Free CeMAP Module II Questions and Answers 1 — Questions and Answers
Question 1: What is the typical insurance policy Waiver of Premium (WOP) deferral period?
- 13 weeks (Correct answer)
- 4 weeks
- 6 months
- It is selected by the policy holder
Correct answer: 13 weeks
Waiver of Premium (WOP) is a common feature in protection insurance policies, such as income protection or critical illness cover. It ensures that if the policyholder becomes unable to work due to illness or disability, the insurer will cover future premium payments. The typical deferral period before WOP benefits begin is 13 weeks, providing a safety net after an initial waiting period.
Question 2: The following is stated in the three main Land Law Acts of 1925, with the exception of:
- A minor cannot hold an interest in land
- The borrower has no legal right to “Let” the mortgaged property (Correct answer)
- Where two or more loans are secured on a property their priority is determined by the date of their registration
- The Lender is not liable for any loss made on the execution of it's power of sale
Correct answer: The borrower has no legal right to “Let” the mortgaged property
The Land Law Acts of 1925 aimed to simplify land ownership and conveyancing in England and Wales. While they address issues like minors not holding legal estates and the priority of registered charges, a borrower generally retains the legal right to 'let' (rent out) a mortgaged property. However, they typically require the lender's consent to do so, as it impacts the lender's security.
Question 3: A clause in Peter's mortgage offer stipulates that some repairs must be completed within three months of the property's completion. What does this potentially mean?
- An undertaking is required (Correct answer)
- A retention is required
- A HLC is required
- A new valuation is required
Correct answer: An undertaking is required
When a mortgage offer includes a condition for repairs to be completed after completion, the lender often requires an undertaking. An undertaking is a formal promise, usually from the borrower's solicitor, to ensure that specific conditions, like property repairs, are met within a given timeframe. This allows the mortgage funds to be released while providing the lender with assurance that the property will be brought to the required standard.
Question 4: Sylvie owns and operates her own design company. She invests cautiously. In the case of her death, which type of protection is most likely to be appropriate for her capital payback mortgage?
- With profit endowment
- Decreasing Term Insurance (Correct answer)
- Level Term Insurance
- Unit linked endowment
Correct answer: Decreasing Term Insurance
Sylvie has a capital payback mortgage, meaning the outstanding loan balance decreases over time with each repayment. Decreasing Term Insurance is specifically designed to match this reducing debt. The sum assured decreases throughout the policy term, aligning with the diminishing mortgage balance, making it a cost-effective way to ensure the mortgage is fully repaid upon her death.
Question 5: Which of the following statements does not invalidate a guarantee?
- Undue influence exerted on the guarantor
- Change in occupation of the guarantor (Correct answer)
- Duress exerted on the guarantor
- La.ck of capacity of the guarantor
Correct answer: Change in occupation of the guarantor
A guarantee can be invalidated if it was obtained through improper means, such as undue influence, duress, or if the guarantor lacked the mental capacity to understand the agreement. These factors compromise the voluntary and informed nature of the guarantee. However, a change in the guarantor's occupation, while potentially affecting their financial situation, does not inherently invalidate a legally binding guarantee that was properly executed.
Question 6: What will happen to house prices if the supply of housing exceeds the demand?
- Prices are positively correlated to interest rates and will move in the same direction
- Prices are likely to go up
- Prices are likely to go down (Correct answer)
- Prices will stay the same
Correct answer: Prices are likely to go down
This is a fundamental principle of supply and demand in economics. When the supply of housing exceeds the demand, there are more available properties than there are buyers. To attract purchasers and sell the surplus, sellers typically have to lower their asking prices. This downward pressure on prices leads to a general decrease in house values.
Question 7: Under a full with profit endowment mortgage, the borrower is guaranteed:
- Repayment of the loan on maturity (Correct answer)
- Flexibility regarding the mortgage term
- Early surrender without charges
- Tax efficient and low cost repayment option
Correct answer: Repayment of the loan on maturity
A full with-profit endowment mortgage guarantees that, provided all premiums are paid, the policy will mature with a payout sufficient to repay the original mortgage loan amount. This guarantee is a key feature, offering borrowers certainty that their capital repayment mortgage will be cleared at the end of the term. Any additional investment growth beyond the guaranteed amount is paid as a bonus.
Question 8: When one of two joint tenants passes away, the property will automatically:
- Belong to the deceased’s estate
- Be held in trust until the death of the survivor
- Be inherited by any children
- Belong to the survivor (Correct answer)
Correct answer: Belong to the survivor
In a joint tenancy, property is owned equally by two or more individuals, and the principle of 'right of survivorship' applies. This means that upon the death of one joint tenant, their share of the property automatically passes to the surviving joint tenant(s). The deceased's share does not form part of their estate and cannot be bequeathed through a will.
Question 9: When one of two joint tenants passes away, the property will automatically:
- Be inherited by any children
- Be held in trust until the death of the survivor
- Belong to the deceased’s estate
- Belong to the survivor (Correct answer)
Correct answer: Belong to the survivor
This question is a duplicate of Q11. Under a joint tenancy, the legal principle of 'right of survivorship' dictates that when one joint tenant dies, their interest in the property automatically transfers to the surviving joint tenant(s). This means the property bypasses the deceased's will and estate, belonging entirely to the survivor.
Question 10: In July 2004, a residential mortgage was suggested for a borrower buying their first house. How does the Mortgage Conduct of Business Rules address mortgage administration?
- Regulation does not apply (Correct answer)
- Transitional regulation rules apply
- It is deemed to be semi-regulated
- It is fully regulated
Correct answer: Regulation does not apply
The Mortgage Conduct of Business (MCOB) rules, which regulate residential mortgage administration, were introduced by the Financial Services Authority (FSA) and became effective from 31 October 2004. Since the mortgage in question was suggested in July 2004, it predates the full implementation of MCOB regulation. Therefore, at that specific time, the administration of such a mortgage was not subject to these rules.
Question 11: How is the client's credit evaluated by the lender?
- The lender must use the SVR as the starting point for the interest rate stress test, rather than the fixed rate
- Lenders need the actual figures for committed expenditure, but for basic essential and basic quality‑of‑life expenditure they can use either the borrower's actual figures or statistical or modelled data from organizations such as the Office for National Statistics
- The lender must consider potential interest rate increases over a minimum period of five years from the start of the mortgage, unless the mortgage is on a fixed rate for at least five years or the mortgage term is less than five years
- By take references from a number of sources, including employers, lenders and landlords, financial statements are also useful as they can provide a good indication of track record and lifestyle (Correct answer)
Correct answer: By take references from a number of sources, including employers, lenders and landlords, financial statements are also useful as they can provide a good indication of track record and lifestyle
Lenders assess a client's creditworthiness through a comprehensive evaluation, not solely relying on credit scores. They gather information from various sources, including employment history, previous lending records, and landlord references, to understand a borrower's financial track record and stability. Financial statements also provide valuable insights into income, expenditure, and overall lifestyle, helping the lender determine repayment capacity and willingness.
Free CeMAP Module II Questions and Answers 1
What is the typical insurance policy Waiver of Premium (WOP) deferral period?