Chapter 2 Flashcards
(41 cards)
A1) How do you find out a clients disposable income?
It is the difference between their income and their expenditure.
What will a budgeting assessment allow you to do?
It will allow you to examine whether a proportion of income might be redirected away from a current area of expenditure to an area of higher priority.
It is better to recommend a partial solution your client can afford, rather than…
a perfect solution that they cannot.
A2) What is the first step to managing debt?
Working out how much money is coming in and how much money is going out.
What is essential spending?
Housing costs, insurance, council tax, utilities, childcare etc.
What is everyday spending?
Food, cleaning, transport, school etc
What is occasional spending?
Clothing, entertainment, birthdays, holidays etc
What are some tips which could help a client reduce their spending?
1) Consider making small cutbacks on non-essential items.
2) Check the Annual Percentage Rate (APR) on credit cards and loans - see pay them off sooner/shop around for a better deal.
3) Switching to a cheaper provider for: phones, electricity, gas etc..
Priority debts include:
Mortgages, utilities and council tax.
Debts of lesser importance include:
Credit cards, overdrafts and personal borrowing.
Who should a client in debt reach out to first if they are struggling to pay?
The lender, as they may be able to set up an arrangement where the client pays smaller amounts over a spread out time.
If there is a surplus of income each month and there are number of unsecured debts, which is the best route to go down for a client?
Getting a debt management plan (DMP.) This is an agreement between the creditors and the client on how the debt will be paid back. The client can sort this out with the creditors individually or they can use a debt management company which will negotiate with the creditors to establish an acceptable repayment plan.
How does a debt management company work?
A debt management company will consolidate all of the clients debts into one monthly affordable payment after negotiating will the client’s creditors.
Private companies will charge a fee for their services, however their are free services available too.
All advisers must be properly licenced under the consumer credit acts 1974/2006.
What us debt consolidation?
Debt consolidation means negotiating a new loan to repay an existing loan or loans, often with a lower interest rate and lower monthly payments.
Why should advisers exercise great caution recommending debt consolidation plans to clients? (especially if it is secured on the client’s property.)
1) Companies that offer this service often charge high fees, including those for early repayment.
2) Even though the monthly payment might be lower, clients could end up paying more and more over time.
3) A client with a history of running up loans may simply continue to do so, and eventually put themselves in a more serious position.
4) In a worse-case scenario , if the loan is secured on their property they could lose their home if they default on their payments.
B) What is a mortgage?
The security offered in exchange for a loan. When the security is signed over to the lender in exchange for the mortgage, this transfer of ownership is called the assignment.
A mortgage involving a property can involve the deeds of the property or many simply register a charge on the property with the Land Registry.
Which are the main two ways in which a mortgage can be repaid?
1) Capital and interest repayment
2) Interest only repayment
What is a capital and interest repayment?
This is where the monthly repayments to the lender include a sum to cover a contribution towards the repayment of the capital, plus a sum to cover the interest.
Over time as the loan is gradually repaid the interest reduces inline with the reducing outstanding capital.
What is an interest only repayment?
It is where only the interest accruing on the loan is paid and the outstanding capital remains the same.
The objective with this type of loan is to repay it from another source at the end of the term.
What is a capped mortgage?
The lender guarantees that the interest rate will not rise above a given level for a certain period of the loan.
What is a cap and collar mortgage?
The lender guarantees that the interest rate on the loan will not rise above a given level (the cap). However, there is also a minimum rate below which the interest will not fall (the collar).
The two can be applied together, so rates are guaranteed to be between an upper and lower limit for a given period of time.
What is a discount mortgage?
The interest rate charged for an initial period of the loan is reduced by a set percentage below the standard rate set by the lender.
What is a Euro based mortgage (or other foreign currency)?
The interest and capital of the loan is designated in euros, usually to take advantage of lower interest rates.
This can result in gains or losses as the currency exchange ratee moves relative to Sterling.
What is an equity-linked mortgage (aka a shared appreciation mortgage)?
The lender takes a stake in the equity of the property that has been purchased. The amount loaned, on which interest is charged is less than the amount advanced for the purchase.
On the sale of the property, the proportion of the lender’s equity stake is repaid to them. It is possible for the borrower to slowly accrue the lender’s equity stake over time.
