6.1 Repayment Methods

Question 1

Which of the following is TRUE regarding a capital repayment mortgage?

A. The capital is paid off through sale of the property at the end of the term
B. Only interest is repaid during the term
C. It requires a separate investment vehicle to repay the loan
D. The loan is guaranteed to be repaid if payments are maintained

Answer 1

D. The loan is guaranteed to be repaid if payments are maintained

Explanation: A capital repayment mortgage repays both interest and capital over time, so the loan is guaranteed to be cleared by the end of the term if payments are made as agreed.

Question 2

Under MCOB 4.7A, what must a lender ensure when a borrower selects an interest-only mortgage?

A. That the borrower uses an endowment policy as the repayment vehicle
B. That the borrower understands the capital is due at the end of the term
C. That the borrower pays more than the required interest
D. That the property is sold halfway through the mortgage term

Answer 2

B. That the borrower understands the capital is due at the end of the term

Explanation: MCOB 4.7A requires that borrowers fully understand their obligation to repay the capital at the end of the term for interest-only mortgages.

Question 3

Which of the following repayment vehicles is generally NOT considered credible by lenders?

A. Pension plan
B. Sale of a second property
C. House price inflation
D. Stocks and Shares ISA

Answer 3

C. House price inflation

Explanation: House price inflation is not a guaranteed or reliable repayment method and is therefore not considered a credible repayment vehicle.

Question 4

Which type of mortgage is most suitable for a Buy to Let investor who plans to sell the property to repay the loan?

A. Capital repayment mortgage
B. Retirement Interest Only mortgage
C. Pure interest-only mortgage
D. Offset mortgage

Answer 4

C. Pure interest-only mortgage

Explanation: A pure interest-only mortgage is only suitable for Buy to Let, where the property sale is expected to repay the loan at the end of the term.

Question 5

In a capital repayment mortgage, how are early payments typically structured?

A. Mostly interest with a small portion of capital
B. Only capital
C. Mostly capital with some interest
D. Equally split between capital and interest

Answer 5

A. Mostly interest with a small portion of capital

Explanation: In the early years of a capital repayment mortgage, most of the monthly payment goes toward interest, with less paying off the capital.

Question 6

A borrower has an interest-only mortgage but no repayment vehicle in place. Which of the following is MOST likely to be a suitable mortgage for this individual?

A. Shared ownership mortgage
B. Lifetime mortgage
C. Retirement Interest Only (RIO) mortgage
D. Help to Buy equity loan

Answer 6

C. Retirement Interest Only (RIO) mortgage

Explanation: A RIO mortgage is designed for older borrowers with no repayment plan. The property is sold on death or moving into care to repay the capital.

Question 7

Which of the following is a DISADVANTAGE of a capital repayment mortgage?

A. Monthly payments are usually lower than interest-only
B. Capital is not repaid during the term
C. The mortgage relies on investment performance
D. Separate life cover is required

Answer 7

D. Separate life cover is required

Explanation: Capital repayment mortgages do not include life cover, so separate protection is needed in case of death during the term.

Question 8

According to MCOB 11.6.4.9, what is a lender required to do during the term of an interest-only mortgage?

A. Check the repayment vehicle is still in place and on target
B. Provide financial advice about the repayment vehicle
C. Increase the borrower’s monthly repayments
D. Convert the mortgage to a capital repayment plan

Answer 8

A. Check the repayment vehicle is still in place and on target

Explanation: Lenders must check the repayment plan is still in place and on track, giving the borrower enough time to act if needed.

Question 9

A borrower chooses an interest-only mortgage with an ISA as a repayment vehicle. What is the main RISK involved?

A. The mortgage may be paid off too early
B. The ISA may not grow enough to cover the capital
C. The borrower will pay less total interest than expected
D. The interest payments will include capital

Answer 9

B. The ISA may not grow enough to cover the capital

Explanation: Interest-only mortgages carry the risk that the investment vehicle (e.g. an ISA) may not grow enough to repay the capital owed at the end.

Question 10

Which of the following is TRUE about Retirement Interest Only (RIO) mortgages?

A. They are only suitable for first-time buyers
B. They require a pension plan as a repayment vehicle
C. Capital is repaid through monthly payments
D. Capital is repaid when the borrower dies or enters care

Answer 10

D. Capital is repaid when the borrower dies or enters care

Explanation: RIO mortgages are open-ended interest-only mortgages designed for older borrowers. The capital is repaid from the sale of the property on death or entering care.