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September 2003 Question 2

S

Snowy

Member
the second paragraph of the question says -

1) "The product operates by offering a loan = to a value of the proportion of the property."

......then point number 2 of the question says that "The loan is for a fixed amount and is not linked to the property value"

......Confusing - what's the difference?

2) Comment number 3 of the examiner's report also states that the nature of the product was a loan and not an investment, so why does the solution use the analogy of investment/return in the answer?
 
(1) The loan is a proportion of the value of the house at a fixed moment in time and therefore the actual loan is fixed. For example, if the current market value is £120,000 and the retired person wants to borrow 50%, the loan is for a fixed £60,000. This means that the retired person will pay back £60,000, not 50% of the value of the house.
(2) The product is a loan, ie £60,000 is borrowed and so £60,000 is paid back, with interest. The only time that investment returns comes into it is when explaining how annuities are taxed.
 
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