MIp40-41_0210:MI 12 Jan 21/01/2010 15:53 Page 3
Training
41
9.Sally has started a discount mortgage. What
month. £782.40 - £600 = £180 (rounded) interest payable only comes into play at the
are the implications of this arrangement?
per month. end of each monthly period, the actual cost
A - It will not protect her from rising interest
B- The capital repayment cost is £6.52 per will be a little greater than the daily basis.
rates.
£1,000 borrowed, making a monthly cost of D- Because these methods relate to when
B - She is certain not to pay more than the
£6.52 x 120 = £782.40. Interest-only is 6% capital is repaid, they achieve different
Bank of England base rate during the
of £120,000 = £7,200 annually, or £600 per results with daily offering the cheapest
discounted period.
month. £782.40 - £600 = £180 (rounded) option.
C - She will receive a bonus payment on
per month. Q7 -Correct answer: A
completion of the discounted period.
C- The capital repayment cost is £6.52 per A- Because the rate is linked to LIBOR,
D -The discount will be added to the capital
£1,000 borrowed, making a monthly cost of determination of movement is out of the
at the end of the discount period.
£6.52 x 120 = £782.40. Interest-only is 6% hands of the lender.
of £120,000 = £7,200 annually, or £600 per B- LIBOR mortgages follow the London Inter-
10.10.What advantage does a typical capped
month. £782.40 - £600 = £180 (rounded) Bank Offered Rate. There is usually no
rate mortgage have over a typical fixed rate
per month. capping applied to either LIBOR or its
mortgage?
D- The capital repayment cost is £6.52 per matching rate.
A - It will allow the borrower to benefit from
£1,000 borrowed, making a monthly cost of C- LIBOR is the benchmark for fixing the rate,
interest rate reductions.
£6.52 x 120 = £782.40. Interest-only is 6% not the Bank of England base rate.
B - The rate will always be lower.
of £120,000 = £7,200 annually, or £600 per D- There is not a direct correlation between
C - There are no arrangement fees.
month. £782.40 - £600 = £180 (rounded) LIBOR mortgages and standard variable
D - There are no early repayment charges.
per month. mortgages.
.
Q4 - Correct answer: D Q8 -Correct answer: D
A- The total cost here is £80,000 @ (i) 3.5% (ii) A- The existence of a one year 'overhang'
6.2% and (iii) 6.2%. Thus £2,800 + £4,960 + confirms that early repayment charges
£4,960 = £12,720. This is higher than option apply for the first six years. This is one year
ANSWERS & JUSTIFICATIONS
D. beyond the fixed rate period.
B- The total cost here is £80,000 @ (i) 4.5% (ii) B- The rate has been fixed for the first five
4.5% and (iii) 6.2% plus £399. Thus £3,600 years. Movement in Bank of England base
Q1 -Correct answer: C
+ £3,600 + £4,960 + £399 = £12,559. This is rate in this period will not have any effect
A- In principle, the higher the interest rate
higher than option D. on the applicable rate.
charged, the smaller the amount of capital
C- The total cost here is £80,000 @ (i) 5.15% (ii) C- The existence of a one year 'overhang'
is repaid out of each instalment, unless the
5.15% and (iii) 5.15% + £199. Thus £4,120 + confirms that early repayment charges
payment is adjusted.
£4,120 + £4,120 + £199 = £12,559. This is apply for the first six years. This is one year
B- In the early years, a greater amount of
higher than option D. beyond the fixed rate period.
capital is outstanding so the amount of
D- The total cost would be £80,000 @ (i) 5.2% D- It is not usual for arrangement fees to be
interest is the bigger proportion.
(ii) 4.2% and (iii) 6.2%, plus £50. Thus refunded if the application is subsequently
C- Over the years, the amount of capital
£4,160 + £3,360 + £4,960 + £50 = £12,530. cancelled.
outstanding reduces, which, in turn,
All other options exceed this amount. Q9 -Correct answer: A
reduces the amount of interest required to
Q5 - Correct answer: A A- A discounted rate offers a discount from the
service it until, in the later years, the rate of
A- With closed bridging, because there is lender's standard variable rate and
capital repayment exceeds the interest
already a firm buyer in place to purcase the therefore will increase/decrease in line
amount in each payment.
existing property, the risk is lower than with that variable rate.
D- In the early years, the interest will exceed
with open bridging. B- A discount rate is linked to the standard
the capital payments until the amounts
B- Because closed bridging is less risky than variable rate. It will not be restricted by a
cross and, in the later years, the capital
open bridging, it can be expected to be ceiling, such as the Bank of England base
payment proportion exceeds that of the
cheaper. rate.
interest.
C- With closed bridging, because there is C- The discounted rate itself is the incentive.
Q2 - Correct answer: D
already a firm buyer in place to purcase the No additional bonus payments are usually
A- Today, there is usually no significant
existing property, the risk is lower than available.
difference between interest-only and
with open bridging. D- A discount rate is a true discount and is not
capital repayment interest rates.
D- Under open bridging, the borrower has yet added back to the capital, unlike deferred
B- The offering of monthly or daily rest is not
to find a purchaser for his existing interest arrangements.
particularly relevant on interest-only
property, so contracts cannot have been Q10 -Correct answer: A
mortgages as the capital does not
exchanged. A- A capped rate offers a ceiling when interest
decrease.
Q6 -Correct answer: B rates rise, but no floor (collar) when they
C- Whilst in most cases it is advisable, it is not
A- Because the annual basis of calculating fall, meaning that they can take advantage
essential to have a repayment vehicle.
interest payable only comes into play once a of lower rates. Fixed rates will benefit if
D- The outstanding capital remains constant
year, it responds poorly to capital interest rates rise, but do not fall if the
throughout the term and must then be
repayment and is more expensive than variable rate reduces below the fixed level.
repaid and there is no built in guarantee
either daily or monthly. B- A capped rate can rise up to its ceiling
that this will happen.
B- The daily basis of calculating interest (cap). This may well be above an
Q3 -Correct answer: B
payable on a loan immediately reflects alternative fixed rate level.
A- The capital repayment cost is £6.52 per
changes in outstanding capital. This means C- Arrangement fees are commonly applied to
£1,000 borrowed, making a monthly cost of
that the borrower will pay less actual most, if not all, mortgage types.
£6.52 x 120 = £782.40. Interest-only is 6%
interest. D- Early repayment charges are usually
of £120,000 = £7,200 annually, or £600 per
C- Because the monthly basis of calculating imposed on capped rate deals.
www.mortgageintroducer.com February 2010 Mortgage Introducer
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