Questions
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 A full with-profits endowment policy.
C An interest-only mortgage with level term assurance.
D An ISA with decreasing 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. Tony and Anna have an interest-only mortgage with a low-cost with profits endowment policy as the repayment vehicle. Which of the following statements in respect of the policy 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.
5. 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%.
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 pre-determined 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.
10. Which of the following is true of a deferred interest mortgage?
The:
A borrower can choose to take a payment holiday for a set period each year.
B borrower receives a discount in the early years of the loan.
C debt will increase after an initial period.
D payments are interest only for an initial period.
11. Jennie has taken out a lifetime mortgage, which meets the SHIP Code of Practice requirements. If she takes advantage of the scheme's mortgage interest 'roll up' facility, what are the implications?
A Her interest payments will gradually decrease year on year.
B Her repayment vehicle may not be sufficient to repay the mortgage at the end of the term.
C It increases the debt which needs to be repaid on death.
D The arrangement might result in a negative equity situation if interest rates increase.
12. Sandra is considering a £150,000 interest only offset mortgage with a variable interest rate of 6.5%. After meeting the costs of the mortgage she will have £15,000 in a deposit account, earning 4% interest. Assuming no changes to interest rates, how much interest will she be charged each year if she offsets her savings?
A £8,775.
B £9,270.
C £9,375.
D £9,750.
13. In relation to CAT standard mortgages, some conditions apply to all loans and some to certain loans. Which of the following is a specific requirement for a fixed rate mortgage to meet CAT standards?
A Interest must be calculated on a daily basis.
B The arrangement fee cannot exceed £150.
C There can be no separate charge for a mortgage indemnity guarantee.
D There must be no early repayment charge levied at any time.
14. Apart from the need to budget, what other key factor can influence the attractiveness of a fixed rate mortgage compared to a variable rate mortgage?
A A desire to avoid early repayment charges.
B A desire to keep the mortgage term as short as possible.
C The ability to avoid future interest rate volatility.
D The borrower's state of health.
15. A commercial mortgage is best described as a mortgage where:
A the associated repayment vehicle is paid for with company funds.
B the borrower is a corporate entity.
C the lender makes a loan to a group of borrowers.
D the security for the loan is non-residential property.
16. Aggie is mortgaging her property using a lifetime mortgage. Will the loan be regulated by the Financial Services Authority?
A No, irrespective of her age.
B Only if she is over the age of 65.
C Only if she is under the age of 75.
D Yes, irrespective of her age.
17. Which of the following statements in respect of a low-start mortgage is correct?
A Additional forms of security are usually required.
B The borrower may be allowed to select an initial rate of interest within certain limits.
C The outstanding debt at the end of the low-start period will always be more than the original loan.
D They are structured on an interest-only basis for the initial period.
18. In which of the following transactions is the lender least likely to use the applicant's income from employment in determining how much to lend?
A Brian, who is purchasing a property on a shared ownership basis.
B Dean, who is purchasing his flat from his landlord, the local authority.
C Emma, who is purchasing a property with a buy-to-let mortgage.
D Lisa, who is purchasing a small house with an equity share mortgage.
19. Nigel has taken out a new mortgage that requires him to pay monthly rent as well as mortgage payments. What type of mortgage does he have?
A Deferred interest.
B Equity share.
C LIBOR.
D Shared ownership.
20. Which of the following statements is correct in respect of Sharia-compliant mortgages?
A Only the ljara method involves the payment of interest to the lender.
B The Murabaha method involves the payment of rent to the lender.
C Under the ljara method, the lender purchases the property and immediately sells it to the applicant.
D Under the Murabaha method, the property is purchased by the lender and sold to the applicant at a higher price.
ANSWERS & JUSTIFICATIONS
Q1 A Unit 5; U1.1
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.
B Assuming the basic life cover equates to the mortgage capital the mortgage will be repaid. However, this is an expensive way to purchase life assurance.
C Level term assurance is a cheap form of life cover, but without a repayment vehicle in place it is difficult to see how the loan can be repaid.
D An ISA is an investment vehicle with no guarantee to repay the mortgage at the end of the term. Decreasing term assurance is cheap life assurance but inappropriate if linked to an interest-only mortgage.
Q2 B Unit 5; U1.2
A Today, there is very little difference in interest rates offered between interest-only and capital repayment mortgages.
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.
C These days, it is not essential for an investment vehicle to be in place. Indeed, for some schemes, particularly for the elderly, this would be inappropriate.
D Because of the issue of ensuring that repayment can be made at the end of the mortgage term and with appropriate guaranteed vehicles very expensive, this type of loan is not appropriate for the risk averse.
Q3 D Unit 5; U1.2
A Pauline is risk averse and will therefore wish to guarantee repayment of the mortgage. ISAs do not offer this guarantee.
B Pauline is risk averse and will therefore wish to guarantee repayment of the mortgage. The type of interest payment preferred or recommended is incidental to this.
C Pauline is risk averse and will therefore wish to guarantee repayment of the mortgage. Relying on savings can be an act of faith and offer no guarantees. Many negative things can occur during a mortgage to damage this type of planning.
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.
Q4 A Unit 5; U1.4
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.
B 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.
C The terminology is not expressed properly. Annual bonuses are reversionary, not terminal and final bonuses are 'terminal' not reversionary.
D The terminology is not expressed properly. Annual bonuses are reversionary, not terminal and final bonuses are 'terminal' not reversionary.
Q5 C Unit 5; U1.4
A 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.
B 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.
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.
D 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.
Q6 D Unit 5; U2.1
A The capped rate is effectively a variable rate mortgage with a guarantee that a certain ceiling cannot be breached. This can be a slightly complicated arrangement for borrowers to appreciate.
B A complicated product where a lower interest rate is paid in the early years, with the shortfall capitalised and added to the original capital amount to be repaid over the balance of the term.
C LIBOR is the London Inter-Bank offered rate, something with which the general public is unfamiliar.
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.
Q7 C Unit 5; U2.2
A A lender can impose an arrangement fee on any of its mortgage products if it so wishes.
B It is common for early repayment charges to be part of a base rate tracker mortgage deal.
C The interest rate charged on base rate trackers is commonly substantially lower than the lender's standard variable rate.
D No cap is placed on base rate trackers, they are designed to follow the Bank of England base rate - wherever it goes.
Q8 B Unit 5; U2.4
A Fixed rate mortgages can usually be redeemed within the fixed rate period, but are usually subject to an early repayment charge.
B Arrangement fees are commonly charged on fixed rate mortgage deals.
C As this is a fixed rate mortgage, there will be no rate changes.
D As this is a fixed rate mortgage, there will be no rate changes.
Q9 D Unit 5; U2.5
A Capped rates can be standalone products and do not necessarily have a collar (floor) in place.
B A capped mortgage is essentially a variable rate mortgage moving freely below the cap but being limited to a maximum rate.
C By nature of the fact that the rate cannot exceed the cap, a capped mortgage cannot track the Bank of England base rate.
D A capped mortgage is essentially a variable rate mortgage moving freely below the cap but being limited to a maximum rate.
Q10 C Unit 5; U2.5
A Payment holidays are not a usual feature of deferred interest mortgages as they are already benefiting from a reduction in interest payments.
B A discount implies a lower rate is charged. However, with a deferred interest mortgage, the full rate is due but is simply paid later by capitalising it and adding it to the capital outstanding.
C Under a deferred mortgage, part of the interest is not paid initially, but at the end of the deferred period is capitalised and added to the outstanding debt.
D Interest is owed throughout the full mortgage term of a deferred mortgage.
Q11 C Unit 5; U2.6
A Under a roll-up facility no interest is paid until the property is sold.
B Home income plans are designed to cease at death or when the owner enters long term care. They are not expected to have a capital repayment vehicle in place other than the property value.
C No interest is paid but is accumulated and repaid from the proceeds of the property sale, often on death of the owner.
D SHIP offers a no negative equity guarantee.
Q12 A Unit 5; U2.8
A Under an offset mortgage the interest will be calculated on the net amount hence £150,000 less £15,000 = £135,000 @ 6.5% = £8,775.
B Under an offset mortgage the interest will be calculated on the net amount hence £150,000 less £15,000 = £135,000 @ 6.5% = £8,775.
C Under an offset mortgage the interest will be calculated on the net amount hence £150,000 less £15,000 = £135,000 @ 6.5% = £8,775. £9,075 assumes £150,000 @ 6.5% less £15,000 @ 4%.
D Under an offset mortgage the interest will be calculated on the net amount hence £150,000 less £15,000 = £135,000 @ 6.5% = £8,775. £9,750 makes no allowance for the offsetting amount of £15,000.
Q13 B Unit 5; U2.9
A Daily interest calculation and no MIG fees apply to all CAT mortgages. The arrangement fee for a fixed rate mortgage cannot exceed £150. The lender can charge an early repayment charge within limits
B Daily interest calculation and no MIG fees apply to all CAT mortgages. The lender can charge an early repayment charge within limits
C Daily interest calculation and no MIG fees apply to all CAT mortgages. The arrangement fee for a fixed rate mortgage cannot exceed £150. The lender can charge an early repayment charge within limits
D The lender can charge an early repayment charge within limits. Daily interest calculation and no MIG fees apply to all CAT mortgages. The arrangement fee for a fixed rate mortgage cannot exceed £150.
Q14 C Unit 5; U2.11
A Fixed rate mortgages commonly have early redemption penalties.
B The selection of a fixed rate should not influence the overall mortgage repayment period.
C Because rates are fixed for a pre-agreed period the mortgage is, for that time, free from the impact of interest rate movements.
D The borrower's state of health will not have a significant impact on the choice between fixed and variable rate mortgages.
Q15 D Unit 5; U3.1
A Commercial mortgages are available to those who wish to purchase non-residential property. The borrower could be an individual, a partnership or a company.
B Commercial mortgages are available to those who wish to purchase non-residential property. The borrower could be an individual, a partnership or a company.
C Commercial mortgages are available to those who wish to purchase non-residential property. The borrower could be an individual, a partnership or a company.
D Commercial mortgages are available to those who wish to purchase non-residential property. The borrower could be an individual, a partnership or a company.
Q16 D Unit 5; U3.2
A Lifetime mortgages are defined as those available only to borrowers over a certain age, as defined by the lender.
B Lifetime mortgages are defined as those available only to borrowers over a certain age, as defined by the lender.
C Lifetime mortgages are defined as those available only to borrowers over a certain age, as defined by the lender.
D Lifetime mortgages are defined as those available only to borrowers over a certain age, as defined by the lender.
Q17 D Unit 5; U3.3
A The security of the property concerned under usual circumstances will offer sufficient security for a low start mortgage.
B A low start mortgage is usually a defined lender offer on terms determined by them.
C Under a low start mortgage there is no roll-up, and capitalisation of the unpaid interest portion unlike a deferred interest mortgage.
D Under low start mortgages, the mortgage is interest-only at least for the agreed low start period, but then usually moves to capital repayment.
Q18 C Unit 5; U3.8
A A lender will usually consider the applicant's income when lending on a share ownership basis, as it is from income that repayments will be paid.
B A lender will usually consider the applicant's income under a right-to-buy mortgage as it is from income that repayments will be paid.
C As it is expected that rental income will pay the mortgage payments on a buy-to-let property, the applicant's income is of less importance.
D A lender will usually consider the applicant's income when lending on an equity share mortgage as it is from income that payments will be paid.
Q19 D Unit 5; U3.11
A Deferred interest mortgages entail the full purchase of the property so no rent will be paid.
B Equity share mortgages offer a reduction in the effective interest rate or payment in exchange for the lender retaining a proportion of the equity when the property is sold.
C A LIBOR mortgage usually entails the full purchase of a property with no rent to be paid.
D Shared ownership entails partial purchase of a property with rent to be paid on the remaining part.
Q20 D Unit 5; U3.14
A Only rent and capital are paid under the Ijara method.
B No rent is paid under the Murabaha method, which involves only payment of capital based on the price of sale from lender to buyer.
C Under the Ijara method, the bank buys the property and enters into a 'promise to purchase' a agreement by which the buyer pays capital and rent over the term.
D Under the Murabaha method, the bank buys the property at an agreed price and then sells it immediately to the client at a higher price.
