Topic 23 Flashcards
Interest-rate options (33 cards)
What is a standard variable‑rate (SVR) mortgage?
A mortgage where the interest rate varies at the lender’s discretion, usually in line with changes in the Bank of England base rate, but the lender decides whether and when to change its SVR.
A mortgage where the interest rate varies at the lender’s discretion, usually in line with changes in the Bank of England base rate, but the lender decides whether and when to change its SVR.
Lower product fees, usually no early repayment charges, and flexibility for borrowers who do not want to be locked into a deal.
What are the disadvantages of an SVR mortgage?
No protection against steep interest rate rises, frequent payment changes in volatile markets, difficult budgeting, and no portability option.
Why have many lenders moved away from offering SVR mortgages?
They now prefer offering discounted or tracker mortgages, which are more attractive to borrowers and competitive in the market.
What is a discounted‑rate mortgage?
A variable‑rate mortgage offering a discount from the lender’s SVR for a set period, after which it reverts to the SVR.
How does a stepped discount mortgage work?
The discount changes over time, e.g., 1% in year one, 1.25% in year two, and 1.5% in year three.
What are the main considerations for a discounted‑rate mortgage?
Possible product and application fees, early repayment charges, compulsory purchases (rare), and no protection against SVR increases.
What is a tracker mortgage?
A variable‑rate mortgage that tracks a specified benchmark, usually the Bank of England base rate, by a set percentage for a defined period.
What is a base‑rate tracker mortgage?
A tracker mortgage that follows the Bank of England base rate, typically for up to five years, at a set margin above or below the base rate.
What happens to a tracker mortgage when the base rate changes?
The mortgage rate adjusts by the same amount as the base rate change, maintaining the agreed margin.
What is an interest‑rate ‘collar’?
A minimum rate below which a tracker mortgage cannot fall, introduced after base rates dropped very low in 2009.
What charges may apply to a tracker mortgage?
Product fees, application fees, early repayment charges, and possibly compulsory purchases (rare today).
Can borrowers make overpayments on a tracker mortgage?
Yes, typically up to 10% of the initial mortgage per year without penalty.
What is a fixed‑rate mortgage?
A mortgage where the interest rate is fixed for a set period (typically 1–5 years), after which it usually reverts to the lender’s SVR.
How do lenders fund fixed‑rate mortgages?
By raising funds at a fixed rate in the wholesale money markets and lending them out at a higher rate to make a profit.
What is the main advantage of a fixed‑rate mortgage?
Predictable monthly payments and protection against interest rate increases during the fixed term.
What are the main disadvantages of a fixed‑rate mortgage?
No benefit if interest rates fall, early repayment charges, fees (application/product), and possible associated purchase requirements.
What is a portability option on a fixed‑rate mortgage?
The ability to transfer the mortgage to a new property without incurring early repayment charges, subject to lender approval and policy.
Why do lenders impose early repayment charges on fixed‑rate mortgages?
To recover losses if a borrower redeems early, as the lender would need to re‑lend the funds, possibly at a lower rate.
What is a capped‑rate mortgage?
A mortgage where the rate varies with the lender’s SVR but cannot exceed a preset cap. If the SVR drops, the borrower benefits from lower payments; if it rises above the cap, the borrower only pays the capped rate.
Who is a capped‑rate mortgage suitable for?
Someone expecting interest rates to rise who wants the security of a maximum payment but would like to benefit if rates fall.
What are some features of capped‑rate mortgages?
Likely application/product fee, early repayment charge during capped period, possible charge‑free overpayments, and portability options.
Why are capped‑rate mortgages less attractive when fixed‑rate rates are low?
Because the benefit of a capped rate is reduced when fixed‑rate mortgages already offer low, predictable rates.
What is an interest‑rate collar?
A feature where the mortgage rate cannot go below a set minimum (collar) or above a set maximum (cap).
