Topic 10 - Assessing the applicant's financial status Flashcards
Which of the following is true? For a mortgage application form:
the applicant must complete the form and it is the adviser’s responsibility to ensure it is accurate.
the adviser must complete the form and it is the customer’s responsibility to ensure it is accurate.
either the applicant or the adviser can complete the form, but it is the customer’s responsibility to ensure it is accurate.
either the applicant or the adviser can complete the form, but it is the customer’s responsibility to ensure it is accurate. - The customer can decide who completes the form, but its accuracy is their responsibility.
A lender will usually require details of previous employment if a mortgage applicant has been with their current employer for less than:
two years.
three years.
five years.
three years.
Which of the following types of income is least likely to be included by a lender when assessing mortgage affordability?
Secure trust income.
Informal child maintenance payments.
Company pension.
Informal child maintenance payments. - Child maintenance payments will need to be subject to a court order and payable for a specified time. Secure trust income and company pensions are acceptable sources of income.
A self-employed person’s income for mortgage purposes is normally calculated as turnover minus:
routine business expenses.
the cost of necessary raw materials.
the cost of necessary raw materials and routine business expenses.
the cost of necessary raw materials and routine business expenses. - Net profit is the figure used by lenders, and is calculated as gross profit (turnover minus the cost of necessary raw materials) less routine business expenses.
Certain businesses can submit a ‘short’ tax return rather than providing detailed accounts. The maximum earnings for a business wishing to do so is:
net profit below the threshold for making a VAT return.
gross profit below the threshold for making a VAT return.
turnover below the threshold for making a VAT return.
turnover below the threshold for making a VAT return. - A ‘short’ self-assessment tax return is available to businesses with turnover below the threshold for having to make a VAT return.
Which of the following statements apply to a director’s loan account? Select all that apply.
It records loans from the company to a ‘participator’.
It records loans from a ‘participator’ to the company.
It can provide loans to the spouse of a shareholder.
all 3 - The term ‘participator’ is defined as a person with a share or interest in a company, or the family of a participator.
Which of the following factors would prevent a lender from waiving or modifying an affordability assessment if a borrower wished to vary the terms of, or replace, an existing mortgage? Select all that apply.
a - The mortgage is on a fixed rate.
b - The mortgage amount will increase to cover an arrangement fee.
c - The borrower missed three mortgage payments at the start of the current year.
d - The variation would be from a variable rate to a capped rate.
e - The borrower wishes to increase the mortgage to build an extension.
f - The borrower is currently with a lender that does not offer new mortgages.
C & E - MCOB rules allow the affordability assessment to be waived for if the varied or new mortgage was increased only to cover product or arrangement fees, or if the borrower is currently with a lender that does not offer new mortgages (‘mortgage prisoner’). The type of new contract is not relevant if the overall cost will not increase. Borrowers with a payment shortfall currently or within the previous 12 months must be subject to a full affordability assessment.
A couple have applied for a mortgage. The lender has established the following during the affordability assessment:
Net income: £2,200 a month.
Personal loan payments: £200 a month for the next 4 years.
Spending for basic day-to-day needs: £600 a month.
Council tax and utilities: £350 a month.
Life, car and home insurance: £75 a month.
Spending on clothes, recreation, household and personal items: £200 a month.
Savings: £200 a month.
The couple’s monthly free disposable income would be assessed as:
£975.
£775.
£575.
The £975 figure incorrectly deducts only committed expenditure (the loan) and basic essential expenditure (day-to-day needs, council tax, utilities and insurances).
The £775 figure correctly deducts committed and basic essential expenditure, together with basic quality-of-life expenditure (clothes, recreation, household and personal items).
The £575 figure incorrectly includes regular savings as expenditure.
Which of the following applies when a lender carries out an interest rate stress test for a mortgage applicant?
The test must be carried out on mortgages of all types and lengths of term.
The minimum interest rate increase to apply is 1%.
The lender must use its own statistics to determine which interest rate to use.
The minimum interest rate increase to apply is 1% - The test is not required for fixed-rate mortgages with a term of five years or more, or for mortgages with a term of less than five years. When deciding on the interest rate to use for the stress test, the lender must use an independent and recognised source of information, taking into account market expectations and Financial Policy Committee recommendations regarding the assumptions to use.
A ‘credit-impaired’ customer is looking for a further advance, claiming it is to consolidate credit card debt into his mortgage. Using the lender’s standard criteria, the new mortgage would be unlikely to meet the lender’s affordability criteria. What actions are available to the lender under MCOB rules? Select all the available actions.
a - Agree to the further advance but settle the credit card debt using the further advance.
b - Agree to the further advance and take reasonable steps to ensure the credit card debt is repaid on completion of the mortgage.
c - Use discretionary measures to alter the affordability assessment.
d - Agree to the further advance but include the monthly credit card payments as committed expenditure in the affordability assessment.
e - Agree to the further advance and warn the customer that he should pay off at least some of the credit card balances.
A, B & D - The lender must use consistent processes for assessing affordability. It must take ‘reasonable steps’ to ensure the credit card balances are repaid on completion of the mortgage
Surinder and Kuldip are both applying for mortgages on houses in the UK. Surinder has just got a new job in Northampton and is moving there; Kuldip is buying a house there too for his family but he is working overseas on a long‑term contract. The lender cannot treat Kuldip’s application differently from Surinder’s just because he is not currently living in the UK. True or false?
False. A lender cannot discriminate on grounds of race or nationality but it can impose different terms on a borrower who is living outside the UK, or decide not to lend at all, because of the increased difficulty of pursing the borrower in the event that they default on the repayments.
Last week Sam contacted her bank’s mortgage adviser about applying for a mortgage, and the adviser told her that she and her partner could probably afford to borrow £180,000, which is three times their joint income. A friend who works in a building society has now told Sam that the bank is no longer allowed to assess her application on the basis of an income multiple. Should Sam be concerned about the way the bank dealt with her enquiry?
Yes or No
No – lenders are allowed to give initial assessments based on income multiples. If Sam were to go ahead and make a mortgage application the lender would be required to carry out a full and detailed assessment of her income and that of her partner.
A lender may take account of sales‑related income in assessing a borrower’s ability to repay a loan. True or false?
True: variable sales‑related income is usually averaged over three or five years.
All sole traders must provide a detailed breakdown of their business expenditure on their tax return. True or false?
False. All businesses must maintain accurate accounts but a detailed breakdown of expenditure is only required on a tax return if the business turnover is above the VAT registration threshold.
Which of the following would not be an acceptable reason for a lender to waive affordability checks when varying the terms of a regulated mortgage started in 2013?
Borrowing would be increased to cover the cost of the arrangement fee.
The borrower has requested a new 2.99% fixed‑rate loan on expiry of their current 3.30% fixed‑rate loan.
A further advance is required for essential maintenance to the structure of the property.
A further advance is required for home improvements.
A further advance is required for home improvements.
