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Any answers?

Mortgage Solutions | 21 Sep 2009 | 07:00

Mortgage Solutions

Mortgage Solutions’ regular training page produced in association with CeMap services.

1 Which of the following would provide a borrower
with a high degree of certainty that the loan will
be repaid in full by the end of the mortgage term,
together with a cheap form of life assurance?


a) A capital repayment mortgage with decreasing
term assurance.
b) An interest-only mortgage with a full with-profits
endowment policy.
c) An interest-only mortgage with an ISA and
decreasing term assurance.
d) An interest-only mortgage with level term assurance.

2 Which of the following is true in relation to
interest-only mortgages?

a) Interest rates tend to be slightly lower than repayment
loans.
b) The monthly payments to the lender will be lower
than with a repayment mortgage.
c) There must be an investment vehicle in place to
repay the loan.
d) They are suitable for risk averse borrowers.

3 Pauline is taking out an interest-only mortgage without a repayment vehicle, to minimise her initial monthly payments while she completes her accountancy qualifications. However, she is fairly risk averse. What available option is likely to suit
her once she has passed her exams?

a) Fund ISAs to repay the capital.
b) Maintain the loan on a fixed interest basis.
c) Rely on savings from her increased earnings.
d) Transfer to a capital repayment basis.

4 What is the maximum tax-free cash available from a personal pension plan used to repay a mortgage?

a) 15%
b) 20%
c) 25%
d) 30%

5 Tony and Anna have an interest-only mortgage with a low-cost with-profits endowment policy as the repayment vehicle. In respect of the policy, which of the following statements is correct?

a) Annual reversionary bonuses and a terminal bonus may be added to the   guaranteed sum assured, but these are not guaranteed.
b) Annual reversionary bonuses may be added to the guaranteed sum assured, although they are not guaranteed and a terminal bonus is guaranteed to be added at maturity.
c) Annual terminal bonuses and a final reversionary bonus may be added to the guaranteed sum assured, but these are not guaranteed.
d) Guaranteed annual reversionary bonuses are added to the guaranteed sum assured, and a terminal bonus may be added although this is not guaranteed.
6 Which type of mortgage is likely to be most attractive to those who want a straightforward, easy to understand arrangement?
a) Capped
b) Deferred
c) LIBOR linked
d) Variable rate
7 Which of the following could be considered as an advantage of a base rate tracker mortgage over a standard variable rate mortgage, both offered by the same lender?
a) An arrangement fee is unlikely to be payable.
b) An early repayment charge is unlikely to apply.

c) The interest rate charged is likely to be lower.

d) The interest rate charged will not exceed a predetermined level.

8 Which of following statements is correct in respect of a five-year fixed rate mortgage offered by Eastern Bank?
a) It cannot be redeemed during the five-year fixed
rate period.
b) The Bank is likely to charge an arrangement fee.
c) The rate charged will always be higher than the
Bank's standard variable rate.
d) The rate charged will always be lower than the
Bank's standard variable rate.
9 Nikki is considering a capped rate mortgage. Which of the following statements is true?
a) Capped rate mortgages always have a collar (or
floor).
b) The interest rate is fixed below the cap.
c) The interest rate will track the Bank of England
base rate.
d) The interest rate will vary with the lender's variable
rate up to the cap.
10Which of the following is true of a low-start
mortgage?
a) The borrower can choose to take a payment holiday for a set period each year.
b) The borrower receives a discount in the early
years of the loan.
c) The debt will increase after an initial period.
d) The payments are interest only for an initial
period.

Answers

1 a) As long as the payments are maintained as required on a capital repayment mortgage, there is a guarantee that the mortgage will be paid off. In addition, decreasing term cover reducing in line with the capital outstanding offers the cheapest life cover.
2 b) Because the monthly payments do not include the repayment of part of the capital, they are lower for interest-only mortgages than for capital repayment mortgages.
3 d) Pauline is risk averse and will therefore wish to guarantee repayment of the mortgage. If Pauline switches to a capital repayment basis and maintains her payments, the loan is guaranteed to be repaid by the end of the term.
4 c) Under current legislation, 25% of all pension funds, including personal pensions, can be taken as a tax-free lump sum with the balance used to purchase a pension. The lump sum can be used for any purpose, including mortgage repayment.
5 a) Modern with profits endowment policies usually have annual bonuses, called reversionary, added to them, and a terminal bonus at maturity. As both of these rely on the investment performance of the underlying life fund, they cannot be guaranteed.
6 d) The variable rate is very simple, with the rate changing as the Bank of England base rate changes, although rate changes are not guaranteed to move in line, they will follow the trend.
7 c) The interest rate charged on base rate trackers is commonly substantially lower than the lender’s standard variable rate.
8 b) Arrangement fees are commonly charged on fixed rate mortgage
deals.
9 d) A capped mortgage is essentially a variable rate mortgage moving
freely below the cap but being limited to a maximum rate.
10 d) Payments are interest only for an initial period and then move to capital repayment.

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