Topic 2: Types of borrower

Question 1

What is a Buy to let?

Answer 1

Where a borrower buys a residential property with a view to letting (renting) it to someone else as a form of investment.

Question 2

What is Joint and Several Liability?

Answer 2

Joint borrowers are responsible for the whole mortgage jointly but also individually if one cannot meet their obligations.

Question 3

What is Consumer Buy to Let?

Answer 3

A buy-to-let mortgage where the purpose of letting out the property is not for business or investment, eg where someone inherits a property and rents it out while they decide what to do with it, but needs to raise funds for improvements.

Question 4

What is a High-Net-Worth Customer?

Answer 4

A mortgage customer who has a minimum income of £300,000 a year or net assets of at least £3m.

Question 5

What is a Professional Customer?

Answer 5

A mortgage customer who has worked in the home finance sector for at least a year in a role that requires knowledge of the mortgage product or service being discussed, and is capable of understanding the risks of the product.

Question 6

What is a Business Borrower?

Answer 6

Someone wishing to arrange a mortgage that would normally be a regulated mortgage or MCD regulated mortgage contract, but the sole reason for the mortgage is to raise funds for a business. The term does not apply to mortgages taken out on business premises.

Question 7

What is a Business Partnership?

Answer 7

Two or more people working together in a business on a self-employed basis. The partners are, in effect, the business, and each partner is responsible jointly and severally for the debts of the business.

Question 8

What is a Limited Liability Partnership (LLP)?

Answer 8

A business partnership where the business is a separate legal entity from the partners, and can borrow in its own right. The LLP is registered at Companies House and the partners’ liability for the partnership debts is limited to the amount they have invested in the business.

Question 9

What is a Limited Company?

Answer 9

A business owned by its shareholders. The company is a separate legal entity from the shareholders and can borrow in its own right. Shareholders have no liability for the company’s debts beyond the amount they invested in the company’s shares.

Question 10

What is a Special Purpose Vehicle (SPV)?

Answer 10

A limited company formed specifically to allow the shareholders to invest in buy-to-let property, using the company structure to benefit from certain tax advantages.

Question 11

What are Mortgage Prisoners?

Answer 11

Borrowers who have a regulated mortgage and may be prevented from changing their arrangement with their existing lender if tighter affordability requirements under MCOB are applied to them.

Question 12

Who are Vulnerable customers?

Answer 12

Borrowers who could be at risk of being disadvantaged by a lender’s action due to their personal circumstances. Examples of vulnerability would include debt problems, bereavement or a recent prison term.

Question 13

What is Insolvency?

Answer 13

Where someone’s liabilities exceed their assets and they cannot meet their commitments within a reasonable timescale.

Question 14

What is Bankruptcy?

Answer 14

A court order in response to a petition from an insolvent debtor or their creditors. A bankruptcy order usually lasts for 12 months and, once it has been granted, the bankrupt’s assets and some of their income can be taken to settle their debts.

Question 15

What is Individual Voluntary Arrangement (IVA)?

Answer 15

A formal agreement between an individual and their creditors to pay off a proportion of their debts by regular payments over an agreed period, after which the debt is deemed to be settled (as long as the agreed repayments have been made).

Question 16

What are the three Ps of Assessing a Mortgage Application?

Answer 16

PERSON: is the lender legally able and willing to
lend to the applicant?PROPERTY: is the property suitable security
for the required mortgage?
PURPOSE: is the purpose of the mortgage acceptable (eg house purchase, home improvement,
capital raising)?

Question 17

What are three key reasons why private borrowers seek mortgage finance?

Answer 17

1. Family Home-Those who are borrowing to buy a home for themselves and their family. These borrowers form the bulk of the residential mortgage market.
2. Second Charge -Those who already have a mortgage and are seeking to arrange top-up finance from another
   lender on a second-charge basis.
3. Bridging Finance -Those arranging a loan to finance a new purchase before they have sold their existing property, ie to ‘bridge’ the finance gap (covered in Unit 6).

Question 18

What is the Interest Coverage Ratio (ICR)?

Answer 18

the ratio of rental income to mortgage payments (including associated costs and tax). Each lender can set an ICR
based on rental demand and typical rent levels in the area, with the PRA
setting 125 per cent as a minimum industry standard, meaning that rent must be at least 125 per cent of the landlord’s costs, although some lenders set a minimum as high as 145 per cent.

Question 19

What is the Interest Rate Affordability Stress Test?

Answer 19

(sometimes referred to as the stress
ICR) – the lender is required to consider the effect of interest rate increases on the borrower’s ability to service the mortgage over a minimum period
of five years from the start of the mortgage, unless the mortgage is on a fixed or capped rate for at least five years or the mortgage term is less than five years. This is achieved by increasing the actual rate of the selected mortgage to give a notional rate, which is then used for the ICR. The lender can determine the rate to use, but it must be at least 2 per cent above the actual rate.

Question 20

What is the Income Affordability Test?

Answer 20

where the borrower will be using some personal
income to support the mortgage, the lender must carry out a detailed
affordability assessment.

Question 21

What are Personal Representatives?

Answer 21

Personal representatives (or executors in Scotland) act in managing the
estates of deceased people. If the deceased person has left a will, the personal representative is called an executor and is named by grant of probate. If the
deceased has not left a will, the representative is an administrator, appointed by letters of administration.

Question 22

What is an Attorney?

Answer 22

An attorney is a person who is given the responsibility to deal with someone else’s financial or other personal affairs through a document called a ‘power of attorney’. There are many users of attorneys, including elderly people who can no longer manage their own finances or people who live outside the UK for
long periods.

Question 23

What are Trustees?

Answer 23

Trustees are people appointed in a document called a trust deed to hold a specific asset, or assets, on behalf of others called the beneficiaries, and to act
for the beneficiaries according to the terms set out in the deed.

Question 24

Mortgages taken out by individuals for business purposes are regulated and subject to MCOB if:

Answer 24

• the borrowing is secured by a legal charge on a property where at least 40 per cent of the land is used as a residence (the standard definition of a regulated mortgage); and
• the sole purpose of the mortgage, remortgage or further advance is to raise funds for use by a small business (ie one with turnover of less than £1mper year).

Question 25

Which groups of people are unable to borrow?

Answer 25

• minors;
• the mentally incapacitated;
• undischarged bankrupts and those with poor credit records.

Question 26

What is a Debt Relief Order?

Answer 26

An order granted by the official receiver to a non‑property owning
individual with debts of less than £30,000 and limited assets who cannot repay their debts. It prevents creditors from seeking repayment without the approval of a court while the DRO is in place; after 12 months the debts are usually written off.

Question 27

What are the 3 key terms for Powers of Attorney?

Answer 27

DONOR - The person granting powers to their representative.
ATTORNEY - The person granted the powers to act on the donor’s behalf. Also sometimes referred to as the ‘donee’.
DEPUTY - Appointed by the Court of Protection to look after the affairs of someone who becomes mentally incapacitated.

Question 28

What is an ordinary power of attorney?

Answer 28

An ordinary power of attorney enables the attorney to carry out activities relating to the donor’s financial and property affairs. It is typically used bypeople who are mentally capable but physically infirm to enable someone to
pay bills and carry out transactions on their behalf. It is also commonly used
by people who are abroad for a while, allowing someone else to pay their bills and so on. The donor has complete control over their affairs, can carry out the same transactions as the attorney, and can revoke the powers whenever they wish. They can also limit what the attorney can do.

Question 29

What is a lasting power of attorney?

Answer 29

While an ordinary power of attorney ceases on mental incapacity, a lasting power of attorney (LPA) is specifically designed to enable people to decide
who will look after their affairs if and when they are mentally unable to do so themselves, and to enable that person to take up those powers with minimal disruption. An LPA must be registered with the Office of the Public Guardian
(OPG) before it becomes effective.

Question 30

A Lasting Power of Attorney can take two forms?

Answer 30

1. Property and financial affairs
2. Health and welfare

Question 31

What is an enduring power of attorney?

Answer 31

Until 30 September 2007, it was possible to set up an enduring power of
attorney (EPA). An EPA can be used like an ordinary power of attorney, while
the donor has mental capacity; in other words, the attorney can assist the donor to manage financial matters. If the donor loses mental capacity, the EPA must be registered with the Office of the Public Guardian in order for the attorney to continue to act for the donor.