Topic 10 - Assessing the Applicant's Financial Status

Question 1

What types of income are taken into account?

Answer 1

• Employment
• Self-employment
• Directorship
• Secure trust income
• Other secure income

If maintenance then needs to be backed up by courts and the terms length need to be checked

Question 2

Suitable documents for evidencing income:

Answer 2

• Payslip
• Bonuses
• Self-assessment taxation calculation

If these aren’t available, an employer’s reference may be acceptable

Question 3

How is income from self-employment assessed?

Answer 3

HMRC tax calculations produced from the individual’s self assessment (past 2 or 3 years)

OR

Accountant’s certificate (past 2 or 3 years , accountant needs to be part of a registered body)

OR

Full business accounts for the past 3 years

Question 4

What comprises a director’s pay?

Answer 4

• Salary
• Dividends
• Director’s Loan

Question 5

If a director’s loan is not repaid within the accounting year what happens?

Answer 5

A tax charge if it is repaid after that the tax will be paid back nine months after the accounting year it was repaid.

Question 6

A director’s loan below how much could be interest-free?

Answer 6

£10000

Question 7

What expenditure must be deducted to calculate free disposable income?

Answer 7

• Committed expenditure: contractual agreements
• Basic essential expenditure: food, bills
• Basic quality-of-life expenditure: clothing, household, basic recreation, childcare, etc.

Question 8

Where the mortgage is for debt consolidation, the firm must also take into account:

Answer 8

• Costs incurred by increasing the term
• Whether it is appropriate to secure previously unsecured debts
• If the customer is known to have payment issues, whether negotiating an arrangement with their creditors would be more appropriate than consolidating through a mortgage

Question 9

A credit-impaired customer is one who:

Answer 9

• Has owed the equivalent of 3 months payments on a mortgage or other loan within the last 2 years
• Has had one or more county court judgements in the last 3 years
• Has had an IVA or bankruptcy order in force within the last 3 years

Question 10

All sole traders must provide a detailed breakdown of their business expenditure on their tax return. True or false?

Answer 10

False. Only if they’re over the VAT threshold

Question 11

To comply with MCOB 11, lenders must retain documents that provide a rationale for the decisions taken on mortgage applications for how long?

Answer 11

For the length of the mortgage contract in hard copy or electronic form.

Question 12

What does the lender need to know about the loan required?

Answer 12

Advance required and the purchase price this represents (loan to value)

Deposit

Repayment method

Buildings and contents insurance requirements

Other insurers requirements

Question 13

How is additional income from employment assessed

Answer 13

Lender will evaluate the stability and lifespan of the income.

For example: take a percentage of guaranteed overtime

Percentage of 3 years bonuses or commission

Question 14

Assessing income from self employment. What is the difference between turnover, gross and net profit

Answer 14

Turnover in business is not the same as profit, although people often confuse the two:

turnover is your total business income during a set period of time – in other words, the net sales figure
profit, on the other hand, refers to your earnings that are left after expenses have been deducted
It’s worth noting that there are two different ways you can measure profit. ‘Gross profit’ means sales, minus the cost of the goods or services you sell – it’s also called the ‘sales margin’.

‘Net profit’ is the figure that’s left over during a specific period after all expenses (such as administration and tax) have been deducted

Question 15

What do Businesses over the VAT ratio have to do have to provide

Answer 15

Full set of accounts

Profit and loss accounts

Balance sheet (Capital Account: remains of capital used to make the business, further capital injected, surplus profits, personal drawings)

These accounts can tell a lender a lot

Question 16

If a directors loan is over 10000 what happens?

Answer 16

It’s is treated as a taxable benefit in kind, unless the director is obliged to pay interest at a rate equal to or above the official rate for beneficial loan arrangements published by HMRC

Question 17

Why might a participator in a directors account be in credit?

Answer 17

Injected capital

Property or business equipment. Eg 400 pound a year rent for bedroom home office or renting property for business or equipment rent

Providing the company has the assets to do so a high credit directors account will be looked at favourably.

Question 18

When can a lender vary a mortgage without an affordability assessment?

Answer 18

The level of lending does not increase the amount outstanding (other than to cover product and arrangement fees)

There are no change to the terms of a contract that will affect affordability

Question 19

MCOB 11.7 transition agreement. Borrowers that want to vary terms or take out a mortgage with the same lender can do so. Rules allow an increase in borrowing of the following apply

Answer 19

1. First charge before 26 April 2014
2. The level of lending does not increase the amount outstanding (other than to cover product and arrangement fees)
3. Arrangement in customers best interests
4. Customer has not increased borrowing apart from the cost of only essential maintenance and repair.

Point 2 does not apply if: property value at risk without maintenance and repair, funds raised are spent on work, lender has evidence the cost is no more than the work cost, non mcd mortgage

Question 20

How are directors treated for mortgage purposes

Answer 20

As employees unless they own 20-25% then they are a sole trader.

Question 21

Some consumers want to switch to a more affordable mortgage but can’t despite keeping up with their payments new rules allow lenders to apply more proportionate affordability assessments what is this process and rules:

Answer 21

It is the lender’s decision whether to implement the new process.
„ To apply the relaxation, the lender must have established an internal switching policy that allows customers to move to more affordable arrangements.
„ The borrower must have an existing regulated mortgage with the lender or a different lender, and must want to replace the mortgage with a new regulated mortgage on the same property.
„ The new mortgage cannot exceed the outstanding amount of the existing mortgage, other than to finance related mortgage and adviser fees.
„ There must not have been a payment shortfall at the time of the application or in the previous 12 months.
„ The rule only applies where the new arrangement will be more affordable, which is defined as costing less each month than previously.
„ The lender is not required to meet the income and expenditure requirements of MCOB 11 if the new arrangement is more affordable, and is not required to assess the effect of future interest rate increases. It is not required to consider the effect of future changes to the borrower’s income and expenditure unless the mortgage term will run past their planned retirement date or state pension age.

Question 22

Example affordability calculation

Answer 22

Bank/B.S. model assumes expenditure of £600 per month for a couple, plus £130 per month per dependent plus actual financial monthly commitments (Loans etc)

Interest rate of 5.6% is assumed = repayments required at £6.27 per £1000 of a loan for 25 year term.

H has salary of £25,000 p/a = net monthly income = £1650

F earns £6000 p/a = £500 net monthly

Total net monthly income combined is £2150

So:

Monthly expenditure for couple = £600
Monthly expenditure for 2 kids = 2x £130 = £260
Total = £860

Financial commitments = £50/month

Total expenditure = £910 monthly

Free disposable income = £2150 - £910 = £1,240

Based on lender’s repayment factor they could borrow=

£1240 / 0.00627 (£6.27) = £197,000