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Cemap 2&3 Self Testing > 26. Raising Additional Funds From Property > Flashcards

26. Raising Additional Funds From Property Flashcards

1
Q

Are further advances usually for the same term as the existing mortgage or different term?

A

usually same term or shorter

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2
Q

What are the advantages (2) and disadvantages (1) of choosing a FA over a RMTG or second charge loan?

A
  1. Cost Effective
  2. Less Legal and Admin work
  3. RMTG could get you a better deal in some cases, depending on rates
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3
Q

What is the disclosure of alternatives (in relation to an FA)?

A

The lender needs to tell the borrower than RMTGs and Second charge loans are available as alternatives to FA. However, they do not have to provide advice on them and vice versa.

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4
Q

How does the application process for a FA differ from that of a normal mortgage?

A

It does, it’s exactly the same. It’s only less admin and legal work because the lender and sols already possess the charge and info on track record.

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5
Q

If the purpose of an FA is for home improvements, is this usually looked upon favourably or unfavourably by the lender?

A

Favourably, some only lend FA for home improvements, other will allow increased LTV for this

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6
Q

What is usually the minimum length of time a lender will require the existing mortgage to be in place before they will consider a FA?

A

6 months

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7
Q

Are further advances usually granted on a repayment or I/O basis, or both?

A

Usually repayment only

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8
Q

If someone takes out a FA - will the interest rates of the new monies be based on the rates at the time the original loan was taken out or the current rates at the time the FA is processed?

A

Current rates

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9
Q

In relation to FAs:
1. Are there application fees?
2. Are there ERCs?
3. Are overpayments permitted?

A
  1. Yes but ususally lower than normal
  2. Yes
  3. Yes within limits
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10
Q

What will the order of priority be if a borrower takes out an FA with their first charge lender when they already have a second charge loan against the property?

A

Priority is chronological. If nothing is done:
1. original mortgage - first charge
2. second charge loan - second charge
3. FA with origial lender - third charge

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11
Q

What options might a lender have to ensure that an FA with them is not superceeded in order of priority by a second charge lender who already has a loan against the property? (2)

A
  1. Offer the borrower enough funds to pay the second charge loan off and ensure this is done as a condition on completion
  2. Get a deed of postponement from the second charge lender
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12
Q

What is the deed of postponement?

A

A deed granted by a second charge lender which postpones their charge in the order of priority, allowing a new FA to jump the queue

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13
Q

What is tacking?

A

When as part of a deed of postponement, a new FA is ‘tacked’ onto the original mortgage to become part of the initial first charge loan

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14
Q

When would a deed of postponement not be required, yet an FA could still superceede a second charge in order of priority? (3)

A
  1. First charge owner did not know about the second charge
  2. The original mortgage deed obliged the first charge owner to make a FA and this obligation was registered with land reg
  3. There was a maxmimum lending limit agreed between the lender and the borrower within the orginal mortgage with an agreement to drawdown funds later on’

In these instances, the FA is automatically tacked onto the original mortgage

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15
Q

According to MCOB 7, 7A & 7B regulations relating to existing customers, what must lenders provide before the customer submits an application for a further advance?
1. Regulated mortgages
2. MCD regulated mortgages

A
  1. regulated (before march 21 2016) - ESIS or Illustration which meet the requirements for preapplication disclosure.
  2. MCD regulated (21 march 2016 onwards) - ESIS which meets the requirements for pre-application disclosure.
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16
Q

In relation to further advances, should the ESIS be based on the FA amount or the total amount of borrowing?

A

FA amount only, but should include a section detailing the total borrowing & new total payment.

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17
Q

For mortgages which include a drawdown facility, do drawdowns become part of the first charge or it’s own charge?

A

part of the first charge

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18
Q

True or false - Affordability must be checked before every drawdown in a drawdown mortgage

A

True

19
Q

True or false - to drawdown a sum within a drawdown mortgage, a formal application must be submitted

A

False, no formal application needed - they can have anything up to the maximum LTV amoount agreed. (usually around 75%)

20
Q

What is one possible advantage for the customer of using second charge lending, rather than a further advance?

A

Can be used to avoid higher lending charges

21
Q

Do first charge lenders need to agree to any requests for second charge loans to be taken out against the property?

A

By law, no - a second charge loan can be taken out without permission from the first charge borrower.

However, most lenders include a clause in the mortgage deed which states that land registry cannot register another charge without informing them first

22
Q

Who is considered to be the first charge lender for unregistered land?

A

The lender which holds the title deeds

23
Q

How can second charges be recorded for unregistered land?

A

on the land charges registry

24
Q

Why might having a second charge loan be an early warning sign of potential financial problems? (2)

A
  1. The borrower may have been turned down for FA by the first charge lender
  2. Second charge lending is more expensive, so why have they gone for this option? Indicates the borrower may need a lump sum urgently
25
Q

Are second charge loans regulated under MCOB? If so, how?

A

Yes, subject to the same regulations as regulated mortgages, providing that 40% of property is a dwelling.

These rules came into force in 2016, but loans taken out before then are covered retrospectively, aka, back book loans.

26
Q

Are second charge loans taken out for business purposes subject to MCOB?

A

Only if the loan is for amounts up to £25,000

27
Q

What documents do lenders need to supply in relation to second charge loans?
1. Before application
2. When product starts
3. Post sales procedures

A
  1. Initial disclosure documents, ESIS & Adequate explanations
  2. Confirm key details of product
  3. Same post sales procedures as normal
28
Q

What is included in an adequate explanations document? (3)

A
  1. Product key features
  2. how this impacts the customer
  3. what happens if they default
29
Q

If a second charge loan is used to consolidate debt, what must the lender do in relation to the existing debt (2)

A
  1. Ensure any consolidated debts are repaid when the new loan starts OR
  2. Included existing debts in the affordability assessment
30
Q

Is Interest roll-up allowed for second charge loans used to consolidate debt?

A

Yes but only if the customer requests it, not automatically

31
Q

Define closed bridging

A

bridging loan where the borrower has a confirmed exit strategy, ie. a feasible plan for repaying the loan in a set timescale. eg contracts are exchange with a buyer for their existing property or those who have funds but aren’t able to access them in time

32
Q

Define open bridging

A

a bridging loan with no exit strategy/firm buyer of their existing property

33
Q

Which of open or closed bridging loans have higher rates?

A

Open, higher risk = higher rate

34
Q

Are bridging loans usually I/O or C/R? why?

A

I/O - designed to be short term

35
Q

How long can the term of a bridging loan be?

A

Varied - can be hours or years

36
Q

Is interest roll-up available for bridging loans?

A

Yes, repaid when the property is sold

37
Q

Are bridging loans usually subject to a minimum loan amount? If so, how much?

A

Yes - around £30,000

38
Q

Are bridging loans more or less expensive than normal mortgages? Are they subject to fees?

A

More expensive, they are a form of second charge loan. Yes, subject to all the normal fees, e.g. app fee, val fee, legal fees & exit fees

39
Q

How are bridging loans regulated? Are there any exemptions?

A

Exactly the same regulations as a normal mcob regulated mortgage - they are actually just a really short term normal mortgage. So, 40% dwelling and taken out by individuals, not companies unless less than £25k.

Exempt if there is:
- no fixed duration
- is due to be paid within 12 months
- four or less repayments needed
+ used temporarily whilst transitioning to another product

40
Q

If a bridging loan is exempt from MCD regulations, does it still need to assess affordability, suitability and whether there is a credible exit strategy?

A

Yes. Must check if a bridging loan is more suitable than a normal mortgage, if they can afford regular payments and if it is appropriate for finance to be given to them quickly

41
Q

The affordability of bridging loans should be based on the repayment strategy. What considerations are required for:
1. Interest roll up
2. Sale of existing property
3. replacing it with a normal mortgage

A
  1. Affordability assessment not required as no payment needed, but should be made aware of the effects of roll up
  2. guidance not rules, that the lender should get the property inspected to see if it is a suitable exit strategy
  3. is there a guaranteed mortgage offer? If not, hope much would the offer likely be for based on current circumstances
42
Q

Does the lender need to carry out a review of the performance of the exit strategy during the term of bridging loans?

A

No, because they are so short there is no need

43
Q

To extend the term of the offer, who needs to agree to do this? Are new affordability assessments needed?

A

Borrower must agree, lender can’t do this automatically. Yes new affordability assessments are needed, unless one of the following is true:
1. High net worth customer
2. Finance is for a business overdraft
3. Interest roll-up

44
Q

GO BACK TO LOOK AT END PAGES OF THIS CHAPTER IN NOTEBOOK ONCE EQUITY RELEASE PRODUCTS DISCUSSED IN OTHER CHAPTER

A

PLEASE

Cemap 2&3 Self Testing (29 decks)

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