TOPIC 12 - Suitability Flashcards
An underlying basic principle of mortgage advice is that:
the recommended mortgage term should be as short as is affordable.
a 25-year mortgage term should be seen as the norm.
mortgages should never run past the borrower’s retirement age.
the recommended mortgage term should be as short as is affordable.
While 25 years is the most common term, the recommended mortgage term should be as short as is affordable. If it is intended to run past the borrower’s retirement age, the lender should take steps to ensure it will continue to be affordable.
Will, a mortgage adviser, is advising a client who has a preference for a capped-rate mortgage, because she would like to be able to budget but also benefit from any reduction in interest rates. Will does not have a capped-rate product in his portfolio. What should he do?
Recommend a fixed-rate mortgage with an interest rate no higher than the best capped rate on the market.
Recommend a discounted-rate mortgage, because the rate will be lower than a capped rate.
Decline to make a recommendation.
Decline to make a recommendation.
Which of the following would not be a potential risk for a discounted-rate repayment mortgage?
Negative equity.
Interest rate risk.
Investment risk.
Investment risk.
The risk of negative equity faces any borrower with a high loan-to-value mortgage, because if house prices fall their mortgage could be more than the value of the property. Interest rate risk would also apply, because the interest rate on discounted-rate mortgages is variable, albeit discounted form the normal rate for a period. Repayment mortgages are not exposed to investment risk.
The Financial Conduct Authority (FCA) has sought to temper the risk posed by interest rate rises by:
introducing tighter affordability criteria.
introducing an interest rate stress test.
promoting the use of fixed interest rates.
introducing an interest rate stress test.
Psychometric profiling is a process whereby the adviser uses software tools to:
assess the client’s psychological attitude to risk in general.
assess the level of risk in the client’s chosen mortgage.
decide the most appropriate investment vehicle to run alongside an interest-only mortgage.
assess the client’s psychological attitude to risk in general.
Psychometric profiling is a process whereby the adviser uses software tools to assess the client’s psychological attitude to risk in general. It considers how they would react to several ‘what if’ scenarios, both positive and negative, and their feelings about hypothetical situations.
MCOB 4.7a and MCOB 11.6 require lenders to make sure the customer demonstrates that they have arranged a clearly understood and ‘credible’ repayment strategy for interest-only mortgages. Which of the following is true?
The lender must ensure the customer receives advice on the strategy.
There are no specific rules about what a ‘credible’ strategy would be.
The lender must carry out annual checks during the mortgage term to ensure the strategy is still on target.
There are no specific rules about what a ‘credible’ strategy would be.
The lender is not required to provide advice on the strategy, and MCOB is not prescriptive about what is meant by a ‘credible’ strategy, although MCOB 11.6 provides some examples of strategies likely to be acceptable or unacceptable. For interest-only mortgages other than lifetime mortgages and bridging loans, the lender must carry out a review at least once during the mortgage term.
Which of the following would not be a potentially acceptable repayment strategy for an interest-only mortgage?
The use of quarterly bonuses and commission payments to reduce the balance.
The sale of a buy-to-let property also owned by the customer to repay the mortgage at the end of the term.
Reliance on growth in the property value so that it can be sold to repay the mortgage at the end of the term.
Reliance on growth in the property value so that it can be sold to repay the mortgage at the end of the term.
The use of additional irregular income to reduce the balance over time, or the sale of another asset owned by the borrower, would be acceptable as potential repayment strategies. Reliance on property growth to repay a mortgage would not be acceptable.
The lender must keep records of an interest-only mortgage for:
one year from the start of the mortgage.
three years from the start of the mortgage.
the term of the mortgage.
the term of the mortgage.
For which of the following interest-only mortgages is the lender not required to check during the term that a repayment strategy is in place and likely to meet its target?
Lifetime mortgage
Endowment linked
Fixed rate
Lifetime mortgage
For interest-only mortgages other than lifetime mortgages and bridging loans, the lender must carry out a review at least once during the mortgage term.
Which of the following would be most likely to be considered a credible repayment strategy for an interest‑only mortgage?
Using a pension commencement lump sum (PCLS) to pay off the loan.
Relying on the increase in value of the property to provide equity that can be released to pay off the loan.
Planning to use a promised inheritance from a relative.
Using the proceeds from the sale of another property owned by the borrower.
Using the proceeds from the sale of another property owned by the borrower.
Providing the value of the other property is equal to or greater than the sum needed to pay off the loan, this is most likely to be considered a credible repayment strategy. Using a PCLS might also be a credible approach but only if the pension pot is large enough to provide a PCLS equivalent to the loan. Relying on an inheritance or a substantial increase in the value of the property are both too uncertain.
For an interest‑only mortgage, how often must the lender carry out a review of the borrower’s repayment strategy?
Whenever the borrower requests it.
At least once during the term.
Halfway through the term.
At least once every five years.
At least once during the term.
