Suitability & Affordability Flashcards
CCJ
- High risk customers
- Listed in the register of judgements orders and fines
- Listed for 6 years unless cleared in a month
- If cleared after 1 month it’s shown as satisfied
Bankruptcy & Property
Sole Owner
- If there is £1k+ equity in the property it is transferred to the trustee in bankruptcy
- The bankrupt no longer owns the property and it is sold to pay back creditors
Joint Owned
- Ownership is not transferred to the trustee
- The trustee applies for a possession order if the borrower has £1k+
- Trustee enters a form J at the land registry that will keep them informed of what’s happening with the home, if it sells or if ownership is transferred.
- If it’s a family home, forced sale can be delayed by 12-months
- The joint owner can buy the bankrupt out
Affordability Verification Documents Employed
P60 & Payslips
Affordability Verification Documents Self-Employed
- P/L accounts for 3 years
- Includes net profit & drawings
- Business with £15k or less turnover, detailed accounts are not required
Affordability Verification Documents Business Borrowing
- If the loan is secured on the main property for business purposes the borrower is assessed on a personal basis.
- The health of the business is also assessed
Affordability Verification Documents Directors
- Accountant to provide the companies financial position
- Company accounts for 3 years where the year end is 18 months before application
- Self-assessment
- Payslips for 3 months
Risk Effect on options
- Will dictate the need for Interest only or Capital Repayment
- Will dictate variable or fixed/capped rate
Risk Profiles
Cautious
- Capital Repayment
Balanced
- 1/2 Capital Repayment
- 1/2 Interest Only
Adventurous (Speculative)
- Only this profile would fit interest only with a repayment vehicle
Methods for assessing risk
Risk Scoring
Client allocates a number from 1-10
Detailed Questionnaire
Psychometric Testing
Most sophisticated risk profiling tool
Mortgage Term
- The shortest possible should always be selected
- The term dictates protection policies, life cover & income protection
- Must think about retirement
Interest Only Mortgage Repayment Vehicle
The lender is now responsible for checking a repayment vehicle is in place at application stage
- Records should be kept for the whole term
- Must seek evidence at least once during the term
- Affordability is assessed on interest payments and repayment vehicle premiums
- NOT necessary for Lifetime mortgages & Bridging loans
Repayment Vehicles NOT ACCEPTED
- House price inflation
- Receiving a legacy
- Windfalls
- Ad-hoc investment payments
Acceptable Repayment Vehicles
- Targeted Investments
- Endowments
- Pension Mortgages
- ISA Mortgages
Might also be - Downsizing
- Regular bonuses
- Sale of another asset e.g. BTL
Retirement Interest Only Mortgage
- Introduced March 2018 Works in a similar way to interest only but - No fixed term - No repayment vehicle - No interest accumulation
Affordability is assessed to pay into retirement
Debt is settled by
- Death of both
- Selling the home
- Both move into a care home
The Property
Lenders need:
- Address & plot number if new
- Price
- House/Flat/Bungalow
- Tenure (freehold/leasehold/commonhold)
- Number of rooms
- Vacant Possession (Usually a requirement for lending)
- Alterations required (May need retention or undertaking)
- Residential/Business purposes
- New build within 10 years - Builder details and are they part of the NHBC
- Self-Build - assessment from NHBC, Inspector, Structural warranty inspector. These details are checked by the valuer
Determining Property Value - Tenure
Freehold (Most Valuable)
- Effected by Covenants & Easements
- Freehold flats are not lendable
- Ex local authority flats are not lendable
Leasehold
- Leasehold needs to be 30-40yrs beyond mortgage term (over 80yrs)
- If less that 80 years they will pay premium & a marriage value to extend the lease.
- Marriage value is the difference of the current value and the value when the lease is extended
- A short lease has a massive difference in the marriage value.
- Over 80yrs a marriage value isn’t needed
- Freeholder has the right to 50% of the marriage value.
- Leaseholder can extend after 2 years
- Lender insists that the leaseholder serve a statutory notice of claim to the freeholder & that the lease extension can be attributed to the new owner.
- To increase the value the owners should extend the lease before selling
- Lenders must consider forced sale, small leases effect the value and market appetite
Marriage Value
If a lease is less that 80 years they will pay premium & a marriage value to extend the lease.
- Marriage value is the difference of the current value and the value when the lease is extended
- A short lease has a massive difference in the marriage value.
- for leases over 80yrs a marriage value isn’t needed
- Freeholder has the right to 50% of the marriage value.
Types and Designs of Property
Considerations on value:
Bungalow - Most expensive
House
Flat - least expensive
Location
- Commuter routes
- Affluent neighbourhoods
- Good Schools
Period properties with original features tend to be worth more
Method of contruction
Standard - Highly Mortgageable
Non-Standard - much bigger risk to lenders as they need to consider a forced sale
Standard = Bricks, Mortar and Tile
Non-Standard - Timber, Concrete & Steel
Prefab houses
Less desirable as the concrete plinth can decay because of the chemicals in mining waste
Mundic blocks - Wales
Where mining waste is a huge issue and has degraded the concrete. Much less desirable, testing on the mundic blocks are needed before any lending but lenders are unlikely to lend and if they do it won’t be the full amount
Large flat roofs
Less desirable as they have to be replaced every 10 years or so
Conditions and Defects
- Valuer notes necessary repairs & reports them with recommendations to the lender
- This can effect the value
- It may prompt the need for an undertaking or retention
- They will look at comps in the area, if a house that needs a lot of work is valued the same as a completed house it will cause issues.
Multi-use Property
E.g. shop/flat
This is detrimental to a properties value and some lenders will refuse to lend
Insurance Issues
Some properties are uninsurable e.g. flood plains, close to a river or a cliff
Lenders consider a forced sale, if the property can’t be insured the lender is unlikely to lend.
2016 Flood Reinsurance Scheme
Available to help people find affordable insurance for flood prone properties
- Includes residential property made prior to 2009
- Runs for 25 years
- Funded by a levy on home insurers
Environmental Factors
Negative - Devaluing - Radon Gas \+ Carcinogenic, need ventilation - Overhead electric power lines \+ Thought by some to cause cancer \+ Lenders are reluctant - Road widening schemes
Negative Geology of Land
London Clay Slippage Subsidence Floodplains Busy Roads Mobile Masts Substations
Positive Environmental
Eco Friendly
- Feed in tariff scheme (solar & wind)
- Homeowners get paid for generating energy and exporting it to the national grid
- Usually £90-£220 PA
Rent a roof scheme
- Company rents your roof to install solar panels for 20-25 years
+ This might cause a strain on the roof
+ Homeowner doesn’t have access to the roof while rented
- Solar panels are ugly and so can put a lender off as they worry about resale.
Vacant Possession
Properties with a tenant are less desirable
a sitting tenant could cause problems for the lender in the event of a forced sale which is why you must get a lenders permission before letting.
Valuations
All surveys are non-refundable
- Building societies must do this by law
- Other institutions don’t have to do this but usually do
Lender Valuation - Basic Valuation
Commissioned by the borrower
- Condition report
- Homebuyers report
- Building Survey
A mortgage advisor cannot recommend a survey
Why it’s needed
- The survey determines the value for the lender
- Helps them ascertain how much to lend and if they should
- Determines the insurance reinstatement value
Basic Valuation - £175 - £1,100
For lender & reinstatement value purposes
- Applicant pays a fee for this
- Very basic
- Lenders LTV is based on this
Desktop Valuation - Basic
- Lender doesn’t attend the property, it’s based on past data and similar properties
Undertakings & Retentions - Basic
Undertakings
Work to be completed in a specific time period
Retention
Major work, the lender can hold funds back until the work is completed
Non-warranty Disclaimer - Basic
Lenders disclaim responsibility for the state of the property purchase price
Borrower litigation on Basic Valuers for duty of care
Borrowers have successfully sued valuers based on duty of care. They succeed when the value is 5-10% different to actual value.
Claims are successful on two grounds:
- Lenders disclaimer is insufficiently prominent
- Borrowers are inexperienced and needed extra support
Basic Valuation Record Includes
- Acceptance
- Rejection
- Conditional recommendation acceptance
+Undertaking or Retention - Higher or lower value
A lower valuation may get a smaller mortgage & may be contingent on further consultation from experts e.g. drainage, engineers, arborists etc
LTV
This is based on the lender valuation, not the purchase price of market value
- Low LTV is a lot less risky
Conditional Report £250-£300
- Commissioned by the buyer
- This is not for a valuation
- Snapshot of the property condition incl property issues and planning issues.
- Uses a traffic light system
Red - Serious issues
Amber - Repairable defects
Green - No defects
This report doesn’t offer recommendations
Homebuyer Report - Survey & Valuation - £400 - £1,000
- Identifies obvious problems e.g. damp
- They won’t lift heavy things or carpet
- Limited in scope
- Reports urgent issues
- Will recommend action & further reports
Contains everything in the conditional report along with:
- Market valuation
- Information on the area
- Insurance reinstatement figure
- Will include pre-recorded EPC, will not carry out a new one
Uses a traffic light system as well
Building Survey - £600-£1,300
Thorough and complete survey commissioned by the borrower.
- Borrower has comeback via duty of care
- Lender can insist on their own survey
Subsidence
The shift of land downwards - from wet to dry, the earth shrinks and causes cracks in the building
Heave
Shift of land up - from dry to wet, can be from the removal of trees so the water pools
Undertakings
The property is in good condition but the lender requires some work to be done, they usually specify a timeframe
The lender can check in 3-6 months to ensure work is complete
Retention
Where major issues are detected e.g. wet/dry rot or woodworm
The lender will assess before handing over all the money
Bridging loans can be used in the meantime
New Builds & Construction
- Lenders like builders who are members of the NHBC
- Builders comply with consumer code for home builders
- NHBC scheme - Protection & Warrently
+ covers full value for 2 years
+ claim is made first to the builder and then the NHBC - After 2 years the guarantee covers the full cost over a min claim value for major structural work.
- The claims are subject to an upper limit
- The warranty is in effect from exchange and protects against insolvency, this covers the loss of deposit and other costs
Premier Guarentee
Home warranty for new builds
- Covers 1st 2yrs if defects are not covered by the builder - Defects insurance period
- 3-10yrs for structural
Local Authority Building Control New Home Warranty LABC
Cover split by 3 periods
- Building period
- Defects period
- Structural Insurance
This is a non-profit membership org
Premier guarantee & LABC underwritten by Lloyds of London
Other warranties by Evolution Building warranties and BuildZone
Zurichs standard 10 withdrawn in 2009, they still honour the 10 year until 2019
Consumer Code for Builders
- Fair treatment of customers
- Customers know the expected service levels
- Customers are given reliable information
- Customers must know how to make a complaint
If the builder is not a member for a body, the lender will get a supervising architect to regularly inspect the building. The builder must also have professional indemnity insurance at a min of £1m
When you don’t need planning permission
Extensions
- Front or side isn’t closer to the highway
- Can’t be higher than the existing roof
- 2 story extension isn’t closer than 7 meters to boundary
- Depth of the 2 story ext no more than 3 meters to the rear of a wall or the original house
- Addition doesn’t cover 1/2 the land
- Material match existing
- Converted garage cannot add to size
- Loft extension within 50m3 detached or 40m3 semi
- Erecting a satellite dish
- Single story ext
+ 4m projection for detached
+ 3m projection on non detached
Neighbourhood consultation scheme
Applies to larger developments including single story developments
- Detached 4-8 meters
- Non-Detached 3-6 meters
Designed to simplify the process for straightforward projects and allow fast tracking
Applicants write to the local authority planning department with details
If any objections are recorded from the neighbourhood the local authority will take them into account
When you do need planning permission
- Structure erected next to a property
- Large extension built outside of the permitted developments
+ new property
+ work on a listed property
+ converting an existing property
+ splitting an existing development
+ changes to original plans
Planning Consent Process
- Submit plan online with outline
- Placed on register & notices served to neighbours
- Committee will decide
- If they build outside of the approved plan they may need to tear it down and reinstate to the original form
When buying a changed property the buyer needs to check the permissions
The local authority has the power to block work
Building Regs
Apply to the structure & materials for health and safety and to maximise energy efficiency
Local authority inspects buildings and use enforcement power for breaches
Buildings subject to building regs
- New Buildings
- Extensions
- Cavity walls
- Loft conversions
- Under-pinning a property
Buildings exempt to building regs
- Car ports
- Garage under 30 meters squared
- New boundary wall or garden
Listed Buildings
Buildings with Architectural and Historical Interest
- Building consent is always required
Categories
Grade 1: 2.5% - Buildings of exceptional interest
Grade 2: 5.5% - Particular Interest
Grade 3: 92% - Special Interest
Grade 1&2 - changes involve historic England, Wales or Scotland
Repairs are dictated by the local authority
Consent is required for changes, extensions or demolition.
Agricultural Holdings Act 1948
- Gives tenants a high degree of security
- Unattractive to lenders, specialised lenders are usually needed
- It’s very hard to remove an agricultural tenant, the only reason for removal would be poor land management
Higher Lending Charge (HLC)
Invoked by lenders on a high loan to value ratio as this is more risky to the lender in the event of default
Lender specifies LTV, usually 75-90% of valuation (lender valuation, not price)
Lender uses the charge to buy an indemnity policy to protect against negative equity.
Calculation:
House price: £175k Borrowing: £155k House valued: £170k High lending threshold: 85% Higher lending rate: 5%
Formula £170k x 85%= 144,500k £155k needed (155k-144,500 = £10,500) Lender charges 5% on £10,500 Total HLC = £525
One off charge £525 to borrow an extra £10,500
MIG
The lender will use the HLC to buy a MIG to protect against negative equity.
- The lender claims from the insurer and they pay the difference between the sale price and the outstanding mortgage minus an excess of 20%
Rights of Subrogation
The insurer can sue the borrower under the right of subrogation for the amount paid to the lender
The lender can also sue the borrower for the 20% deductible.
The insurer will always insist on prudent lending to diminish the risk of this happening.
Security of the Lender
2 Types
- Borrower (promise to pay)
- Property (equitable value)
- Lender will insist on Buildings Insurance
- Life assurance can be used additionally
- Endowment with a surrender value can be used
- Policy holder can assign the endowment to the lender
- Assigning is where an endowment is legally transferred to the lender
- Alternatively the lender takes deposit of the endowment which means they have equitable right but no legal right.
Buy to Let Rental Yields
The PRA introduced tougher stress testing based on rental yields
Rental yield indicates if the investment is successful.
3 Calculations
Gross rental yield
Net rental yield
Total return on rental property
Gross & net rental yield do not take into account borrowing costs so that they can compare their return against mortgage rates. If the yield is better than the borrowing rate then they are making a positive return
Total return on rental property includes borrowing costs to judge their actual return before tax.
Gross Rental Yield
Gross rental yield is the total gross rent as a percentage of the purchase price.
Gross rent / Property purchase price x 100
E.g.
£16,800 PA rent / £350k Price x 100 = 4.8% Gross Yield
Net Rental Yield
Gross rent less running costs as a percentage of the purchase price.
This is more accurate as it takes into account the running costs.
Gross rent - running costs/property purchase price x 100
E.g.
£16,800 PA rent - £3,000 PA running cost = £13,800
£13,800 / £350k x 100 =
3.94% Net Yield
Total Return on Rental Property
Total net return less mortgage costs, this is the actual net returns the investor will receive before tax.
Gross rent less running costs and mortgage/property purchase price x 100
E.g.
£16,800 PA rent - £3000 PA running cost - £7,800 Mortgage Interest cost = £6000
£6000 net income / £350k Purchase price x 100
= 1.71% Total return on rent
House buying costs
Estate agent fee (seller) - 1.5 - 3.5% sale price
Mortgage fees
- Reservation fee - booking fee to reserve a special mortgage deal (can be refunded) £100-£1000
- Arrangement fee (may include valuation) £50-£2000
- HLC if applicable
- Lender reference charge £50
- Intermediary fee - fixed charge
+ Advisor may receive procuration fee from lender
- Mortgage packers charge % of advance or flat fee
- Mortgage Exit Admin Fee (MEAF) to terminate mortgage
- Valuations and Surveys £250-£750
Legal Fees
Fees before the exchange of contracts - Local land charges registry search & enquiries to local authority \+ Road changes, town planning etc - Local authority searched \+ to identify new developments/roads - Environmental search \+ flooding, mining etc - Drainage Search \+ is property connected to the mains/sewers - Bankruptcy Search \+ borrower & vendor
Fees before completion
- Title indemnity fee: 0.1% on property value for non-guaranteed title or modified property without permissions that need reinstatement.
- Set-up to protect the lender or everyone
Fees on completion
- Bank transfer fee
- Solicitors conveyancing fee
+ depends on the work involved and can be carried forward if the sale falls through
Fees after completion
- Land registry fee - Cost depends on the value of the property, value over £1.5m are the most expensive, usually £40 - £910
+ if ownership doesn’t change i.e. new mortgage the the cost is between £40 - £250
- Fees are reduced by 50% when using the government online platform.
SDLT for Commercial Property
No 3% surcharge for additional property when commercial
£0-£150k - 0%
£150-£250 - 2%
£250k+ - 5%
SDLT residential bulk buying rules introduced 2011
effective when you buy 2 or more properties at the same time
SDLT is collected on the mean price (Average) rather than the aggregate (Total)
- Properties must be bought from the same vendor in a single or linked transaction (3% surcharge applies)
E.g. 5x £150k properties
£150k = SDLT £5k
£5k x 5 = Total SDLT £25k
