Topic 2 - Types of Borrower Flashcards
Private (personal) borrowers seek mortgage finance for three main reasons:
1) Borrowing to buy a home
2) Second charges
3) Bridging finance
Buy-to-let (BTL) borrowers mortgages tend to have a criteria that rental income is…
…145% of the loan repayments. This is known as interest coverage ratio (ICR).
A consumer buy to let (CBTL) -
Where the purpose of arranging a mortgage is not wholly or predomianntly for business purposes.
High-net-worth customers -
They have a minimum annual net income of £300,000 or minimum net assets of £3m.
Lenders are allowed to apply more flexible processes dealing with them than for mainstream mortgages.
Professional customers -
Customers who have worked in the home finance sector for at least a year, who the firm believes to be capable of understanding the risks involved in the proposed arrangements.
Personal representatives -
They act in managing the estates of deceased people.
If the deceased personal has left a will, the representative is called an executor and is named by grant of probate.
If a will has not been left, they are an administrator, appointed by letters of administration.
Lenders can lend to them if they need a loan to administer the estate or to buy property for a dependent of the deceased.
Attorneys -
Those given the responsibility to deal with someone else’s financial or other personal affairs.
Ordinary or lasting - health and welfare/property and financial affairs.
Trustees -
People appointed in a trust deed to hold assets for beneficiaries.
Generally the terms of larger trusts allow trustees to borrow money for certain purposes and up to specified limits.
Mortgages taken out by individuals for business purposes are regulated and subject to MCOB if:
the borrowing is secured on a property where at least 40% is used for dwelling and the sole purpose is to raise funds for use by a small business (one with a turnover of less than £1m per year and not a LLP or limited company).
Lender must see a business plan, or evidence it is for business and check affordability.
If repayment are to be taken from business resources the strength of these must be checked.
I’d business is personal income for someone the lender must assess if the business can support customers essential expenditures and living costs
A special purpose vehicle (SPV) -
A way of holding business property through a limited company rather than individuals holding it in their own name.
Shareholders ( and directors )own the SPV which is the legal owner of the property
In most cases, the lender requires personal guarantees from the directors before agreeing to the mortgage.
Corporate borrowing -
Lending to a limited company, for residential or commercial purposes.
Companies memorandum must allow them to borrow and highlight restrictions.
Will only lend to small businesses if the directors and shareholders give guarantee
Not regulated mortgages
Commercial mortgage -
One secured on a commercial property as opposed to a residential property.
Not regulated
There are two categories of borrowers who are considered special by the FCA as they require careful treatment in relation to mortgages:
- Mortgage trapped customers - those who were not able to switch to another lender after 2014 due to tightening of affordability requirements by MCOB.
- Vulnerable customers:
- Those buying a property using the statutory right to buy
- Those entering a sale and rent back agreement
- Equity-release applicants
Groups of people unable to borrow:
- Minors
- The mentally incapacitated
- Undischarged bankrupts and those with poor credit records - can borrow over 500 pounds but it’s tell lender they are bankrupt. Can borrow 500 pounds and do not disclose if not ask.
However they can’t acquire interest in a property via mortgage, they can remortgage but this will be practically impossible
Insolvency occurs when:
A persons liabilities exceed their assets and they cannot meet their financial obligations within a reasonable period of them falling due.
