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2015 Presentation - Mortgage training for graduates

A

Andy87

Member
Good day everyone,

Please help me with the following question.

The task of the 2015 presentation questions states that: "Our typical first time buyer has usually saved up a deposit of £5,000 and they are looking to buy a property that costs £105,000 so they need to borrow £100,000 from XYZ. They usually only stay in the first property they buy for 5 years."

As far as I understand a typical customer remortgages somehow in 5 years term. This implies that their regular payments somehow change due to changed circumtnaces.

Also the questions asks the following: "As you are aware our niche sector of the market is first time buyers and they typically only stay 5 years in their first property, so for your illustrations you might want to consider what happens over five years as well as over the whole term."

It is pretty obvious what is going on over the first five years. But how can we know what payments/interest rate/outstanding amount/... are after that term if the customer has a new house (and propably a new mortgage)?
On the examiners' solution (Slide 6) they draw a line which does not account for any change after 5 years.

Could you please explain how can it be?

Thank you in advance.

With kind regards
Andy
 
Not sure what your confusion is.
You are taking a 25-year mortgage and they provide numbers for what is required to pay it back over 25 years.
You are given an option to repay early, for whatever reason (want to move to another house, have spare cash lying around etc), and for simplicity we'll ignore any conditions for repaying early(eg extra fees).
Typically, their customers want to move after 5 years and repay the mortgage early.
However, this isn't mandatory, ie the bank isn't going to make you pay $88k at the end of 5 years. You just keep paying in line with the 25 year plan. It could easily be 4 yrs or 6, as well

In terms of explaining it it makes sense to say
you buy a house and take out a 25 yr mortgage... and this is what is required. (line on graph going all the way to 25 yrs.)
You have to option to repay early and many of our customers (sell house buy another) repay after 5 years. That's where the line at 5 years comes in and you say that the remaining loan is $88k.

What happens next is anyone's guess, depending on value of new house, mortgage rates at time, etc.... but this is another step along the line and its not worth going into details.

(reading between the lines of "our niche is first time buyers who repay after 5 year" suggests that some of these go to other providers for their second home. again not worth mentioning here)

There is some focus in question on problem of negative equity. If this occurs then it might be more difficult for them to repay mortgage (early) at 5 years because they need to pay cash in addition to sale proceeds of house.
 
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