topic 3

• Mortgage


  A long-term loan to finance the purchase of a property
• Deed


  A document that the buyer signs to agree that if they can't continue to make repayments on the loan, the lender can claim the property back and sell it to pay off the remaining debt
• Mortgage borrowers


  • First-time buyers
  • Existing customers moving out
  • Existing customers switching their mortgage
  • Existing customers increasing mortgage
• First-time buyers


  • Traditionally young people in the early stage of their working lives on low incomes, but now have to save for several years to build a deposit and cannot afford to buy until they are in their 30s
• Existing customers moving out

  • Selling their homes and buying another, have to pay off their existing mortgage from the proceeds of the sale of their property and take out a new mortgage
• Existing customers switching their mortgage

  • Not moving homes but have found a better deal with a different provider
• Existing customers increasing mortgage

  • Want to increase the amount they owe on their home, usually because they need the money for other purposes such as building a house extension
• Lenders can extend the mortgage term beyond the maximum age if the customer can give evidence that they will have enough income beyond retirement
• Costs at the time of purchase


  • Survey of the property
  • Legal fees
  • Stamp duty if the property is more than a certain value
  • Mortgage application fee
  • Insurance
  • The cost of furnishing and fitting the property
• Loan to income (LTI)


  The ratio of the size of the loan to the income of the customer, the lower someone's income, the less they can borrow
• Calculating maximum amount lenders will lend

  1. Basic annual salary+ any extra annual income (overtime, bonuses)- monthly credit commitments (credit cards)

  2. Provider calculates the person's discretionary income

  3. Provider then multiplies the discretionary income by a figure that reflects its assessment of the customer's creditworthiness
• From 1st October 2014 mortgage lenders can only lend more than 4.5 times income to 15% of their total new residential applicants, this mainly affects buyers who live in London as home prices are very high
• Loan to value (LTV)

  The ratio size of the loan to the value of the property, the difference between a property value and the amount lent is called the equity of the owner
• A provider might lend between 60% and 90% of the value of the home being bought and sometimes with a maximum amount
• Mortgage term


  A typical mortgage period is 25 years but the customer can choose to shorten or make the period longer, the age of the borrower will also be a deciding factor
• Mortgage types


  • Repayment mortgages
  • Interest-only mortgages
  • Part interest-only and part repayment mortgages
• Repayment mortgages


  The monthly repayment instalment is calculated by capital and some interest, the proportion of capital and instalments change as time passes but the customer is not aware of it
• Interest-only mortgages


  The monthly repayment covers only the interest on the whole amount borrowed for the whole mortgage period, at the end of the mortgage period, the borrower still owes the full amount borrowed and must repay this capital sum in one payment
• Part interest-only and part repayment mortgages


  Part of the monthly instalment represents capital but it is not the full amount of capital that would have been included in a repayment mortgage, the borrower must have a repayment plan in place to be able to pay the capital shortfall at the end of the mortgage period
• Mortgage interest and charges


  • Fixed-rate mortgages
  • Variable-rate mortgages
  • Discounted mortgages
  • Offset mortgages
  • Loyalty mortgages
• Fixed-rate mortgages


  The interest is fixed for a stated number of years at the beginning of the mortgage, borrower can benefit from it if interest rates rise in the period, but not if interest rates decrease, helps borrowers draw the budget in the fixed period, majority charge an early repayment fee
• Variable-rate mortgages


  Borrowers pay a rate of interest that is subject to change from the outset and throughout the term, the provider's basic mortgage rate is known as a standard variable rate (SVR), borrowers are exposed to interest rates if they change
• Discounted mortgages


  A variable rate mortgage that gives the customer a set discount off the provider's SVR for an agreed period, borrower benefits from lower initial monthly repayments, there is an early repayment fee, may give customers an unrealistic idea of their ability to afford the mortgage
• Offset mortgages

  Sets the interest rate that would have been earned on the borrower's savings and current account against the interest owing on the mortgage, therefore, make a lower monthly repayment or continue to pay the same amount each month but reduce the number of years on the mortgage term, using a savings account lowers the LTV ratio, allows borrowers to pay a less interest
• Loyalty mortgages

  Rewards for loyal customers, to be eligible customers must have had an open and active personal current account that has been credited with a minimum of 800 pounds in each of the last three months, this scheme encourages customers not to switch their current account
• Mortgages to help first-time buyers

  • Some providers schemes where the savings of the family member can be linked to a mortgage loan of a first-time buyer, the family member pays 10% of the purchase price of the home into a specific savings account for 3 years and the homebuyer then only needs a minimum 5% deposit
• Factors affecting the interest rate paid

  • Whether the product is a fixed-rate or a variable-rate mortgage
  • The LTV ratio, the larger the deposit paid is the smaller the LTV ratio is
  • Whether the customer qualifies for a loyalty mortgage
  • Whether the customer is remortgaging the property- a provider might offer a lower rate to encourage the customer to switch providers
  • In the case of a fixed-rate mortgage, the number of years for which the rate is fixed
• Many people choose to insure their mortgage debt in case they are unable to make the repayments and this adds to the cost
• Islamic home finance


  Instead of being called mortgages, they are called 'home purchase plans', Sharia forbids the payment or receipt of interest, but allows the sharing of risk of profit
• Methods used to provide Islamic home finance

  • Ijara method
  • Murabaha method
• Ijara method

  The provider buys the client's selected property, then sells the property to the clients for the same price under a promise-to-purchase agreement, with repayment spread over a term of up to 25 years, the client occupies the property under a lease during the payment term, paying a monthly amount that combines both capital repayment and rent for the lease, the provider makes its profit through the rent paid over the term, more expensive than a regular mortgage
• Murabaha method

  The provider buys the property at an agreed price and then sells it immediately to the client at a higher price, the higher price charged to the purchaser reflects the profit element for the provider, a first payment, typically of around 20% of property value, is usually required, the client will then make monthly fixed payments to the provider during the term, less popular than the Ijara method, as it is more expensive overall and less flexible in terms of early repayment
• Forbearance

  A temporary postponement of payments by the borrower
• Ijara method

  Paying a monthly amount that combines both capital repayment and rent for the lease
• Ijara method

  • The monthly payment is fixed for 12 months at a time and is then reviewed to allow for any adjustments to the rental element
  • The provider makes its profit through the rent paid over the term
  • More expensive than a regular mortgage
• Murabaha method

  The provider buys the property at an agreed price and then sells it immediately to the client at a higher price. The higher price charged to the purchaser reflects the profit element for the provider.
• Murabaha method

  • A first payment, typically of around 20% of property value, is usually required
  • The client will then make monthly fixed payments to the provider during the term
  • The property is registered in the client's name rather than the provider's
  • Less popular than the Ijara method, as it is more expensive overall and less flexible in terms of early repayment
• Forbearance


  A temporary postponement of payments by a lender instead of forcing the borrower into foreclosure or default
• Forbearance


  • The provider allows the customer to stop making repayments for a limited period
  • Might allow them to make reduced payments for a limited period or extend the mortgage term to reduce monthly repayments
• Advantages of forbearance


  • Provides support to customers
  • Prevents people from becoming homeless
  • No write off loan and absorb the loss