Unit 6:20 How Mortgages Get Paid Off

Question 1

Capital Repayment Mortgages

Answer 1

• Monthly payment combines capital repayment and interest; fixed amount maintains consistent payment schedule
• Slow start effect: Initial payments mostly service interest with minimal capital reduction; equity builds faster in later years
• Consistent payments throughout term ensure loan fully repaid by agreed end date
• Interest rate changes trigger payment recalculation to maintain original term length
• No Built-in Life Cover, you have to take out insurance

Question 2

Flexibility with Capital Repayment Mortgages

Answer 2

• Reacting to Rate Changes: Maintaining same payment during interest rate drops accelerates mortgage repayment
• Extra Payments: Regular overpayments can significantly reduce mortgage term
• One-Off Lump Sums: Occasional larger payments help shorten overall repayment period
• Temporary Relief: Lenders may permit reduced payments during financial difficulty

Question 3

Interest-Only Mortgages

Answer 3

• No Capital Reduction
• Lower Monthly Payments:
• Repayment Vehicle Required: Separate investment plan needed to accumulate funds for settling debt at end of term
• Full Repayment Due: Entire borrowed amount must be repaid in lump sum at end of mortgage term

Question 4

MCOB Regulations for Interest-Only Mortgages

Answer 4

• MCOB 4.7A: Lenders must ensure borrowers have clear and credible repayment strategy capable of repaying loan at term end
• MCOB 11.6.4.9: Lenders required to conduct at least one review during mortgage term

Question 5

Interest Calculation Methods

Answer 5

• Annual Rest: Interest calculated once yearly (typically January 1st); payments accounted for but only reduce debt at year-end
• Monthly Rest: Interest calculated at start of each month based on outstanding balance; payments immediately reduce debt
• Daily Rest: Interest calculated daily; payments or overpayments instantly shrink debt, maximizing interest savings

Question 6

Annual Percentage Rate of Charge (APRC)

MCD Regulated Mortgages

Answer 6

• Introduced by Mortgage Credit Directive in 2016 as comprehensive measure of borrowing costs
• Includes arrangement fees, valuation fees, and insurance premiums
• Enables more accurate comparison between different lender offerings
• Represents true cost of mortgage beyond just interest rate

Question 7

Second APRC Requirements

Answer 7

• Capped Interest Rate: Must assume rate will rise to cap at earliest opportunity
• Uncapped Variable Rate: Must use highest borrowing rate from past 20 years
• Linked to External Index: Must consider highest rate for that index in past 20 years
• No External Reference Rate: Must use highest benchmark rate specified by FCA or other authority