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Cemap 2&3 Self Testing > 24. Other Mortgage Products > Flashcards

24. Other Mortgage Products Flashcards

1
Q

What is a foreign currency mortgage?

A

One where the borrower’s income is in a different currency to the mtg

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2
Q

What are the restrictions that apply to foreign currency mortgages? (3)

A
  1. High minimum loan
  2. Low LTV
  3. Set up costs
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3
Q

Who is the target borrower for a foreign currency loan ?

A

High net worth with a very large mortgage

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4
Q

Why are foreign currency loans high risk?

A

The exchange rate can alter at any time, these mortgage types have become much less popular in recent years as foreign currencies have become more closely aligned to the pound, so reward isn’t worth the risk

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5
Q

What is a managed currency loan?

A

Foreign currency loan where instead of you having to convert from sterling into a foreign currency, the lender does the conversion for you

It’s less risky but very expensive, making it less attractive

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6
Q

What does the mortgage credit directive define a foreign currency loan as? (2)

A
  1. Currency other than the borrower’s income
  2. Currency different from the one where the borrower lives
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7
Q

In line with MCD regulations, what must lenders do regarding foreign currency loans? (2)

A
  1. Include additional warnings in ESIS about conversion fluctuations
  2. Have some form of system in place to protect borrowers from risk, eg.
    - allowing them to switch currencies if rates fluctuate above certain %
    - capped amounts affecting the borrower as a result of such movement
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8
Q

What is a ‘near prime’ mortgage

A

Just another word for sub prime

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9
Q

What is a credit impaired borrower? (2) What type of mortgage is aimed at this type of customer?

A
  1. no credit history
  2. poor credit history

sub prime mortgages

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10
Q

How expensive do sub prime mortgages tend to be when compared with prime mortgages?

A

Higher rates to reflect the higher risk

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11
Q

What types of mortgages can be sub prime mortgages?

A

The same varieties as normal, just have to pay more and there is more underwriting

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12
Q

What are the main differences between sub prime and prime mortgages? (4)

A
  1. State benefits an be included as part of assessable income
  2. higher interest rates, those with 1-2 CCJs may pay 1-2% more than normal, those with many can be up to 11% more
  3. Max LTV will be lower
  4. Higher product fees and ERC
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13
Q

Are people with good credit allowed to access sub prime mortgages?

A

Yes, so long as they are not disadvantaged

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14
Q

Who are guarantor mortgages aimed at?

A

First time buyers with either not enough deposit or not enough income to meetb affordability requirements

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15
Q

What is the maximum age for a guarantor to usually be considered?

A

65

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16
Q

How might a guarantor prove they have ability to repay the mortgage? (2)

A
  1. evidence of sufficient disposable income after own commitments
  2. Lender can take charge over the guarantor’s own house as security
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17
Q

What is a limited liability guarantor?

A

Guarantor where they are responsible for only part of the debt, not all of it

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18
Q

What effect does having a guarantor have on the amount of loan someone can borrow?

A

Maximum amount will be higher than a standard mortgage

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19
Q

What should a guarantor always do before entering into a mortgage contract?

A

seek legal advice

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20
Q

Are guarantor mortgages designed to be a short term or long term arrangement?

A

short term, lenders will look for evidence that the individual will be able to take over the loan themselves in 3-4 years

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21
Q

What is surety?

A

Assigned savings used as security for sub-prime mortgages

family members put cash into a savings account equal to a % of the mortgage & account is assigned to the lender, allowing the borrower to arrange a mortgage with low or no deposit.

The savings account is locked for a fixed period and the family member earns interest on it.

If all goes well, the money is released and savings and interest is returned to the guarantor, guarantee is cancelled and borrower takes over the mortgage

Of there are problems, lender can extend lock in period or take money from the savings to make up defecit

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22
Q

What is the sharia principle that leads to muslims needing to take out islamic home finance?

A

Muslims are forbidden from paying or receiving interest

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23
Q

What are the two types of islamic home finance?

A
  1. Ijara
  2. Murabaha
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24
Q

How do Ijara home finance plans work?

A

The bank buys the house & forms a “promise to purchase” agreement with customer

customer occupies the property for a lease period of up to 25 years, paying the bank monthly payments made up of CAPITAL REPAYMENT and RENT (not interest)

At the end of the term, ownership of the property is transferred to the customer

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25
Q

How do banks ensure ‘rent’ in Ijara mortgages keeps up with interest rates?

A

Rent is reviewed every 12 months and will be adjusted to reflect rates

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26
Q

Can customers with Ijara mortgages make overpayments and have the property transferred to them early?

A

Yes, but they would be subject to ERC

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27
Q

Is Islamic Home Finance more or less expensive than traditional mortgages?

A

More expensive. Murabaha is the more expensive of the two but both are more expensive than normal

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28
Q

What is a Murabaha mortgage?

A

The bank buys the property and immediately sells it back to the customer at a much higher price than they paid for it

The customer immediately becomes the legal owner but then has a capital repayment only mortgage with the bank for a loan with an inflated sale price

29
Q

Is early repayment allowed with Murabaha mortgages?

A

Usually not

30
Q

Do properties using a right to buy scheme qualify for a murabaha mortgage?

A

no

31
Q

When is SDLT due on Islamic mortgages?

A

Only when the property is initially purchased by the lender, not when it is transferred to the customer

32
Q

Self build mortgages - are stage released paid in advance or arrears?

A

Arrears - work is done out of own pocket, stage release reimburses you for it

Advance stage payments are offered by some lenders, but they’re less common and come with higher rates to reflect the risk

33
Q

Do lenders have to carry out the same affordability assessment with CBTL borrowers as normal borrowers?

A

Affordability checks still required

only difference is that lender has discretion to include possible rent from the cbtl property as part of the assessment

34
Q

If someone has a CTBL resi mortgage and they want to re-mortgage, will they still be a cbtl customer?

A

No, once you remortgage you are no longer an ‘accidental’ landlord

35
Q

It is possible for CBTL borrowers to waive their CTBL protection and be treated as a BTL customer instead. They need to sign a contract to do so, what does the contract state? (3)

A
  1. Property cannot be occupied by the borrower or family
  2. property is for business purposes only
  3. they understand they are waiving their right to protection
36
Q

What types of products are usually accessible for BTL customers?

A

Similar products and interest options to normal mortgages, similar fees and ERCS

37
Q

What is a typical LTV that might be given on a BTL property?

A

75-80%

38
Q

True of false, lenders usually insist BTL borrowers already own their main residence?

A

true

39
Q

What is the minimum gross income usually considered for BTL borrowers?

A

20-25k for individual, or one of either joint borrowers

40
Q

What are the age restrictions lenders usually place on BTL borrowers?

A

min = 18-25
max = 75

41
Q

Are retirees allowed to be BTL borrowers?

A

yes

42
Q

What is the rental cover ratio? What is the regulatory minimum this should be, as decided by the PRA? What is the actual minimum lenders tend to set?

A

Rental cover ratio = % of mortgage payment covered by the rental income

PRA = 125% min
Lenders = 145% min

43
Q

What is the PRA definition of a BTL property? (3)

A
  1. 40% of land is a dwelling
  2. cannot be occupied by the borrower or a relative
  3. MUST have a rental agreement of more than 1 month
44
Q

What are the three main affordability requirements for BTL mortgages, as set out by the PRA in their underwriting standards (2016)?

A
  1. Interest Coverage Ratio
  2. Income Affordability Test
  3. Interest Rate Affordability Stress Test
45
Q

What types of BTL mortgage would be exempt from the PRA’s three main affordability requirements? (4)

A
  1. Corporate lending
  2. BTL mortgage contract with a term of less than 12 months
  3. Application from an existing borrower for CONSENT TO LET
  4. Remortgages where NO MORE THAN ORIGINAL LOAN AMOUNT IS BORROWED
46
Q

What is the Interest Coverage Ratio?

A

Ratio of

Rental income: Mortgage Payments, Associated costs & tax

income:outgoings

47
Q

What is the minimum Interest Coverage Ratio set by the PRA? How does a lender decide on their minimum?

A

PRA = 125%

Lenders base it off typical rental values for the local area, verified by either:
1. Qualified surveyor
2. Automated valuation models
3. existing rental agreement

48
Q

Why might HRT payers need higher interest coverage ratio?

A

Higher tax bills

49
Q

When might an income affordability test be needed? How is it calculated?

A

Needed for borrowers wanting to supplement rental income with personal income

Total NET income (after tax & NI)
AND ACCOUNTING FOR any likely changes in the future (e.g. retirement

MINUS EXPENDITURE (calculated in same way as normal mcobs affordability)

50
Q

When might someone be exempt from an income affordability test?

A

High net worth customer

51
Q

Within the Interest Rate Affordability Stress Test (BTL borrowers) what is the minimum period for stress testing?

A

5 years
unless product is fixed/capped and is for less than 5 years

52
Q

Within the Interest Rate Affordability Stress Test (BTL borrowers) what is the minimum rate considerations for stress testing? (2)

A

must stress test either up to 5.5% or 2% more than current rates, whichever is higher

53
Q

Within the Interest Rate Affordability Stress Test (BTL borrowers) what must rates reflect? (2)

A

1.Market expectations
2. FPC Recommendations

54
Q

Within the Interest Rate Affordability Stress Test (BTL borrowers) what is the maximum rent rate rises you can take into account?

A

2% per year

55
Q

What must lenders take into account when stress testing btl borrowers with 4+ properties?

A

Must take into account overall experience across the full portfolio

56
Q

Why are BTL properties riskier for lenders? (3)

A
  1. No Guarantee property will be permanently tenanted
  2. Borrower may take commitment less seriously as it’s not their home
  3. value & saleability could decrease if mistreated by tenants/not maintained by borrower
57
Q

What are BTL rates like compared with resi?

A

Used to be a lot more expensive, but demand has now driven the rates down

58
Q

What is an Assured Shorthold Tenancy undertaking?

A

Ensures the property can be repossessed by the lender at the end of a short lease

59
Q

How is BTL rental income taxed?

A

Non-earned income at owner’s tax band

60
Q

What expenses can be deducted from BTL rental income before tax is paid? (5)

A
  1. Repairs/maintenance
  2. insurance
  3. letting agent fees
  4. ground rent/service charges (leasehold)
  5. replacing furnishings (wear & tear)
61
Q

What tax relief is available for BTL mortgage interest payments?

A

Tax credit given at Basic rate, regardless of your tax bracket

so 20% tax credit of any mortgage interest payments for the year

if you pay £5,000 in interest that year, you will get a £1,000 tax credit

62
Q

Is CGT payable for BTL properties? When is it payable?

A

Yes, payable at the taxpayer’s rate on anything above annual exemption; However, SDLT can be claimed as a deductable expense from the CGT bill.

payable within 30 days of disposal

63
Q

What are the advantages of owning a BTL property through a SPV? (5)

A
  1. Easier to change ownership
    - shares in company can change without property changing hands
  2. LOWER SDLT of 0.5% if company changes ownership
  3. Company is able to claim MORTGAGE INTEREST AS A BUSINESS EXPENSE
  4. Can hold a number of properties
  5. Directors are not liable for debt, unless they have given personal guarantees
64
Q

What are the disadvantages of owning a BTL property through a SPV? (4)

A
  1. Less choice - not many lenders will lend
  2. More admin/accounting
  3. More expensive - running costs, lack of competition from lenders
  4. Personal guarantees from directors
65
Q

What tax is payable for BTL properties own via a SPV?

A

Corporation tax payable on rental income after expenses (can include running costs and salaries but not dividends)

Only payable on the year it is received

CGT not payable as corporation tax covers gains for businesses, though individuals can be liable for CGT if they sell their shares in the company

66
Q

Is stamp duty land tax payable for SPVs?

A

When buying a property - SDLT is payable +3% surcharge for multiple properties

When transferring ownership - 0.5%

HOWEVER, remember SDLT can be offset against gains for corporation tax purposes

67
Q

Do SPVs have to pay income tax?

A

Directors can decide whether to pay shareholders and themselves an income or not - if they do income tax is payable, if not and money remains in company then no.

68
Q

What is the main disadvantage of transferring a property from individual ownership to an SPV?

A

Normally, you pay CGT when you dispose of something and SDLT when you buy a property

When transferring from an individual to SPV, you have to pay CGT and the company (owned by you) has to pay SDLT to receive it

Cemap 2&3 Self Testing (29 decks)

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