Housing Loans
Core concepts
Housing loan questions test mortgage mechanics: loan-to-value (LTV), repayment vs. interest-only, fixed vs. variable rates, amortisation, early repayment charges, and arrangement/valuation/legal fees. Know the affordability assessment, stress testing, deposit requirements, and mortgage-related protections (e.g., disclosure of total cost).
Understand security (the property secures the loan), default and repossession, mortgage indemnity/insurance, and equity (value minus outstanding loan). Distinguish capital repayment (principal reduces each month) from interest-only (principal due at end, requiring a repayment vehicle).
Traps in questions
- Confusing LTV (loan ÷ property value) with deposit percentage.
- Assuming an interest-only mortgage repays principal - it does not without a vehicle.
- Mixing fixed (certainty, early repayment charges) with variable/tracker (moves with base rate).
- Forgetting fees add to the true cost of borrowing.
- Overlooking early repayment charges on fixed deals.
Worked example / rule of thumb
LTV: property 250,000, loan 200,000 → LTV = 200,000 ÷ 250,000 = 80%; deposit = 20% = 50,000.
Monthly interest-only payment = loan × annual rate ÷ 12. For 200,000 at 5%: 200,000 × 0.05 ÷ 12 ≈ 833.33 interest only. A capital repayment mortgage pays more early on (interest-heavy) and builds equity over time.
Rule of thumb: Lower LTV → lower rate and lower risk; higher LTV → higher rate and possible indemnity premium.