financial studies topic 3- unit 2

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what is the main reason for long term borrowing?
the need to fund a large expenditure such a house or a car
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what is an afforable monthly repayment?
one that is small enough to be affordable and fit into someone's budget
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what is rolling over on a credit card?
when someone pays back this month's balance, then immediately borrows so they reach the same level of debt as before
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what are 3 factors affceting the length of a loan?
type of expenditure, size of expenditure and the affordability of the monthly repayments
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what are 3 benefits of owning your own home?
gives someone a sense of security and belonging, an incentive to keep the property well maintained and they don't have to pay rent in old age
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what is a security deed?
it is an interest in real estate which gives legal title of property to the lender of the mortgage for the term of the mortgage note. once the mortgage has been paid off theres a formal cancellation of the deed
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how does a mortgage lender work out how much it'll lend to an indiviual property buyer?
it is worked out based on affordability criteria and the amount the buyer can pay as a deposit
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what is stamp duty?
a form of tax paid on legal instruments
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what two factors will determine how much a provider will lend to a mortgage customer?
loan to income and loan to value ratios
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what is LTI ratio?
the size of the loan to the income of the customer. the lower the person's income, the less they're able to borrow
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what is LTV ratio?
the size of the loan to the value of the property
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why will the provider have to ensure there's a margin between the value of the property and the amount it lends to the customer?
the property is being held as security for the lender, they need to make sure there's a margin so they don't lose money if it needs to be sold
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what is owner's equity?
the difference between the property value and the amount lent
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what is an interest only mortgage?
the monthly repayment only covers the interst on the whole amount borrowed
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why should borrowers have a margin of safety if interest rates rise?
so they are able to repay their mortgage even if interest rates rise and monthly repayments increase
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what are the benefits and drawbacks fo fixed rates mortgage?
benefit- if interest rates rise, borrowers won't have to pay more. drawback- they cannot benefit from a fall in interest rates
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what are the benefits and drawbacks of variable rate mortgages?
benefit- if the interest rate falls then the monthly repayment decreases. drawback- if the interest rate rises then the monthly repayments increase
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what are the benefits and drawbacks of discounted mortgages?
benefit- the customer benefits from lowe initial monthly repayments. drawback- there is an early repayment fee
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what are the benefits and drawbacks of offset mortgages?
benefit- customers can either make a lower monthly repayment or continue to pay the same amount but reduce the number of years of the mortgage. drawback- customers can lose their savings
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what are the benefits and drawbacks of loyalty mortgages?
benefit- there can be discounts on the application fees of up to £500. drawback- customer must have another account at the provider in order to take advantage of this
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what is the Ijara method of purchasing property?
the provider buys the client's selected property, then sells the property to the client for the same price under a promise to purchase agreement, with repayments spread over a term of up to 25 years
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why is there conflict of principle for the Ijara method?
because the repayment includes capital repayment and rent for the lease and teh rent is seen as a fiar price for using the property
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what is diminishing musharaka?
during the term of finance, ownership of the property is gradually transferred from the lender to the purchaser rather than taking place at the end of the agreement
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what is the murabaha method?
the provider buys the property at an agreed price and then sells it immediately to the client at a higher price. it is less flexible and more expensive overall than the Ijara method
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what are 2 examples of loan forebearance?
allowing the customer to stop making repayments for a limited period and not putting pressure on the borrower through too many calls or letters
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what are the benefits of loan forebearance?
it provides support to customers who hare having financial problems and means that provider doesn't have to write off the loan and absorb the loss in its accounts
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what are the drawbacks of loan forebearance?
teh customer may have to make high repayments once the forebearance term is up and the provider may have to write off all or part of the loan later on
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what are help to buy equity loans?
open to first time buyers and home movers on new build homes up to £600,000. the provider provides a deposit of 5%, the lender provides a mortgage of 75% and the government pays the remaining 20% via equity loan.
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what is a lifetime ISA?
they were made available from April 2017 and can be used to buy a first home or save for retirement
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what are share ownership schemes?
they are provided through housing associations and the borrower buys a share of their home (between 25 and 75%) for which they take out a mortage and pay rent on remaining amount. to qualify they must earn less than £80,000 and be a first time buyer
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what is the new buy scheme?
it allows a person to buy a newly built home with a deposit of only 5% of the purchase price. home must be new build with value of less than £500,000, person's main home and owned fully by them
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can a purchaser end a hire purchase agreement if someone's paid back less than 50% of the price?
if the payment's come to less than 50% they may have to pay so the 50% has been paid. if they pay more than 50% they won't have to pay more but aren't entitled to a refund
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what is a benefit and drawback of 0% finance?
benefit- no interest charged if the payment's made on time. drawback- if customer doesn't make all the payments on time they will have to pay the full amount of interest
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what is a tuition fee loan?
granted to the student to enable them to pay their tuition. the loan is paid in 3 installments, 25% at beginning of terms 1 and 2 and 50% at end of term 3
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what is plan 1?
for courses that began after 1 sept 1998 and before 1 sept 2012, must be earning above min threshold of £17,775 and pay 9% of income above this level, repayments taken by HMRC by the PAYE system until they retire or reach 65
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what is plan 2?
courses after 1 sept 2012, earnings threshold is above £21,000 and from april 2017 rises with inflation, loans are cancelled 30 years after when they first became repayable
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when is the earliest a graduate can start repaying their loan?
the april after graduating or leaving their course
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what is an afforable monthly repayment?

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one that is small enough to be affordable and fit into someone's budget

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what is rolling over on a credit card?

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Card 4

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what are 3 factors affceting the length of a loan?

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what are 3 benefits of owning your own home?

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