D The discount will be added to the capital at the end of the discount period.
10 What advantage does a typical capped rate mortgage have over a typical fixed rate mortgage?
A It will allow the borrower to benefit from interest rate reductions. B The rate will always be lower. C There are no arrangement fees. D iThere are no early repayment charges.
ANSWERS AND JUSTIFICATIONS
Q1 Correct answer: C
A In principle, the higher the interest rate charged, the smaller the amount of capital is repaid out of each instalment, unless the payment is adjusted. B In the early years, a greater amount of capital is outstanding so the amount of interest is the bigger proportion. C Over the years, the amount of capital outstanding reduces, which, in turn, reduces the amount of interest required to service it until, in the later years, the rate of capital repayment exceeds the interest amount in each payment. D In the early years, the interest will exceed the capital payments until the amounts cross and, in the later years, the capital payment proportion exceeds that of the interest.
Q2 Correct answer: D
A Today, there is usually no significant difference between interest-only and capital repayment interest rates. B The offering of monthly or daily rest is not particularly relevant on interest-only mortgages as the capital does not decrease. C Whilst in most cases it is advisable, it is not essential to have a repayment vehicle. D The outstanding capital remains constant throughout the term and must then be repaid and there is no built in guarantee that this will happen.
Q3 Correct answer: B
A The capital repayment cost is £6.52 per £1,000 borrowed, making a monthly cost of £6.52 x 120 = £782.40. Interest-only is 6% of £120,000 = £7,200 annually, or £600 per month. £782.40 - £600 = £180 (rounded) per month. B The capital repayment cost is £6.52 per £1,000 borrowed, making a monthly cost of £6.52 x 120 = £782.40. Interest-only is 6% of £120,000 = £7,200 annually, or £600 per month. £782.40 - £600 = £180 (rounded) per month. C The capital repayment cost is £6.52 per £1,000 borrowed, making a monthly cost of
£6.52 x 120 = £782.40. Interest-only is 6% of £120,000 = £7,200 annually, or £600 per month. £782.40 - £600 = £180 (rounded) per month. D The capital repayment cost is £6.52 per £1,000 borrowed, making a monthly cost of £6.52 x 120 = £782.40. Interest-only is 6% of £120,000 = £7,200 annually, or £600 per month. £782.40 - £600 = £180 (rounded) per month.
Q4 Correct answer: D
A The total cost here is £80,000 @ (i) 3.5% (ii) 6.2% and (iii) 6.2%. Thus £2,800 + £4,960 + £4,960 = £12,720. This is higher than option D. B The total cost here is £80,000 @ (i) 4.5% (ii) 4.5% and (iii) 6.2% plus £399. Thus £3,600 + £3,600 + £4,960 + £399 = £12,559. This is higher than option D. C The total cost here is £80,000 @ (i) 5.15% (ii) 5.15% and (iii) 5.15% + £199. Thus £4,120 + £4,120 + £4,120 + £199 = £12,559. This is higher than option D. D The total cost would be £80,000 @ (i) 5.2% (ii) 4.2% and (iii) 6.2%, plus £50. Thus £4,160 + £3,360 + £4,960 + £50 = £12,530. All other options exceed this amount.
Q5 Correct answer: A
A With closed bridging, because there is already a firm buyer in place to purcase the existing property, the risk is lower than with open bridging. B Because closed bridging is less risky than open bridging, it can be expected to be cheaper. C With closed bridging, because there is already a firm buyer in place to purcase the existing property, the risk is lower than with open bridging. D Under open bridging, the borrower has yet to find a purchaser for his existing property, so contracts cannot have been exchanged.
Q6 Correct answer: B
A Because the annual basis of calculating interest payable only comes into play once a year, it responds poorly to capital repayment and is more expensive than either daily or monthly. B The daily basis of calculating interest payable on a loan immediately reflects changes in outstanding capital. This means that the borrower will pay less actual interest. C Because the monthly basis of calculating interest payable only comes into play at the end of each monthly period, the actual cost will be a little greater than the daily basis. D Because these methods relate to when capital is repaid, they achieve different results with daily offering the cheapest option.
Q7 Correct answer: A
A Because the rate is linked to LIBOR,
determination of movement is out of the hands of the lender. B LIBOR mortgages follow the London Inter- Bank Offered Rate. There is usually no capping applied to either LIBOR or its matching rate. C LIBOR is the benchmark for fixing the rate, not the Bank of England base rate. D There is not a direct correlation between LIBOR mortgages and standard variable mortgages.
Q8 Correct answer: D
A The existence of a one year ‘overhang’ confirms that early repayment charges apply for the first six years. This is one year beyond the fixed rate period. B The rate has been fixed for the first five years. Movement in Bank of England base rate in this period will not have any effect on the applicable rate. C The existence of a one year ‘overhang’ confirms that early repayment charges apply for the first six years. This is one year beyond the fixed rate period. D It is not usual for arrangement fees to be refunded if the application is subsequently cancelled.
Q9 Correct answer: A
A A discounted rate offers a discount from the lender’s standard variable rate and therefore will increase/decrease in line with that variable rate. B A discount rate is linked to the standard variable rate. It will not be restricted by a ceiling, such as the Bank of England base rate. C The discounted rate itself is the incentive. No additional bonus payments are usually available. D A discount rate is a true discount and is not added back to the capital, unlike deferred interest arrangements.
Q10 Correct answer: A
A A capped rate offers a ceiling when interest rates rise, but no floor (collar) when they fall, meaning that they can take advantage of lower rates. Fixed rates will benefit if interest rates rise, but do not fall if the variable rate reduces below the fixed level.
A capped rate can rise up to its ceiling (cap). This may well be above an alternative fixed rate level.
Arrangement fees are commonly applied to most, if not all, mortgage types. Early repayment charges are usually imposed on capped rate deals.
For more help with revision, lessons and how to get your own CPD certificate visit
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mortgage introducer JUNE 2010 39
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