance company might be subsidiaries to big banks - e.g. Black Horse Finance is part of Lloyds Banking Group + arranges finance for people to buy new and used cars, caravans, motor homes etc.
- other finance companies are independent + often specialise in loans for particular purposes - e.g. Volkswagen Financial Services is a subsidiary of Volkswagen group + offers finance for people buying VW vehicles
- the purchaser pays deposit + agrees monthly payments spread balance over agreed number of years - end of term the car belongs to purchaser
90
What is ‘buy now, pay later’
- option offered by some financial companies - obtain the goods immediately but dont begin paying until a stated number of months later e.g. 6
- e.g. after 6 months they can pay the outstanding balance or spread the cost over a longer period
- curry’s do this
91
What is 0% finance on purchases (buy now, pay later)?
- the price of the product purchased is spread over an agreed number of months + no interest is charged provided that payment is made in full by due date
- but consumers need to make sure that they will be able to make make the final payment as interest on the whole amount is charged if they fail to do this
- many of these schemes arrange the payments so that monthly repayments are small but the final one is large - this makes it harder for someone to pay off the debt in time + be forced to delay and be charged full interest
92
FCA involvement in buy now pay later schemes
- amid concerns that people could get into heavy debt during covid, plans were announced to regulate buy now pay later firms
- firms need to do affordability checks before lending + treat customers fairly if they struggle to repay
93
What is a personal contract purchase?
- a flexible porodcur that is offered by some finance companies for the purchase of new or nearly new vehicles
- the customer chooses a car, the deposit they want to pay, the number of years they want the contract to run for + intended mileage of car
- in return they receive fixed-cost motoring for the term of the contract
- at the end of the term they can either buy the car for an agreed lump sum or they give the car back to the lender + walk away with no further obligation
94
How does a personal contract purchase work?
- the car being purchased is given a guaranteed future value (GFV), calculated by the lender + set for the period of the contract
- the GFV plus deposit made by the customer are added together + deducted from cash price of the new car
- the monthly repayments are calculated on the basis of the outstanding balance plus interest
- in effect the purchase is financing the depreciation of the new car
95
What is the student loan company?
- not-for-profit government owned organisation set up to provide loans + grants to students in universities + colleges in the UK
- it pays loans + non repayable grants to cover living costs + studying expenses + it provides loans to meet the costs of tuition fees which is paid directly to the university on behalf of the student
96
Tuition fee loans
- granted to the student to enable them to pay tuition fees of their course
- not financially assessed
- unis + colleges charge different annual fees for different courses up to a govt. set maximum
- interest is charged on a tuition fee loan
- paid in three instalments: 25% at beginning of term 1 and 2 and 50% at beginning of term 3
97
Maintenance loans
- covers the living expenses incurred by students on full time courses
- part of it is eligible students, regardless of their financial circumstances; part depends on income of students household
- there is also a provision for extra weeks’ study + this is also financially assessed
98
How is amount for maintenance loans assessed?
- depends on wheee the student lives, the year of their course, entitlement to other financial support such as bursaries
- the maintenance loan is available once confirmation is received that the person is studying at the university or college
- usually paid into the students bank account in three instalments, except Scotland it is paid monthly
99
When do students repay their loan?
when they have left uni + there income exceeds the minimum threshold
100
What is plan 1 for student loans repayments?
plan 1
- courses that began after 1 September 1998 and before 1 September 2012
- the earliest a student can start repaying their loan is the April after graduation or leaving their course
- they must be earning more than a specified minimum threshold + pay 9% of their gross income above this level
- repayments are usually taken by HM Revenue & Customs via PAYE system
- they continue depending on income, until loan has been fully paid off, the graduate turns 65, dies or becomes permanently unfit for work, or 25 years after the graduate became eligible to repay
101
What is plan 2 for student loan repayments?
- courses that began after 1 September 2012
- same as plan 1 - the earliest a graduate will start repaying the loan is the April after graduating or leaving their course
- the earnings threshold is higher than plan 1 + since 2017 rises with inflation
- loans are cancelled after 30 years after the April when they first became eligible to repay
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Risks of borrowing?
- unable to keep up with repayments due to loss of income from unemployment, illness, business fails or they might die during mortgage period
- the property they are buying might lose value over the period of the loan - e.g. car or household goods - an appliance might have broken
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Risk of mortgages?
- people buying a house would hope it to keep value + expect it to gain value - however periods of economic downturn cause properties to lose value increasing
- therefore the risk of negative equity - market value of property is less than the amount still owed on the mortgage
- the bank would sell the property for less than the outstanding debt + would expect the borrower to pay the difference
- someone in this situation would not only be losing their home but also continue owing money to the lender
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Loses from losing a home?
- they have lost their original deposit
- they have a number of payments
- they have to find somewhere else to live + pay moving expenses as well as rent
- they have to face the stress + upheaval of losing their home - homeowners who have children sometimes view their home as valuable asset to leave their heirs when they die + feel especially distressed when this is no longer possible
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What is life assurance for mortgages?
- people who are repaying a mortgage can take out a life insurance policy that remains in place during the period of the loan
- for someone with a repayment mortgage, it would be taken out on a decreasing-term basis - the amount insured decreases as the capital sum is repaid
- a life term life insurance would be suitable for someone with an interest-only mortgage
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Adv of life insurance for mortgages?
- if the insured person dies during the mortgage term - a lump sum is paid out to cover outstanding debt
- family of deceased are free of debt + own the property outright
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What is payment plan insurance
- PPI can apply to a mortgage or to a personal loan or hire purchase agreement
- it covers loss of earnings due to accident, sickness or involuntary unemployment during the period of the loan
- these policies are not cheap so the borrower must weigh up the cost against the risk of default on their loan
