Mixed Deck — All CEMAP Topics Flashcards

Of the four primary asset classes, which one has the highest level of risk yet may yield the largest returns in the medium to long run?

Answer: Equities

Among the primary asset classes, equities (stocks) generally carry the highest level of risk due to their volatility and direct exposure to company performance. However, this higher risk is typically associated with the potential for the largest returns over the medium to long term, as investors can benefit from capital appreciation and dividends as companies grow and increase their value.

Which of the following best describes a 'repayment' (capital and interest) mortgage?

Answer: Monthly payments cover both interest and capital, guaranteeing the mortgage is fully repaid at the end of the term

A repayment mortgage reduces the outstanding capital with each monthly payment so that, provided all payments are made, the loan is fully repaid at the end of the agreed term.

Which organization sets voluntary product standards and consumer protections for equity release in the UK?

Answer: The Equity Release Council

The Equity Release Council is the industry body that sets standards such as the no negative equity guarantee and the right to remain in the property for life.

What is the role of the surveyor in the mortgage process?

Answer: The surveyor assesses the property's value, condition, and suitability as security for the mortgage lender

The surveyor inspects the property to assess its market value, identify significant defects, and confirm it provides suitable security for the lender.

What is negative amortisation and when can it occur?

Answer: When monthly payments are insufficient to cover the interest due, causing the outstanding balance to increase

Negative amortisation occurs when the mortgage payment does not cover the full interest charge, so the unpaid interest is added to the capital balance.

The FCA's Consumer Duty introduced a new Consumer Principle. What does this principle require firms to do?

Answer: Act to deliver good outcomes for retail customers.

The Consumer Principle, Principle 12, requires firms 'to act to deliver good outcomes for retail customers'. This sets a higher standard than the previous principle of 'treating customers fairly' and requires firms to be proactive in ensuring customers receive good outcomes across product design, price, support, and understanding.

How does compound roll-up interest affect the total debt on a lifetime mortgage over time?

Answer: The total amount owed increases over time because interest is charged on interest already added to the balance

Because interest is added to the loan balance and then interest is charged on that larger balance, the debt grows exponentially through compounding.

What is the difference between indemnity-based and benefit-based income protection policies?

Answer: Indemnity-based policies pay based on actual earnings loss, while benefit-based policies pay a pre-agreed fixed amount regardless of actual earnings at claim time

Indemnity policies assess the actual income loss at the time of claim, while benefit policies pay the pre-agreed amount regardless of what the policyholder is earning when they claim.

What does a HomeBuyer Report (Level 2 survey) include that a basic mortgage valuation does not?

Answer: A summary of condition ratings, visible defects, and recommendations for repairs

A HomeBuyer Report provides condition ratings for key elements and highlights visible defects, going beyond the lender's basic valuation.

A property is valued at £300,000 and the borrower has a deposit of £45,000. What is the Loan-to-Value (LTV) ratio?

Answer: 85%

The loan required is £255,000 (£300,000 minus £45,000 deposit), giving an LTV of 255,000 ÷ 300,000 = 85%.

What is a 'drawdown lifetime mortgage'?

Answer: A lifetime mortgage where the borrower can draw funds from a pre-agreed facility in stages as needed

A drawdown facility allows borrowers to take only what they need at the time, with the remainder available for future withdrawals, reducing interest accumulation.

What is a 'Decision in Principle' (DIP) search most likely to leave on a credit file?

Answer: A soft footprint that is not visible to other lenders, or a hard search depending on the lender

Some lenders conduct a soft search for a DIP (not visible to other lenders), while others perform a hard search that leaves a footprint; the approach varies by lender.

What is the Pre-Action Protocol for possession claims and what does it require?

Answer: It is a set of steps lenders must follow before issuing court proceedings for possession, including exploring alternatives and providing information to the borrower

The Pre-Action Protocol requires lenders to exhaust reasonable alternatives, provide clear information about arrears, and give the borrower adequate time before starting court proceedings.

A mortgage adviser refers a client to a solicitor in exchange for an undisclosed referral fee. Which regulatory requirement does this breach?

Answer: The requirement to disclose material conflicts of interest

Firms must disclose any material conflicts of interest, including referral fee arrangements, so clients can make informed decisions about the advice they receive.

When is a Higher Lending Charge (HLC) typically applied by a lender?

Answer: When the loan-to-value exceeds a certain threshold, often 75% or 90%

An HLC (formerly known as a Mortgage Indemnity Guarantee) is charged by some lenders when the LTV exceeds their threshold, to cover the increased risk of default.

Which type of tax is totally free from equity kept under an ISA?

Answer: Income Tax and Capital Gains Tax

Individual Savings Accounts (ISAs) are tax-efficient wrappers for savings and investments in the UK. Any income generated from investments held within an ISA, such as interest or dividends, is exempt from Income Tax. Furthermore, any profits made from selling investments within an ISA are free from Capital Gains Tax, making them highly attractive for long-term growth.

A couple are taking out an interest-only mortgage. They require life assurance to repay the capital at the end of the term should one of them die. Which of the following policies would be most suitable for this purpose?

Answer: Level Term Assurance

With an interest-only mortgage, the capital debt remains the same (£250,000) throughout the mortgage term. Therefore, a Level Term Assurance policy is most suitable as it provides a fixed, level sum assured that will be sufficient to repay the full mortgage capital if a claim is made at any point during the policy term.

How does the conveyancing process differ for registered and unregistered land?

Answer: Registered land has title guaranteed by the Land Registry with simplified transfer, while unregistered land requires investigation of title deeds going back at least 15 years

Registered land has its title recorded at the Land Registry, simplifying transfer. Unregistered land requires investigation of an unbroken chain of title deeds, typically for at least 15 years.

What is mortgage forbearance and what options might a lender offer?

Answer: Forbearance involves temporary concessions such as payment holidays, reduced payments, term extensions, or temporary interest-only periods

Forbearance is where the lender offers temporary or longer-term concessions to help borrowers in difficulty maintain their home.

During the mortgage underwriting stage, which of the following is the underwriter's main function?

Answer: To assess the application's overall risk against the lender's policies and regulatory standards.

The mortgage underwriter works for the lender and is responsible for conducting a detailed risk assessment of the entire mortgage application. This involves verifying documentation, checking credit history, ensuring affordability, and confirming the application meets the lender's specific criteria and regulatory guidelines before approving the loan.