CF6 rarely asks you to name a product. It asks you to justify one for a specific borrower, which means understanding how each option behaves over time and who it suits.
Repayment method first
| Method | How it works | Suits |
|---|---|---|
| Capital and interest | Each payment covers interest and repays part of the capital, so the debt is cleared by the end of the term | Almost all residential borrowers |
| Interest only | Payments cover interest only and the full capital is outstanding at the end of the term | Borrowers with a credible repayment strategy, some buy to let, retirement interest only |
| Part and part | A portion on each basis | Borrowers needing a lower payment with partial capital reduction |
The behaviour of a capital and interest mortgage matters for the exam. In the early years most of the payment is interest, so the balance falls slowly, and the reduction accelerates later. That is why a borrower who moves house repeatedly and restarts a twenty five year term makes little progress on the capital.
Interest rate types
- Fixed rate. The rate and payment are certain for the fixed period. It protects against rate rises, gives budgeting certainty, and normally carries an early repayment charge. The borrower cannot benefit if rates fall.
- Tracker. Follows a stated external rate, usually base rate, plus a margin. Movements pass through automatically. Some have a collar below which the rate will not fall.
- Discounted variable. A discount off the lender standard variable rate for a set period. The saving is certain but the underlying rate is not, because the lender controls it.
- Standard variable rate. The lender default rate, changed at its discretion, usually higher than product rates and normally without an early repayment charge.
- Capped rate. Variable but with a ceiling, offering some protection while allowing benefit from falls, generally at a higher initial cost.
- Offset. Savings and sometimes current account balances are set against the mortgage balance, reducing the interest charged. The borrower can take a reduced payment or keep the payment and shorten the term.
Choosing between them in a case study
Read the borrower circumstances and match them to the risk they cannot carry.
- Tight budget with no surplus, favour a fixed rate for payment certainty
- Expectation of a lump sum in the near future, avoid a long early repayment charge or check the overpayment allowance
- Higher rate taxpayer with substantial savings, consider offset
- Self employed holding funds for a tax bill, consider offset
- Comfortable with variation and wanting to benefit from falls, consider a tracker
- Plan to move within two years, weigh portability and the early repayment charge
Costs beyond the rate
The total cost of the deal is what the exam wants, not the headline rate.
| Cost | Note |
|---|---|
| Arrangement or product fee | Payable up front or added to the loan, where adding it means paying interest on it |
| Valuation fee | Basic valuation, homebuyer report or full structural survey |
| Legal fees and disbursements | Conveyancing, searches, land registry |
| Stamp duty land tax | Rates depend on price, whether the buyer is a first time buyer and whether an additional property surcharge applies |
| Early repayment charge | Often tapering, expressed as a percentage of the balance repaid |
| Higher lending charge | Historic, but still appears in older cases |
Where two products are compared, the correct approach is total cost over the initial period, including fees, cashback and the reversion rate.
Portability, overpayments and other features
Portability allows the product to move to a new property, subject to a fresh affordability assessment, which is why it is never a guarantee. Overpayment allowances, commonly 10% of the balance a year, matter to borrowers expecting bonuses. Payment holidays, borrow back and further advance facilities are all useful features to name in a recommendation where the borrower circumstances justify them.
Loan to value drives everything
The rate available, the lender appetite and any additional fees follow the loan to value. Improving loan to value by a small deposit increase can move a borrower into a materially better band, and in an exam it is a legitimate and often overlooked recommendation.
Writing the recommendation
State the repayment method and why, the rate type and why, the term and why, then the total cost over the initial period and the main risk the borrower is accepting. Four sentences with reasons will beat a page of product description every time.