12. Suitability

Question 1

What should be considered with regards to suitability if a customer is likely to want to make early repayments? (2)

Answer 1

1. can they make repayments without penalty?
2. if there are charges, are they willing to pay this and is it outweighted by the benefits of the product?

Question 2

What might you recommend if a customer requires minimised initial payments? (2)

Answer 2

A low start or discount mortgage

Question 3

What should advisers always try to advise for the term of the mortgage?

Answer 3

Should always be shortest possible so long as it meets the borrower’s needs

Question 4

What considerations need to be taken into account with regards to term suitability? (5)

Answer 4

1. How does it affect monthly budget?
2. Preferred age to be MTG free?
3. Does cust think they are likely to want to pay off early (if so, avoid ERCs)
4. Lending into retirement - will there be enough income?
5. is cust aware than shorter terms = higher monthly payments and longer term = more borrowing allowed?

Question 5

What are the two main risks to consider with regards to suitability?

Answer 5

1. Not being able to repay
2. Interest rate changes

Question 6

How might there be a risk to someone’s home?

Answer 6

Repossession

Question 7

How might there be a risk of negative equity?

Answer 7

If house prices go down

Question 8

What types of mortgage might be suited to customers with the following attitudes to repayment risk?
1. Adventerous/significant risk
2. Balanced / limited risk
3. Cautious/minimal risk

Answer 8

1. Greater risk=higher reward. May want I/O and hope investment growth would lead to early repayment
2. interested in limited risk if the rewards are attractive. Might want a combo of I/O & CR
3. Important to ensure repayment, only C/R suitable

Question 9

What questions should we ask regarding customer’s attitudes to interest rates? (3)

Answer 9

1. Do they want certainty?
2. Are they worried about increases?
3. Do they have spare income to cover increases?

Question 10

What is used to limit the risk posed by increasing interest rates?

Answer 10

Stress testing

Question 11

Are advisers able to ask custs to rate their attitudes to risk on a scale of 1-10?

Answer 11

no, too subjective

Question 12

What two methods can be used for assessing attitudes to risk?

Answer 12

1. Questionnaires
2. Psychometric profiling

Question 13

According to Mcobs 4 & 11, what must a lender do with regards to the repayment strategy of I/O mortgages?

Answer 13

Must assess the strategy on whether it has potential to repay at the end of term. They need to have a strategy in place but the vehicle itself does not need to be in place.

Question 14

Should advisers give advice on repayment strategies?

Answer 14

No, only IFAs

Question 15

What is not considered a credible repayment strategy? (3)

Answer 15

1. expecting property to increase in value
2. using expected inheritance
3. sale of the property - if it is a main residence. Usually lenders wont allow unless they think it will have potential to buy another property and change strategy

Question 16

Should the cost of paying for a repayment vehicle be included within affordability assessments?

Answer 16

Yes

Question 17

What is the default repayment type that advisors should use when assessing affordability?

Answer 17

Should always assess affordability as if repayment type is C/R unless

there is a clearly understood and credible alternative

i.e. without a good repayment vehicle, affordability should be assessed as C/R and cust will be entitled to lower amount

Question 18

We know that lenders should carry out a review at least once during the term, but which types of mortgages are exempt from this? (3)

Answer 18

1. Lifetime
2. Retirement I/O
3. Bridging Loans

Question 19

What affordability checks are required for an interest only retirement mortgage?

Answer 19

Same as everyone else, just no repayment vehicle needed as repayment is made on death, moving into care or sale of property

Question 20

Who are Retirement I/O mortgages suitable for?

Answer 20

Those over a certain age who

wish to extend their I/O mortgage into retirement but DONT WANT A LIFETIME MORTGAGE