Topic 3 - Borrowing Products Flashcards
(96 cards)
1
Q
What is the main reason ppl borrow money over a long period?
A
- to fund large expenditures: a house, car, study at uni, emergency life event
2
Q
What providers sell loan products specially designed for MT + LT borrowing?
A
- banks
- building societies
- friendly societies
- credit unions
- finance companies
- insurance companies
3
Q
How can the process ‘rolling over’ (using a ST borrowing product for a LT purpose) be done?
A
- by a credit card or overdraft
4
Q
What should the length of a loan reflect + relate to?
A
- type + size of expenditure
- affordability of monthly repayments
5
Q
What is a mortgage?
A
- a very LT loan to finance the purchase of a property
- loan secured on property being bought
6
Q
What groups can mortgage borrowers be categorised into?
A
- first-time buyers
- existing customers moving home
- existing customers switching their mortgage
- existing customers inc. their mortgage
7
Q
Why might existing customers move home?
A
- may be moving to new area
- buying larger home bc family grown
- buying smaller home bc can’t afford cost of present 1
8
Q
Why might existing customers inc. their mortgage?
A
- may need money for another purpose (e.g. building extension)
- lender only allows if inc. equity
9
Q
What are residential mortgages?
A
- loans for ppl buying their own home
10
Q
Why are mortgages not available to anyone under 18?
A
- as a customer must have full legal capacity to borrow
11
Q
What costs must a person pay at the time of purchase when buying their own home?
A
- a survey of the property
- legal fees
- stamp duty if property is > a certain value
- a mortgage application fee
- insurance
- cost of furnishing + fitting property
12
Q
What is the amount a customer can borrow closely connected to?
A
- how much they can afford to repay: connected to income
13
Q
What are the 2 main aspects determining how much a provider will lend to a mortgage customer?
A
- loan to income (LTI)
- loan to value (LTV)
14
Q
What is loan to income (LTI)?
A
- ratio of size of loan to income of customer
- means the lower someone’s income, the less they can borrow
15
Q
What calculation is used to calculate the max. amount someone can borrow/ their discretionary income?
A
- basic annual salary + any xtra annual income - monthly credit commitments
16
Q
What is the mortgage lenders responsibility?
A
- to check borrower can afford to repay loan
- have accurate info ab borrower’s income
17
Q
What is the max. amount mortgage lenders can lend?
A
- 4.5x income to 15% of their total new residential mortgage applicants (only applies to lenders lending >£100M/yr
18
Q
What is loan to value (LTV)?
A
- ratio of size of loan to value of property
19
Q
What is the equity of the owner?
A
- diff. between property value + amount lent
20
Q
What is the relationship between the mortgage period + amount of monthly repayment?
A
- the longer the mortgage period, the lower the amount of the monthly repayment
- longer = higher interest to pay
21
Q
Why is the age of the borrower a deciding factor of the mortgage term?
A
- as bank will want to know borrower will be of working age throughout period of mortgage
22
Q
What are the 2 types of payment someone must make when borrowing money on a mortgage?
A
- capital
- interest
23
Q
What is capital?
A
- total amount they borrowed (paid back in full)
24
Q
What must the borrower pay interest on?
A
- amount borrowed over period of yrs of mortgage
25
What are the 2 types of mortgages?
- repayment mortgages
- interest-only mortgages
26
What are repayment mortgages?
- has a monthly repayment instalment that inc. some capital + some interest
- most common
- amount of instalment doesn’t change (unless variable rate mortgage) but proportions of capital + interest changes
- when last instalment has been made: debt is settled
27
What is an interest-only mortgage?
- monthly repayment covers only interest on amount borrowed (for whole mortgage period)
- at end of mortgage period borrower must repay full amount borrowed in 1 payment
28
How do borrowers pay full amount borrowed in 1 payment at end of mortgage period when using an interest-only mortgage?
- must have financial plan: to afford repayment
- lenders responsibility to check plan is likely to succeed
29
What are examples of repayment methods for an interest-only mortgage?
- endowment insurance policy
- stocks + shares ISA/unit trust/OEICs/investment bonds
- stocks + shares
- personal pension
- sale of second home
- sale of other residential property not yet purchased
30
What are part interest-only + part repayment mortgages?
- part of monthly instalment represents capital (not full amount)
- so borrower must have a repayment plan to pay the capital shortfall at end of mortgage period
31
What are mortgage borrowers always advised + why?
- advised not to borrow limit of what they can afford + leave a margin of safety
- so can continue to repay mortgage if interest rates rise + so monthly repayments inc
32
What are the main interest categories of mortgage?
- fixed-rate mortgage
- variable-rate mortgages
- discounted mortgages
- offset mortgages
- loyalty mortgages
- mortgages to help 1st time buyers
33
What is a fixed-rate mortgage?
- fixes interest rate for a stated number of yrs at start of mortgage
34
What are the benefits + disadvantage of a fixed-rate mortgage?
- if interest rates rise during fixed period, they will continue to pay lower fixed rate
- provides certainty that monthly payment won’t change: helps draw up budget
- if interest rates fall, will will continue to pay fixed rate
- charges early repayment fee (can be expensive)
35
What happens to the interest rate at the end of the fixed rate period of a fixed-rate mortgage?
- becomes variable for remaining term of mortgage
36
What is a variable rate mortgage?
- borrower pays a rate of interest subject to change from outset + throughout term of mortgage
- some linked directly to leader’s basic mortgage rate
37
What is the variable mortgage rate usually known as?
- standard variable rate (SVR)
38
What risks do variable rate mortgages have + not have?
- have interest rate risk
- doesn’t have risk of coming to end of a fixed rate period + being unable to pay higher SVR
39
What is a tracker (form of variable-rate mortgage)?
- interest rate charged ‘tracks’ changes in other specific interest rate
- tracker rate may apply for specific number of yrs or for lifetime of mortgage
40
What is a discount mortgage?
- a variable-rate mortgage that gives customer a set discount off providers SVR for an agreed period (e.g. 2 yrs)
- customer benefits from lower initial monthly payments
- however may give unrealistic idea of ability to afford mortgage
41
Who are discount mortgages suitable for?
- borrowers on moderate income but expect their income to rise over next few yrs
- however early repayment fee
42
What is an offset mortgage?
- sets interest that would have been earned on borrower’s savings + current account against interest owing on mortgage
- so either make a lower monthly repayment or continue to pay same amount each month but reduce number of yrs of mortgage term
43
What does the offset mortgage allow ppl to do?
- pay less interest on mortgage but to retain flexibility provided by their savings, by giving up interest rate earned on them: so has ready money in case of financial emergency
44
What are loyalty mortgages?
- offer rewards or loyal customers
- encourages customers to not switch their current account + enables them to benefit from 1 product bc of their purchase of another
45
What is a mortgage scheme that has been introduced to helps 1st time buyers?
- the savings of a family member can be linked to a mortgage loan
46
What combination does the interest rate charged depend on?
- whether product is a fixed rate or variable rate mortgage
- if a fixed rate mortgage, number of yrs which rate is fixed
- LTV ratio
- whether customer qualifies for a loyalty mortgage
- whether customer is remortgaging property
47
What are ‘home purchase plans’?
- products dev. to allow Muslims to finance purchase of property + comply w Islamic religious law (Sharia law)
48
What does Sharia forbid + why?
- the payment or receipt of interest bc 1 party would gain at expense of another w/o regard to value of goods traded (conflicts w Islamic principle of equality)
49
What does Sharia law allow?
- sharing of risk + profit
50
What are the 2 main methods used to provide finance to Muslims?
- the Ijara method
- the Murabaha method
51
What is the Ijara method?
- provider buys client’s selected property
- provider then sells property to client for same price under ‘a promise to purchase agreement’, w repayment spread over a term up to 25yrs
- provider owns property during repayment term
- client pays a lease during payment term: fixed monthly amount (1 yr at a time) combining capital repayment + rent
- at end of term ownership is transferred to client
- more expensive method than mortgage due to rent
- provider makes profit from payment of rent
52
What is the Murabaha method?
- provider buys property at an agreed price + then sells it immediately at a higher price
- higher price is how provider makes a profit
- more expensive than Ijara method
53
What happens if a borrower has difficulties making repayments to the mortgage lender (e.g. loses their job/falls ill)?
- FCA states lender must treat customers fairly + show patience
- inc. setting up payment plan that’s practical for them + not putting pressure from too many calls or letters
54
What is another e.g. of loan forbearance?
- a payment holiday
- when provider allows customer to stop making repayments for a limited period if period is likely to be short
55
What might a payment holiday also allow?
- make payments for a limited period
- extend mortgage time to dec. monthly repayments 
56
What are the advantages of loan forbearance?
- provides support to customers having financial difficulties + helps maintain good relations between customer + provider
- prevents ppl from being homeless + placing a burden on local authorities + social services
- enhances providers rep + reflects its citizenship/corporate social responsibility policy
- main provider doesn’t have to write off loan + absorb loss in its accounts
57
What are the disadvantages of loan forbearance?
- once customer’s financial difficulties are resolved: faced w higher repayments to make up shortfall that arose whilst making dec. or no repayment
- lender is keeping loan on its books as an asset but may have to write off part or all of loan later. Doesn’t recognise weakness of loan. It should make provisions against its forbearance policy.
58
What is the risk faced by a mortgage lender?
- credit risk (risk borrower may be unable to repay loan)
59
What is repossession?
- when lenders repossess property + sell it to repay loan however still need to write off part of debt
60
What is negative equity?
- when value of property falls below amount owned if market prices fell
- so may not sell for sufficient amount to clear debt
61
Why does the gov. intervene in the mortgage market?
- to help those who cannot afford to buy a home
- intervenes w various home ownership schemes 
62
What are examples of gov. home ownership schemes?
- help to buy equity loans
- help to buy mortgage guarantees
- lifetime ISAs
- shared ownership schemes
63
What are help to buy equity loans?
- open to 1st time buyers + home-movers on new build homes
- purchaser provides deposit of 5% of purchase price, lender provides a mortgage of 75% + gov. pays remaining 20% via an equity loan: means gov. ‘owns’ 20% of property
- if selling they must repay equity loan + can repay some of equity loan w/o selling
- for London properties (worth up to £600,000) gov. will pay up to 40% via equity loan
64
What can a lifetime ISA be used for?
- to buy a 1st home or to save for retirement
65
What are shared ownership schemes?
- provided through housing associations
- borrower buys a share of their home, takes out a mortgage + pays rent on remaining share
66
What are the qualifications for a shared ownership scheme?
- household must earn £80,000/yr or less (£90,000 in London)
- must be a 1st time buyer
- must be renting a council or housing association property
67
Why have there been criticisms about Gov. home ownership schemes?
- ppl argue ppl being helped to buy a home cannot afford to repay mortgage + are more likely to default
- critics say schemes will destabilise mortgage market + should be permanent
68
What are buy-to-let mortgages?
- a long time secured loan taken out by a person who is buying a property w the intention of letting it to tenants (owner of property becomes landlord)
- aim: borrow money to buy property + cover repayments w rents received
69
What are the risks of buying a property to rent it out?
- value of property might fall
- may be vacant periods when a tenant can’t be found
- tenants may fail to pay rent or cause damage
70
What should the prospective landlord consider when resenting out a property?
- the lvl of demand in various areas + choose a location accordingly
- type of ppl they want to rent their property to + choose property to suit those tenants
- prices of property in chosen area + how it might change in future (if prices rise may benefit from capital gain)
71
Why must a prospective landlord need to do many calculation and what are examples of additional costs to the mortgage repayments?
- to ensure the project looks feasible
- additional costs: stamp duty, legal fees, insurance, furniture + fittings, service charges, maintenance + repairs, ground rent if property is leasehold
72
Why must the landlord draw up a budget + what do they need to take into account?
- to show expected income + outgoings for period of mortgage (or at least several yrs ahead)
- any inc. in interest rates that might happen in future
- how budget will be affected for periods when property is empty: if no rent coming in, must absorb all costs themselves
73
What legal considerations should a landlord have?
- ensure they have a valid tenancy agreement
- property + it’s utilities are safe (e.g. safety checks on gas + electricity installations)
74
What is a hire purchase?
- a credit or ‘consumer finance’ contract provided by a finance company to someone buying high-value consumer goods (e.g. vehicles or furniture)
- allows consumer to spread cost of item over time (usually 2-5 yrs)
75
How does a hire purchase work?
- company lends all or part of purchase to purchaser + purchaser repays in instalments
- so purchaser can’t sell/dispose of goods w/o lender’s permission until final payment has been made
76
What happens if the purchaser can’t afford payments or no longer need the goods from a hire purchase?
- can terminate a hire-purchase agreement in writing + return goods at any time
- if payments less than 50% of total price of goods, may need to make payment so 50% has been made
- not entitled to a refund
77
Who are hire purchases regulated and authorised by?
- regulated by Consumer Rights Act 2015
- authorised by Financial Conduct Authority (FCA)
78
Why are hire purchase contracts secure?
- lender can repossess goods w/o court order if purchaser falls behind w repayments + has paid > 1/3 of total repayments
- if > 1/3, company must obtain court order to repossess goods + then can sell goods at at auction + use proceeds to repay outstanding debt. If it doesn’t completely settle debt, purchaser is liable for difference + court costs
79
What may finance companies be?
- some are subsidiaries to well known banks
- that own goods until final instalment + purchase fee are paid
- some are independent + often specialise in loans for particular purposes
80
What is a ‘buy now, pay later’ offer?
- when they obtain goods immediately but don’t begin paying back until stated number of months later
81
What are similar to hire purchase agreements?
- conditional sale agreements
82
What is a personal contract purchase plan?
- a flexible product for the purchase of a new/newly new vehicle
- customer chooses a car, deposit they want to pay, number of yrs they want contract to run for + mileage they intend to do in car
- receive fixed-cost motoring for term of contract (when ended can buy car outright for agreed lump sum or give car back)
83
How does the personal contract purchase work?
- purchased car is given a guaranteed future value (GFV)
- GFV + deposit made by customer deducted from from cash price of new car
- monthly payments calc on basis of outstanding balance + interest
84
What is the Student Loan Company?
- a not-for-profit gov-owned organisation set up to provide loans + grants to students in unis + collages
- pays loans + non-repayable grants to cover living costs + studying expenses + provides loans to meet costs of tuition fees (pays directly to uni on behalf of student)
85
What are the main types of student loans?
- tuition fee loans
- maintenance loans
86
What is a tuition fee loan?
- granted to student to enable them to pay tuition fees of their course
- not financially assessed
- interest charged
- paid in 3 instalments: 25% at start of Terms 1+2, 50% at start of Term 3
87
What are maintenance loans?
- covers living expenses collected by students on full-time courses
- part of loan depends on income of student’s household
- available once confirmation received they study at the uni or college
- usually paid into student’s bank account in 3 instalments
88
What does max. amount of maintenance depend on?
- where they live
- yr of their course
- entitlement to other financial support (e.g. bursaries)
89
How are repayments of student loans, for courses between 1 Sept 1998 + 1 Sept 2012, done?
- earliest can start repaying is April after graduation/leaving course
- must earn > a specific min. threshold + pay 9% of gross income above level
- usually taken by HMRC via PAYE system until loan has been paid off, graduate reaches 65, dies or becomes permanently unfit for work
90
How are repayments of student loans after 1 Sept 2012 done?
- earliest graduate can start repaying is April after graduating/leaving course
- earnings threshold > for Plan 1 + rises w inflation
- loans cancelled 30 yrs after April when 1st become eligible for repayment
91
What are the risks associated w borrowing money?
- person may be unable to keep up repayments they agreed to make
- bc may lose income due to unemployment/illness or their business fails; or might die during mortgage period
- property might lose its value over period of loan (risk being in negative equity)
92
What are the losses a person faces when losing their home?
- lose their original deposit
- made a number of repayments
- have to find somewhere else to live + pay moving expanses + rent
- stress + upheaval from losing home
93
What are the 2 types of insurance?
- life insurance
- payment protection insurance
94
What is life insurance?
- for someone w a repayment mortgage, it’s taken out on a dec-term basis: amount insured dec. as capital sum is repaid
- if insured person dies during the mortgage term, the life policy pays out a lump sum that covers amount of outstanding debt + family are free of debt
95
What can a payment protection insurance (PPI) apply to?
- a mortgage
- a personal loan
- a hire purchase agreement
96
What does a PPI cover?
- loss of earnings due to accident, sickness or involuntary unemployment during period of loan
- policies not cheap
