Unit 5 Setion 1 Mortgge Pyment Methos & Prouts (20%) There re tully only 2 mortgge repyment methos ville CAPITAL REPAYMENT n INTEREST ONLY. Cpitl Repyment Mortgge Also lle Cpitl & Interest mortgge or repyment mortgge Eh monthly pyment involves n element of interest n n element of pitl Therefore, it is reuing lon with the lne outstning eresing ll the time In the erly yers, y fr the iggest element of the pyment is interest with this imlne eing reverse over time So the pitl ereses slowly t first ut towrs the en of the term the erese is muh quiker If ll the monthly pyments re me the lon will e repi in full t the en of the term Avntges Esy to unerstn Esy to orrow more s the lon is reuing while the house vlue is proly rising Goo metho if you hve low risk profile Quite flexile in tht the term n e extene if the orrower suffers hrship Disvntges This metho oes not utomtilly inlue life insurne whih must e tken seprtely known s eresing term ssurne. No hne of surplus t the en of the term Beon Finnil Trining Limite 2008-09 Pge 1
The pitl repyment mortgge Deresing term ssurne Interest Only Mortgges with Repyment Vehile The orrower pys only the interest ue eh month, no pitl is repi t ll uring the term The repyment of the pitl is hieve t the en of the term through pitl repyment vehile suh s n enowment (see lter) This metho not very populr these ys ue to poor performne prtiulrly y enowment poliies Beon Finnil Trining Limite 2008-09 Pge 2
Avntges For enowment options only life insurne is inlue in the pln Monthly pyments re lower Some prouts suh s ISAs, Personl Pensions hve tx vntges Disvntges With most of these there is no gurntee tht the mortgge et will e lere t the en of the term epenent on stok mrket performne Not goo metho for the risk verse The lon mount oes not reue uring the term Clulting Monthly Pyments Exmple Bo tkes out 20 yer pitl n interest mortgge for 60,000 on n interest rte of 5%, n the monthly repyments re 354.78. Assume the interest rte stys the sme for the first 12 months t 5.0%. How muh pitl will he repy in the first yer? Step 1 Work out the totl nnul pyment (pitl n interest 354.78 x 12 mths = 4,257.36 Step 2 Work out how muh the nnul interest pyment is: This is simply: Lon mount x interest rte 60,000 x 5.0% = 3,000 Step 3 Deut interest pyment from the pitl n interest pyment 4,257.36-3,000 = 1,257.36 Beon Finnil Trining Limite 2008-09 Pge 3
Cpitl Repyment Vehiles to py off n Interest Only Mortgge The ompletion of the tle elow my help your revision of this re. The key pitl repyment vehiles re: Full (With Profits) Enowment Low Cost (With Profits) Enowment Unit linke Enowment Unitise (With Profits) Enowment Iniviul Svings Aount (ISA) Personl Pension Pln (PPP) One you hve stuie this setion see if you n omplete the tle yourselves. Metho Cpitl& Interest Pure Int Only no CRV Interest Only Interest Only Interest Only Interest Only Interest Only Interest Only Cpitl Repyment Vehile (CRV) Gurntee Repi on Deth Gurntee Repi on Mturity Life Ins. Require Flex Term Risk N/A No Yes Yes-DTA Yes Low N/A Full W/P Enowment Low Cost W/P Enowment Unit Linke Enowment Unitise W/P Enowment ISA Personl Pension Pln Note As mortgge visers we re not le to sell ny of these prouts s they re investment se. You woul nee to e qulifie finnil viser. Beon Finnil Trining Limite 2008-09 Pge 4
Enowment Poliies A quik guie An enowment poliy is in essene svings pln tht you mke regulr monthly pyments into eh month in ition to your monthly pyments on n interest only mortgge The ie is tht y the en of the mortgge term, this svings pln will e t the very lest equl to the mortgge lne on mturity eg when the poliy ens In ition, ll enowments hve uilt in life insurne so tht if the poliy holer ies uring the term, the full mortgge lne will e pi off eth enefit Personl pension plns, ISAs n other repyment vehiles o not provie uilt in life over whih woul nee to e purhse seprtely, usully s level term over. Full With Profits Enowment Poliies This poliy gurntees to py off the mortgge et on the erlier of Deth uring the term of the poliy On mturity s long s the sum ssure is equl to the mortgge No risks with these ut euse they re gurnteeing so muh they re extremely expensive Full With-profits enowment Beon Finnil Trining Limite 2008-09 Pge 5
Low Cost With Profits Enowment Poliies Designe to e heper lterntive to the Full Enowment This option oes not gurntee to py off the mortgge in full on mturity ut will o so on eth uring the term. The min fetures of the Low Cost Enowment (LCE) re: The poliy strts with gurntee sum ssure of roun hlf of the mortgge lne It is hope tht through the ition of onuses, y the en of the term the fun will e lrge enough to fully ler the mortgge As the fun is in theory lwys growing the mount neee to ler the mortgge on eth is reuing, so in effet the life poliy works on eresing term sis. Bonuses There re two types of onus tht n e e. Reversionry (Annul) Not gurntee to get these ut one e it n t e tken wy Ae to the pln nnully if given Terminl Not gurntee to e given this onus either Pi on eth or mturity On low ost enowment the grnting n size of the terminl onus will etermine whether there will e enough to py off the mortgge Beon Finnil Trining Limite 2008-09 Pge 6
Low Strt Low Cost With Profits Enowment Poliies These operte in extly the sme wy s norml low ost enowment Premiums re lower to egin with perhps hlf the level of norml low ost Premiums will inrese y roun 20% eh yer for the fist 5 yers ompoun whih ens up more thn ouling the initil premium Although it is heper to egin with, the overll ost is higher This sort of pln oul suit soon to e qulifie professionl ountnt Avntges of the low ost with profits enowment the gurntee sum ssure will e pi on mturity proviing premiums re pi. The premiums re muh lower thn on full enowment The mortgge will e pi off on eth There is possiility of surplus The poliy omines investment n life over. Disvntges of low ost with profits enowment The finl vlue on mturity is not gurntee to py off your mortgge All With Profits poliies re inflexile whih mens tht the term n the premium nnot usully e either extene or inrese. There re lso hevy penlties on erly surrener. Beon Finnil Trining Limite 2008-09 Pge 7
Unit Linke Enowment Poliies Different to ll the With Profits plns Crry greter risk ut lso greter rewr hne of surplus Premiums re use to purhse ro rnge of units on the stok mrket Some units re nelle eh month to py for life over whih is uilt in s re ll enowments gurntee eth enefit No gurntee t ll of wht the fun will e on mturity s it will epen on how ll these units will hve performe on the stok mrket The units hve two pries: Offer Prie you uy the units t the offer prie Bi Prie you sell the units k to the Fun Mnger t the i prie Chrges o the ifferene etween the i n the offer prie i/offer spre o poliy fee hrge fixe monthly eution o nnul hrge roun 0.5-1.5% of the fun vlue o erly surrener hrge on surrener in the first 10 yers Most proviers offer perioi reviews to see if the pln is on trget usully fter 10, 15, 20 yers n then every yer therefter Key Issues Unit linke plns hve flexile mturity te so the poliyholer n repy the mortgge erly if he hooses or exten the term if neessry Very importnt note ll With Profits plns hve fixe mturity te whih nnot e reue or extene. Unit linke is the only enowment tht is not With Profits pln. Unit linke is lso flexile in tht you n inrese your premiums if you nee to. There is no finl vlue gurntee on mturity n hrges n e high Beon Finnil Trining Limite 2008-09 Pge 8
Unitise with profit enowment This omines the seurity of the with profits enowment eing le to enefit from onuses n lso the seurity of minimum gurntee sum ssure on mturity. However, it is unitise in tht you re llowe to swith into n out of other unit linke funs whih hve the potentil for high rewrs. However, these swithes my inur mrket vlue juster(mva), whih is penlty inurre on swithing. MVAs re lso inurre on enshment efore mturity. Enowment Shortflls n Complints Low Cost enowment performne hs een very poor in reent yers ue minly to low interest rtes n poor stok mrket performne Enowment proviers hve een orere y the FSA to review ll enowments tht re eing use for mortgge repyment Eh pln must e reviewe t no less thn two yerly intervls showing projete growth rtes of the poliy t 4%, 6% n 8% Where the review shows tht growth rte of 6% woul e neessry to hit the trget require, the provier must notify the poliyholer to inform tht some tion is require The enowment provier must issue letters gre s re high risk of shortfll, mer signifint risk n green no gurntee ut it is urrently on trget. The FSA hs ft sheet tht reommens tion e tken whenever shortfll seems likely Unit Trusts, Open Ene Investment Compnies n Investment Trusts It is rre ut oth of these n e use to repy mortgge They re oth olletive investments in whih lrge numers of investors ontriute to rete fun You re plying the stok mrket in similr wy to Unit Linke Enowments Chrges re generlly lower on these thn on Unit Linke Enowments No life over is inlue this nees to e rrnge seprtely Beon Finnil Trining Limite 2008-09 Pge 9
Iniviul Svings Aounts (ISAs) This is the government s tx effiient svings shemes Contriutions re limite in eh tx yer s follows ISA CONTRIBUTION LIMIT CASH MAXIMUM IN A TAX YEAR 3,600 EQUITIES (STOCKS & SHARES) MAXIMUM IN A TAX YEAR 7,200 TOTAL MAXIMUM CANNOT EXCEED 7,200 If you sve in n ISA you re entitle to keep ll tht you ern n not py ny tx on it. The mximum you n sve in sh in tx yer is 3,600 You n py into your ISA whenever you wnt n you n stop mking pyments t ny time. They n only e estlishe in single nme- joint ISAs re not possile. Sine April 2004 the 10% tx reit on ivien inome nnot e relime y the fun mnger so the stoks n shres ISA or Equity ISA nnot e regre s tx free ut it is still extremely tx effiient. Avntges No liility to inome tx or pitl gins tx Flexile prout Disvntges No gurntee tht there will e enough to py off the mortgge Level term life ssurne woul nee to e rrnge seprtely Beon Finnil Trining Limite 2008-09 Pge 10
Personl Pension Plns (PPPs) A PPP or stkeholer pension(shp) n e rrnge for nyone uner the ge of 75 inluing hilren Sine April 2006 the mximum nnul ontriution is the higher of Up to 100% of their UK ernings OR 3600 There is however n overll mximum nnul llowne whih is urrently 235,000. If this mount is exeee there will e tx hrge on the exess. If your totl pension fun is greter thn 1.65 million there is tx hrge on the exess. Whether the iniviul hs retire or not enefits n e tken t ny time fter 50 lthough this will rise to 55 from 2010 Up to 25% of the fun n e tken s tx free sh The lne of the fun must then e use to uy Compulsory Purhse Annuity or lterntively n inome n e tken s rw own. The 25% tx free sh woul normlly e use to repy the mortgge. So, in orer to repy the mortgge the totl pension fun nees to e t lest 4 times the mortgge lne. Contriutions re pi net of si rte tx @ 20%, so n tul ontriution of 100 into your pension fun woul ost you 80. Higher rte txpyers woul e le to relim further 20% through self ssessment, so it woul ost them 60 A PPP oes not utomtilly inlue life ssurne. Prior to Deemer 2006, you were le to get Pension Term Assurne. This ws enefiil in tht tx relief ws ville. This hs now een withrwn. The term nnot exee the person s 75 th irthy. Beon Finnil Trining Limite 2008-09 Pge 11
Mortgge Aounting Methos Different leners use ifferent ounting methos tht result in ifferent totl ost figures. Annul Rest The nnul mount of interest is eite to the mortgge ount t the eginning of the yer Any pitl repi uring the yer will hve no effet on the mount of interest pi tht yer s it hs lrey een lulte n eite This system neither penlises lte pyments nor rewrs erly pyment If the orrower wnts to reue the mount of interest to e hrge the following yer, pitl nees to e pi in towrs the en of the urrent yer. Monthly Rest Monthly interest is eite to the ount monthly like reit r Borrowers enefit monthly from ny pitl repyments me the previous month Leners mke less profit thn nnul s long s some pitl is eing repi Dily Rest Dily interest is eite t the strt of eh y Erly repyment of pitl uses n immeite reution in lne n therefore interest However, elying pyment even y y uses more interest to e hrge Of the three this is the lest profitle to the lener Annul Review Shemes To help ugeting some leners llow the monthly pyment to e fixe for 12 month perio Souns like this is 12 month fixe rte ut there is ifferene The ount is reviewe t the en of 12 months n epening on whether interest rtes fell or rose uring those 12 months, the orrower will e either in vne or in rrers. The following yer s pyments oul therefore e higher or lower epening on wht hs hppene to interest rtes Beon Finnil Trining Limite 2008-09 Pge 12
Annul Perentge Rte (APR) Introue y the Consumer Creit At 1974 As hrges n fees re inlue the APR will e higher thn the flt rte of interest It ssumes the following: The interest rte will remin unhnge All pyments re me on time The lon will run for the full term with no erly pitl repyments The following osts re inlue: Totl interest pyle Arrngement n ministrtion fees Vlution fees Conveyning fees relte to the mortgge Higher lening hrges Builing & other insurne premiums tthe to the mortgge Seling fee for seling the mortgge ee on reemption The following re exlue: Reemption interest eg erly repyment penlties Life ssurne premiums Defult hrges Tx relief is exlue Where the flt interest rte is quote on n vertisement, the APR must lso e shown more prominently. If the vertisement oes not show flt rte, the APR nee not e shown. Beon Finnil Trining Limite 2008-09 Pge 13
UNIT 5- SECTION 1 TEST Question Answer Mrk Comments / Notes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Totl Result % = ( Totl / 25 ) x 100 Beon Finnil Trining Limite 2008-09 Pge 14
Unit 5 - Setion 1 - Test 1 Whih one of the following sttements regring interest pyments on repyment mortgge is TRUE? The first yer s pyments will e me up of minly interest n then progressively eome greter proportion of pitl The first yer s pyments will e me up of minly pitl n then progressively eome greter proportion of interest The pitl n interest elements remin onstnt throughout the term All of the pyment is interest on repyment mortgge 2 A possile rwk of pitl n interest mortgge is tht it: nnot e toppe up is lwys more expensive thn other methos my not fully repy lon requires itionl life ssurne 3 Whih of the following gurntees to repy the lon t mturity? PEP / ISA Personl Pension Full Enowment Low Cost Enowment 4 In the se of rrers, whih one of the following shemes llows for the term of the mortgge to e extene? With-profits enowment mortgge Low ost enowment mortgge Low strt enowment mortgge Repyment mortgge 5 Fre s premium on his low ost enowment inrese y 20 in Mrh 2006 euse: he hose low strt pln onus levels reue his helth eteriorte of the withrwl of MIRAS 6 The MINIMUM gurntee mturity vlue of unit-linke enowment poliy is: the si sum ssure the totl of premiums pi 75% of totl premiums pi not speifie Beon Finnil Trining Limite 2008-09 Pge 15
7 A higher rte txpyer n reeive tx relief on his pension mortgge ontriutions t: 10% 20% 22% 40% 8 Some orrowers like to feel tht the mount they owe to the lener is eing reue y their monthly mortgge pyments. They shoul hoose : fixe rte mortgge enowment mortgge repyment mortgge ISA mortgge 9 A low ost enowment is usully omintion of whih of the following types of ssurne? With-profit enowment n level term ssurne Without-profit enowment n level term ssurne With-profit enowment n eresing term ssurne With-profit enowment n inresing term ssurne 10 Whih one of the following is FALSE with regr to ISA mortgges? Seprte life ssurne my e neessry Only UK resients (for tx purposes) re eligile All inome n growth is tx free in the hns of the investor The mximum regulr pyment is 800 per month 11 The MAXIMUM tx-free sh sum tht n e tken from personl pension fun of 300,000 to repy n interest only mortgge is: 60,000 75,000 100,000 150,000 12 Alison pi 1500 into sh ISA in My of the urrent tx yer n now wishes to rrnge n ISA mortgge. How muh n she ontriute to n equity ISA this yer? A 4000 5700 5,500 7200 13 Whih interest ounting methoology fils to penlise lte pyers of their monthly pyments? Annul review system Annul rest system Dily interest Fixe pyments Beon Finnil Trining Limite 2008-09 Pge 16
14 Json woul like to rrnge pension mortgge n hs yet to strt ny pension rrngements. Bse on his inome of 28,000, wht is the mximum he oul py into personl pension this tx yer n gin full tx relief? 3,600 28,000 215,000 1,500,000 15 Alison is looking for n interest pyment metho tht will enefit her if she mkes some of her pyments erly. She shoul hoose: fixe pyments nnul rest ily interest nnul review 16 John hs 20-yer repyment mortgge for 75,000 on n nnul rest sis. If the interest rte is fixe t 6% for the first 12 months n the monthly repyments re 7.30 per 1,000 orrowe, how muh pitl will he repy in the first yer? 1,090 1,640 1,900 2,070 17 Tom n Mry hve n interest-only mortgge with low-ost with-profits enowment poliy s the repyment vehile. Whih of the following sttements in respet of the poliy is orret? Annul reversionry onuses n finl terminl onus my e e to the si sum ssure, ut these re not gurntee Annul reversionry onuses n terminl onus my e e to the gurntee eth enefit, ut these re not gurntee Annul reversionry onuses will e e to the si sum ssure, n these re gurntee Annul reversionry onuses my e e to the gurntee eth enefit, ut these re not gurntee 18 Colin is pying 30 per month to the sh element of n ISA in this tx yer. He is onsiering n ISA linke interest-only mortgge. Wht is the mximum itionl mount he n sve in the stoks n shres element of his ISA this yer? 6,840 2,640 3,640 640 Beon Finnil Trining Limite 2008-09 Pge 17
19 Wht re the rtes of growth permitte y the FSA for illustrtions of the projete enefits from unit-linke enowment when use to repy n interest only mortgge? 4%, 6% n 8% 5%, 6% n 7% 5%, 7% n 9% 6%, 7% n 8% 20 The mount ville to repy n interest only mortgge from unit-linke investment epens on the prie of the units on the repyment te. The prie t whih the units re she in is known s the: i prie sh prie offer prie reserve prie 21 Whih of the following sttements out personl pension pln is orret? At retirement the pension provies n inome tht is free of inome tx uner urrent legisltion A mximum of 20% of the fun vlue n e tken s tx-free lump sum on retirement Full tx relief n e lime on ontriutions to the pln The lump sum n pension enefit n e tken t ny time provie ontriutions hve een me for t lest ten yers 22 Whih of the following sttements in respet of 20-yer repyment mortgge is orret? The pitl element will not reue uring the first 5 yers of the mortgge term Monthly pyments erese s the pitl element ereses over the term The interest element of the monthly pyment grully reues throughout the term The interest element of the monthly pyment remins onstnt throughout the term 23 Whih of the following woul provie orrower with high egree of ertinty tht the lon will e repi in full y the en of the mortgge term, together with hep form of life ssurne? A full with-profits enowment poliy A low-strt low-ost enowment poliy An interest-only mortgge with level term ssurne A pitl repyment mortgge with eresing term ssurne Beon Finnil Trining Limite 2008-09 Pge 18
24 Whih of the following is enefit of using unit-linke enowment poliy in onjuntion with n interest-only mortgge? It is ielly suite to the low risk ustomer The units n e she in t ny time mking it possile to repy the mortgge erly Reversionry onuses re normlly reite to the poliy eh yer This type of poliy will lwys hve fixe mturity te 25 Whih of the following is EXCLUDED y lener when lulting the nnul perentge rte (APR)? Mortgge inemnity gurntee premiums Mortgge vlution fees Arrngement fees Assoite life ssurne premiums Beon Finnil Trining Limite 2008-09 Pge 19