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Topic 3 - Borrowing products - Coggle Diagram
Topic 3 - Borrowing products
There are
short-term borrowing products
for example overdrafts, credit cards and personal loans. People borrow money over a long period to fund large expenditure such as; a house, car, to study at university or for emergency life event.
Mortgage borrowers
- a mortgage can be taken by an individual or by two or more people buying a home together.
Existing customers moving home
- these customers are selling their home and buying another.
Existing customers switching their mortgage
- these people are not moving home but have found a better deal with a different provider.
First time buyers
- are usually young people in the early stages of their working lives.
Existing customers increasing their mortgage
- these borrowers want to increase the amount they owe on thier home, usually because they need the money for some other purpose, such as building an extension or paying for a live event.
Summary of the mortgage process -
Lender works out how much to lend based on affordability criteria.
Buyer decides the period over which they want to repay.
Legal processes to buy the property are carried out.
Buyer makes repayments every month for the period agreed with the lender
At the end of the payment period, the lender's rights over the property end
If the buyer fails to keep up the repayments, the lender may repossess the property and sell it to recover the money it lend the buyer.
Mortgage Loan
Loan to income (LTI)
- is the ratio of the size of the loan to the income of the customer. This means the lower someone's income, the less they can borrow. Mortgage lenders can only lend 4.5 times income to 15% of their total new residential mortgage applicants.
Loan to value (LTV)
- is the ratio of the size of the loan to the value of the property. The provider might lend between 60% and 90% of the value of the home being bought.
Mortgage Term
- a mortgage period is 25 years but a customer may choose a longer or a shorter period.
Part interest-only and part repayment mortgages
- the monthly repayment represents some of the capital and some of the interest. The borrower must have a repayment plan in place to be able to pay the capital shortfall at the end of the mortgage period.
Interest-only mortgages
- the monthly repayment covers only the interest on the whole amount borrowed for the whole mortgage period.
Repayment mortgages
- this includes capital and some interest.
Mortgage types
-
Capital
- is the total amount borrowed and this has to be paid back in full.
Interest
- the borrower must pay interest on the amount borrowed over the period of years of the mortgage.
Mortgage Interest and charges
- mortgage interest paid on a mortgage are high in proportion to the total amount paid back over the mortgage period.
Discounted mortgages
- is a variable-rate mortgage that gives customer a set of discount off the provider's SVR (Standard Variable Rate). This scheme may be for just 2 years and it gives customer benefits from lower monthly repayments and after the discounted period the rate will rise.
Off-set mortgages
- sets the interest that would have been earned on the borrower's savings and current accounts against the interest owing on the mortgage, so that a lower monthly repayment is made.
Variable-rate mortgage
- the borrower pays a rate of interest that is subject to change from the outset and throughout the term of the mortgage, if interest rate rises, then the monthly repayment increases.
Loyalty mortgages
- some providers offer loyalty mortgages to reward their loyal customers
Fixed-rate mortgage
- interest rate is fixed for a stated number of years at the beginning of the mortgage.
Islamic home finance
- is offered to Muslims to finance the purchase of property and comply with Islamic religious (Sharia Law)
Ijara method
- (lease to own) method, the mortgage provider buys the client's selected property. The provider then sells the property to the client for the same price under a promise to purchase agreement, with repayment spread over a term of up to 25 years. The provider is the registered owner of the property under a lease during the payment term, paying a monthly combines both capital repayment and rent for the lease.
Murabaha method
- the provider buys the property at an agreed price and then sells it immediately to the client at a higher price. A first payment of 20% of the property value is usually required and a monthly fixed payment is paid to the provider.
Government home ownership schemes
- these are ownership schemes to help those who cannot afford to buy a home.
Help to Buy mortgage guarantees
- Since December 2015, the government has guaranteed the mortgage of a first-time buyer or home-mover who buys a newly built home or an existing property with a 5% deposit.
Lifetime ISAs
- was introduced in April 2017 and can be used to buy a first home or to save for retirement.
Help to Buy equity loans
- these are available to first-time buyers and home-movers on new build homes. The borrower owns the home and they can sell at any time but they have to repay the equity loan.
Shared ownership schemes
- are provided through Housing Associations, the borrower buys a share of their home (25% and 75%) for which they take out a mortgage, and pay rent on the remaining share.