2. Types of Borrower

Question 1

What are the 3 Ps of assessing a mortgage application?

Answer 1

Person: is the lender legally able and willing to lend to the applicant?

Property: is the property suitable security for the required mortgage?

Purpose: is the purpose of the mortgage acceptable (E.g. house purchase, home improvement, capital raising)?

Question 2

List some types of borrower

Answer 2

Private //
Buy to let //
Business //
Corporate //
Commercial //
Personal representatives and attorneys //
Trustees

Question 3

Why might a private (personal) borrower seek mortgage finance?

Answer 3

To buy a home for themselves and their family. These borrowers form the bulk of the residential mortgage market.

Those who already have a mortgage and are seeking to arrange top up finance from another lender on a second charge basis.

Those arranging a loan to finance a new purchase before they have sold their existing property, i.e. to ‘bridge’ the finance gap.

Question 4

With regards to buy to let what is the interest coverage ratio?

Answer 4

The ratio of rental income to mortgage payments. Each lender can set an ICR based on rental demand and typical rental levels in the area, with the Prudential Regulation Authority setting 125% as a minimum industry standard.

This means the rent must be at least 125% of the landlords costs, although some lenders set a minimum as high as 145%

Question 5

What is the minimum industry standard interest coverage ratio as set by the Prudential regulation authority?

Answer 5

125%

Question 6

In 2016 the PRA Introduced underwriting standards for buy to let mortgage contracts; what were the main three factors?

Answer 6

Interest coverage ratio

Income affordability test

Interest rate affordability stress test

Question 7

What is the interest rate affordability stress test?

Answer 7

The lender is required to consider the effect of interest rate increases on the borrowers ability to service the mortgage of a minimum period of five years from the start of the mortgage, unless the mortgage is on a fixed or capped rate for at least five years or the mortgage term is less than five years

Question 8

What is the income affordability test in relation to buy to let?

Answer 8

Where the borrower will be using some personal income to support the mortgage, the lender must carry out a detailed affordability assessment

Question 9

When might a lender not be required to consider an interest rate affordability stress test?

Answer 9

If the mortgage is on a fixed or capped rate for at least five years or if the mortgage term is less than five years

Question 10

Describe a consumer buy to let mortgage (CBTL)

Answer 10

This is when the purpose of arranging a mortgage is not wholly or predominantly for business purposes. Borrowers in this category are sometimes described as “accidental landlords”.

There are people who need to let out a property because of personal circumstances rather than because they have chosen to buy a property for rental

Question 11

Who would qualify as a high net worth customer?

Answer 11

The financial conduct authority defines a high net worth customer as one with a minimum annual net income of £300,000 or minimum net assets of £3 million.

In the case of joint applicants, at least one of them must meet the definition in their own right.

A high net worth customer can also be someone whose obligations under the mortgage contract are guaranteed by a person who meets high net worth criteria

Question 12

How does the FCA define a professional customer?

Answer 12

One who has worked in the home finance sector for at least a year, in a professional position that requires knowledge of the product or service to be arranged, and who the firm reasonably believes to be capable of understanding the risks involved in the proposed arrangements

Question 13

Explain who personal representatives are

Answer 13

Personal representatives act in managing the estates of dead people. If the deceased person has left a will, the representative is called an executor and is named by grant of probate.

If the deceased has not left a will, the representative is an administrator, appointed by letters of administration

Question 14

Why might a lender lend to a personal representative/ representatives?

Answer 14

Lenders can lend to personal representatives of an estate if they need a loan to administer the estate or to buy property for dependents of the deceased.

Question 15

What is an attorney?

Answer 15

An attorney is a person who is given the responsibility to deal with someone else’s financial or other personal affairs via a power-of-attorney.

Types of people who use attorneys can include elderly people who can no longer manage their own finances or people who live outside of the UK for long periods

Question 16

What are trustees?

Answer 16

Trustees are people appointed in a document called a trust deed to hold a specific asset, or assets, on behalf of others called beneficiaries, and to act for the beneficiaries according to the terms set out in the deed

Question 17

Mortgages taken out by individuals for business purposes are regulated and subject to MCOB if:

Answer 17

1) The borrowing is secured by a legal charge on a property where at least 40% of the land is used as a residence (The standard definition of a regulated mortgage)

2) The sole purpose of the mortgage, remortgage or further advance is to raise funds for use by a small business (I.e. One with turnover of less than £1 million per year and not an LLP or limited company)

Question 18

With regards to business borrowers and MCOB, What constitutes a small business?

Answer 18

One with turnover of less than £1 million per year and who is not an LLP or limited company

Question 19

What is the standard definition of a regulated mortgage?

Answer 19

Where the borrowing is secured by a legal charge on a property where at least 40% of the land is used as a residence

Question 20

When is a mortgage not a regulated mortgage?

Answer 20

If the mortgage is taken out by a business (i.e. an LLP or limited company), or by individuals in the business, and is secured on business premises.

Question 21

 When it comes to partnerships, why do lenders ensure that any lending contract makes them jointly and severally liable for the loan?

Answer 21

Because a business partnership is an arrangement between self-employed people to work together and the assets of the partnership owned jointly by the partners themselves hence they are also jointly liable for any mortgage debt and repayments

Question 22

Is mortgage lending to a limited liability partnership regulated?

Answer 22

No

Question 23

What is a limited liability partnership (LLP)?

Answer 23

An LLP is a form of partnership where the business is a separate legal entity from the partners, who act as agents of the partnership.

Like a limited company the partners do not have a direct liability for the debts of the partnership over and above any capital they brought to the partnership when it was formed.

Question 24

When lending to an LLP does the lender lend to the partnership or its individual partners?

Answer 24

The lender will lend to the partnership itself, not the individual partners.

Question 25

What is a special purpose vehicle (SPV)?

Answer 25

A special purpose vehicle is a way of holding business property through a limited company, rather than the individual(s) holding the property in their own name

Question 26

Before making a lending decision, when lending to a limited company, what should a lender do?

Answer 26

The lender should confirm that the company is permitted by its memorandum and articles of association to borrow, whether there are any restrictions or limits on such borrowing and whether the individuals the lender is dealing with have the authority to commit the company borrowing

Question 27

 In respect of corporate lending what maximum percentage of building society’s commercial assets can be held in loans to limited companies on secured land?

Answer 27

25%

Question 28

What type of property is a commercial mortgage secured against?

Answer 28

A commercial mortgage is secured against commercial property (for example, a shop or a factory).

A commercial mortgage can be offered to either an individual or a company, but will not be a regulated mortgage

Question 29

What is a mortgage prisoner?

Answer 29

A mortgage prisoner is a customer who has a regulated mortgage and may be prevented from changing to another arrangement with the existing lender or moving to another lender if they are subject to the standard affordability requirements on the MCOB

Question 30

Describe a vulnerable customer

Answer 30

Someone who is especially susceptible to detriment as a result of their personal circumstances, particularly when a firm is not providing appropriate levels of care

Question 31

List some of the reasons an individual may be considered vulnerable

Answer 31

Physical or mental disability // Poor health // Weak numeracy and literacy skills // Financial difficulty // Bereavement // etc

Question 32

For mortgages, who does the FCA regard as vulnerable customers because of the nature of the financial arrangement they are considering?

Answer 32

Those buying a property using the statutory right to buy // Those entering a sale and rent back agreement // Equity release applicants // Customers whose main purpose is debt consolidation

Question 33

Which groups of people are unable to borrow? (/ whose ability to borrow is restricted)

Answer 33

Minors (under 18) // The mentally incapacitated // Undischarged bankrupts and those with poor credit records

Question 34

A person of unsound mind who requires housing to be funded by a mortgage is represented by whom?

Answer 34

A deputy appointed by the Court of Protection, unless they have set up an appropriate power-of-attorney

Question 35

Insolvency occurs when?

Answer 35

A persons liabilities exceed their assets; and

A person cannot meet their financial obligations within a reasonable period of them falling due

Question 36

Bankruptcy occurs when?

Answer 36

Any person who is insolvent and has been declared bankrupt by the County Court. The court issues a bankruptcy order

A person could be insolvent but not bankrupt - at least not until they or their creditors apply for a bankruptcy order

Question 37

For how long does the period of bankruptcy last?

Answer 37

12 months, however the bankruptcy order can be extended in certain situations - for example, if the individual does not cooperate with the trustee

Question 38

What must a borrower do with regards to a previous bankruptcy?

Answer 38

A borrower must declare a previous bankruptcy if asked by the lender. Failure to declare a previous bankruptcy when asked can render the person guilty of fraud.

Question 39

What is an individual voluntary arrangement (IVA)?

Answer 39

A formal agreement between a debtor and their creditors to make reduced payments towards their total debt over an agreed period, typically five years, after which the debt is deemed to be settled.

Question 40

What is a debt relief order?

Answer 40

An order granted by the official receiver to an individual with debts of less than £20,000 and limited assets who cannot repay their debts. It prevents creditors from seeking repayment without the approval of a court while the DRO is in place; after 12 months the debts are usually written off

Question 41

What is an ordinary power-of-attorney?

Answer 41

It enables the attorney to carry out activities relating to the donors financial and property affairs. The donor has complete control over affairs and can carry out the same transactions as the attorney. They can also limit what the attorney can do.

Question 42

When does an ordinary power-of-attorney cease?

Answer 42

When the donor becomes mentally incapable, and if they have not made other arrangements, the Court of Protection will appoint someone to look after their affairs

Question 43

What is a lasting power-of-attorney?

Answer 43

A lasting power-of-attorney is specifically designed to enable people to decide who will look after their affairs if and when they are mentally unable to do so themselves. A lasting power-of-attorney must be registered with the Office of the Public Guardian before it becomes effective

Question 44

With whom must a lasting power-of-attorney be registered?

Answer 44

The Office of the Public Guardian (OPG)

Question 45

What two forms is a lasting power-of-attorney available in?

Answer 45

Property and financial affairs and health and welfare

Question 46

What is an enduring power of attorney?

Answer 46

Until the 30th of September 2007 it was possible to set up an enduring power-of-attorney. An EPA can be used like an ordinary power-of-attorney, while the donor has mental capacity; in other words, the attorney can assist the donor to manage financial matters

Question 47

With regards to an enduring power-of-attorney, if the donor loses mental capacity what must the attorney do to continue to act for the donor?

Answer 47

Register the EPA with the Office of the Public Guardian

Question 48

When can an EPA be revoked?

Answer 48

If it is unregistered, providing the donor has mental capacity.

A registered EPA may also be revoked, but only after confirmation from the court of protection that the donor fully understands the implications of doing so

Question 49

When an application is made to register an EPA with the office of the public guardian, who must be informed?

Answer 49

The donor and at least three of the donor’s relatives aged at least 18 and mentally capable