Due to the Mortgage Market Review, what strict eligibility criteria do lenders often apply to interest-only mortgages?
Lenders often require a large deposit (over 25%) and high annual earnings (£75,000 – £100,000).
The most popular type of mortgage, where the interest rate varies throughout the loan’s lifetime based on the lender’s discretion, is the _____.
Standard Variable Rate (SVR) mortgage
What type of variable rate mortgage has a direct and automatic link to an external interest rate, such as the Bank of England base rate?
A tracker mortgage.
What is a discounted mortgage?
It is a variable rate loan where the interest rate is set at a specified percentage below the lender’s standard variable rate for an initial fixed period.
A variable rate mortgage with an upper limit, above which the rate charged will not rise, is known as a _____.
Capped rate mortgage
What is a ‘collar’ in the context of a capped rate mortgage?
A ‘collar’ is a minimum interest rate that protects the lender against the rate falling too low.
How does an offset mortgage work?
Positive balances in the customer’s linked savings and current accounts are used to offset the mortgage debt, so interest is only calculated on the net balance.
Which type of mortgage operates like a current account with a large overdraft facility at mortgage interest rates?
A current account mortgage.
What is the purpose of a ‘repayment vehicle’ for an interest-only mortgage?
It is a separate long-term investment or savings strategy designed to build up a lump sum to pay off the mortgage capital at the end of the term.
What was the most popular investment vehicle historically used for interest-only mortgages, which combined a regular savings plan with life assurance?
An endowment policy.
Why are endowment policies no longer widely available as mortgage repayment vehicles?
Due to the endowment mis-selling scandal of the 1990s, where poor investment performance led to widespread shortfalls in repaying mortgages.
What is the tax-free part of a pension that can be used as a repayment vehicle for an interest-only mortgage?
The pension commencement lump sum (PCLS).
What is a key disadvantage of using a pension to repay a mortgage?
The money used to repay the mortgage is not available to provide an income in retirement, thus diluting pension provision.
What is the purpose of Mortgage Payment Protection Insurance (MPPI)?
It provides protection in case the borrower is unable to keep up mortgage payments due to accident, sickness, or unemployment.
What is the typical maximum period for which MPPI will pay benefits?
Benefits are typically payable for a maximum of twelve months or two years.
Why can providers not sell MPPI at the same time as a mortgage?
This rule was introduced following the PPI mis-selling scandal to give borrowers a cooling-off period to consider the product.
What is the cheapest and most appropriate type of term insurance to cover a repayment mortgage?
Decreasing term insurance.
How does a mortgage protection policy (a type of decreasing term insurance) work?
The amount of cover reduces each year, roughly in line with the outstanding capital on a repayment mortgage, while the premium remains fixed.
What is the primary use of level term insurance in a mortgage context?
It provides the protection needed to repay the full capital under an interest-only mortgage if the borrower were to die early.
What protection product can be added to a term insurance policy to pay out on the diagnosis of a specified serious illness?
Critical illness cover (CIC).
What is the term for products that allow individuals, typically over 55, to access cash tied up in their property?
Equity release products.
In the context of property ownership, what does ‘equity’ refer to?
Equity is the difference between the current value of the property and the remaining mortgage debt owed.
What are the two main types of equity release products?
Lifetime mortgages and home reversion plans.
Which type of equity release product involves taking out a mortgage on the property, with repayments typically deferred until death or entry into care?
A lifetime mortgage.
