Property (Freehold) - Mortgages (2) Flashcards
What advice can a solicitor give on mortgages?
Solicitors’ Advice: Solicitors will often be asked to advise on mortgages (which is subject to strict regulation).
(1) Regulated Activity: Arranging or giving advice on a specific mortgage offering is a regulated activity, requiring financial services authorisation or professional firm exemption if incidental to typical services (s327 FSMA 2000).
(2) Generic Advice: Solicitors can give generic advice on how mortgages work generally, but must ensure they can give ‘best possible’ information - if this is beyond their expertise, they should refer the client to an expert (CoCS).
What different types of mortgages are there?
Types of Mortgage: Several types of mortgage exist.
(1) Capital Repayment: Borrower repays capital plus interest in monthly instalments.
-Interest: Interest may be charged at a standard variable rate, fixed rate, or index-linked rate.
- Advantage: Entire loan is paid off by the end of term.
- Disadvantage: More expensive in the short-term.
(2) Interest-Only: Borrower pays interest in monthly instalments, and capital at end of term.
- Advantage: Cheaper in the short term.
- Disadvantage: Difficult to fund at the end of term.
(3) Endowment: Borrower pays interest in monthly instalments, and pays a premium to an endowment investment policy fund regularly, who will invest their money and pay off the mortgage at the end of the term.
- Prohibition: Endowment mortgages are now prohibited, but some older ones still subsist.
- Advantage: Policy fund repays capital at end, which can be cheaper.
- Disadvantage: If policy fund fails, borrower is liable for the shortfall.
(4) Sharia-Compliant: Mortgage policy that avoids interest payments (sharia prohibits interest). This may be:
- Bank Purchase: Lender purchases property, and resells it in instalments to borrower at a higher price.
- Bank Lease: Lender purchases property, and leases it to them at high rent, transferring it at a later date.
What will the lender require in terms of mortgage deed and registration?
Mortgage Deed and Registration: Legal mortgages are made by deed, and registered against the property.
(1) Priority Creditor: Having first legal charge over a property gives the lender priority over other creditors, and powers such as the power of sale (s101 LPA) (see land).
(2) Terms and Conditions: Deeds can also impose terms and conditions over borrowers, mitigating risk of default (such as requiring lender consent permission to sell, and offering security).
What will the lender require in terms of the terms of the loan document?
Terms of Loan Document: Lenders will issue ‘Terms of Loan’ documents, setting out terms by which borrowers must abide.
(1) Name of Document: The name of the document will differ by purchase.
- Mortgage Offer: ‘Mortgage offers’ are made for residential and simple commercial mortgages.
- Commitment Letter: ‘Commitment letters’ are made for complex commercial mortgages.
(2) Key Terms: Terms will include the mortgage sum, repayment schedules, security etc. These include:
- Conditional Terms: Terms that must be satisfied prepayment.
- Acceptance Terms: Terms requiring borrowers to commit to a mortgage (even before exchange).
- Withdrawal Terms: Terms permitting withdrawal of mortgage offer (even after exchange).
- Security/Charge: Lenders will often take security over the loan by fixed charge (usually the property).
What is the UK finance handbook?
UK Finance Handbook: UK Finance publishes the UK Finance Mortgage Lenders’ Handbook for Conveyancers. This is a handbook for conveyancers regarding residential mortgages, but with scope for commercial transactions as well.
(1) Part 1: Sets out requirements relevant to all lenders.
(2) Part 2: Sets out requirements relevant in specific circumstances.
(3) Part 3: Sets out instructions for solicitors representing only lenders.
What must a solicitor consider when acting for a lender?
Acting for Lender: Solicitors may act for lenders, both independently and in addition to borrowers.
(1) Full Representation: Solicitors can only act fully for both parties if there is no, or no significant risk of, conflict between the parties, unless an exception applies.
Residential: Loans are on standard terms, so conflict is less likely.
Commercial: Loans are negotiated, so conflict is more likely.
Substantially Common Interest: May act if in best interests, agreed in writing, and safeguards imposed.
(2) Partial Representation: More commonly, solicitors will act fully for borrowers, and merely report to lenders the results of their investigation of title and searches and enquiries, to demonstrate ‘good and marketable’ title.
>Buyer tends to pay lender’s legal fees.
What is a certificate of title?
Certificate of Title: Solicitors must provide a ‘Certificate of Title’ to lenders before funds are confirmed (pre-exchange). This demonstrates whether the property has good and marketable title, which is the standard required to secure the mortgage.
(1) Residential Certificate: Residential properties are certified in a form prescribed by the Law Society and UK Finance. The solicitor confirms: a) no legal problems; b) ownership after completion; c) date required for funds.
(2) Commercial Certificate: Commercial properties are certified by a more detailed form, such as that prescribed by the City of London Law Society.
Format: A series of statements that the solicitor: a) does not disclose against (confirms); or b) discloses against (denies). The statements themselves are not altered, merely confirmed or denied.
(3) Negligence of Solicitor: Negligent preparation of a certificate can lead to an action in tort against the solicitor.
