Topic 2 - Types of Borrower

Question 1

What is a mortgage deed?

Answer 1

The mortgage contract

(KIND OF like a trust deed which contains rules for trustees)

Question 2

If two people take out a mortgage, the mortgage deed makes them jointly liable for the loan

If more than two people take out a mortgage, the mortgage deed makes them severally liable for the loan

With this is mind, what happens if one of the borrowers refuse to pay the mortgage or disappears or another situation like this occurs?

Answer 2

Because the mortgage deed makes them jointly and severally liable, it means all borrowers are responsible for paying back the whole mortgage

if a borrower disappears, refuses to pay or something else like that, the remaining borrower/borrowers is/are liable to pay the loan

ie, if a couple split up and one runs away the remaining person still pays it

Question 3

What are the 3 main reasons private borrowers(like me) seek mortgage finance

Answer 3

Family home (Those who are borrowing to buy a home for themselves and their family)

Second Charges (Those who already have a mortgage and are seeking to arrange top-up finance from another lender on a second-charge basis)

Bridging Finance (Those arranging a loan to finance a new purchase before they have sold their existing property. Remember there are two types- open/closed briding finance- look at CEMAP 1 to remember)

Question 4

True or false - Most lenders will not consider BTL mortgages for first‑time buyers and those
who do not own their own home

Answer 4

True

Question 5

The PRA introduced extra affordability requirements that lenders must take into account when assessing buy-to-let mortgage applications

What are they?

Answer 5

The ‘interest coverage ratio’

Interest rate affordability stress test

Income affordability test

Question 6

The PRA introduced extra affordability requirements that lenders must take into account when assessing buy-to-let mortgage applications

These are:

Interest coverage ratio

Interest rate affordability stress test

Income affordability test

Answer 6

The ‘interest coverage ratio’ - the ratio of rental income to mortgage payments must be 125%, as set by the PRA. Ie, if you have a mortgage of 100k, the rental income must be 125k. NOTE: ‘mortgage payments’ in this case includes associated costs (ie, tax, maintenance of house etc, not just the payments towards the loan)

Interest rate affordability stress test-
The lender must consider whether the borrower can afford interest rate increases over next 5 years (unless their mortgage is fixed or capped). They do this with a stress test. The stress test must simulate interest rates going up by ATLEAST 2%, and whether the borrower could afford this

Income affordability test – where the borrower will be using some personal income to support the BTL mortgage, the lender must carry out a detailed affordability assessment (like a normal mortgage)

Question 7

What is a consumer BTL mortgage?

Answer 7

Where the purpose of the mortgage is not ‘wholly or predominately for business purposes, (which a BTL mortgage is…)

For example: someone may inherit a property or it may be someone who needs to move quickly because they have a new job and do not have time to sell their family home before moving

Borrowers of CBTL mortgages are called ‘accidental landlords’

Question 8

Who does the FCA class as high net worth individuals?

Answer 8

Individuals with net-annual income of £300,000 or minimum net assets of 3-Million

High‑net‑worth customers can also be someone who has a mortgage that is guaranteed by an individual with 300000 or 3m in assets

Question 9

How does the FCA class ‘professional customers’ when it comes to mortgage arrangements

Answer 9

Someone who as worked in the home finance sector for at least a year

Question 10

Can mortgage lenders lend to personal representatives

Answer 10

Yes, but only if they need a loan to administer the estate or to buy property for a dependant of the deceased

Question 11

What does it mean if someone is a personal representative?

Answer 11

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 12

In Scotland, if the deceased person has appointed an executor
in a will, they are the WHAT?

Otherwise, the
executor is appointed by the court and are known as WHAT.

Answer 12

q1= executor‑nominate

q2= executor‑dative

Question 13

Mortgages taken out by individuals for business purposes are only regulated and subject to MCOB under what reasons?

Answer 13

the borrowing is secured by a legal charge on a property where at least
40% 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 £1m per year

Question 14

True or false

A mortgage has been taken by an individual for business purposes. It is to raise funds for their business. Their business receives 1.4million in turnover. The mortgage is secured against the property via a first charge. 50% of the land is being used for residential purposes

Is this mortgage regulated and subject to MCOB?

Answer 14

No it is not because:

Mortgages taken out by individuals for business purposes are only regulated and subject to MCOB for the following two reasons:

The borrowing is secured by a legal charge on a property where at least
40% of the land is used as a residence (the standard definition of a regulated mortgage); - THIS PART IS FINE BECAUSE THEIR PROPERTY USES 50%

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 £1m per year) THIS PART IS NOT FINE BECAUSE THEIR BUSINESS HAS A TURN OVER OF 1.4MILLION SO IS NOT CLASSED AS SMALL

HENCE NO

Question 15

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

the borrowing is secured by a legal charge on a property where at least
40% 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 £1m per year

if the mortgage is taken out by a business, or by individuals in the business, AND is secured on a business premises is this regualted?

Answer 15

This is not regulated because the mortgage is secured on a business premises

Question 16

What is a business partnership?

Answer 16

A business partnership is an arrangement between self‑employed people to work together. Unlike a company or like limited liability partnerships, it is NOT a separate legal entity..

… This means the assets/debts
of the partnership are owned jointly by the partners themselves.

Question 17

Elena and Rita are in a business partnership together, and have
arranged a mortgage loan of £240,000. They agree between them
that Elena will pay for a third of the mortgage and Rita for two thirds.
However, Rita very suddenly leaves the country and does not leave
any contact details.

How much of the loan is Elena liable to repay?
a) £80,000
b) £160,000
c) £240,000

Answer 17

C

Business partnerships (unless a limited liability partnership) is where the all partners are jointly responsible for the assets/debts so mortgages set up by business partnerships are set up on a jointly and severally basis like most normal mortgages where there is 2 or more individuals involved)

Question 18

Is limited liability partnership mortgage lending regulated?

Answer 18

No

Question 19

What is the main difference between a Limited Liability Partnership and a business partnership?

Answer 19

BP = The business is not a separate legal entity from the partners meaning all partners are responsible for the assets/debts of the business

LLP = The business IS a separate legal entity meaning the partners are only liable for the capital they invested in the business ( this one is like a limited company)

Question 20

What is a special purpose vehicle and why are they used to hold business property?

Answer 20

Special purpose vehicles (SPV) are basically limited companies that are used for a specific purpose ( often to reduce financial risk ) - this is my definition

(SPV) is a way of holding business property through a limited company, rather than the individual(s) holding the property in their
own name

Basically, the SPV is the legal owner of the property. The SPV is controlled by directors (who are often shareholders). The SPV is owned by shareholders

This means the shareholders are not liable for the SPV’s debts (the property)

People often set it up in this arrangement as teh tax treatment is better than of normal BTL arrangements.

The directors often have to guarantee the mortgage and they do this by allowing the lender to take a legal charge against their own home.

As SPV is a business it is not a regulated mortgage

Question 21

What is corporate borrowing?

Answer 21

Lending to a limited company

Question 22

Are corporate mortgages regulated by the FCA?

Are corporate mortgages subject to MCOB?

Answer 22

Q1: corporate mortgages are not regulated by the FCA. REMEMBER, only loans to individuals are regulated by the FCA

They may be covered by the MCOB rules ONLY IF the business is classed as small. ie turnover less than 1million

Question 23

What restrictions do building societies have in relation to corporate lending?

Answer 23

Building societies can lend a maximum of 25% of its commercial assets as mortgage loans to limited companies

Question 24

What is a commercial mortgage

Is it regulated by the FCA?

Answer 24

A commercial mortgage is one that is secured on commercial property (for
example, a shop or a factory) as opposed to residential property. A commercial mortgage can be offered either to an individual or to a company,

It is not regulated by the FCA because the loan is to a company. Loans may only be regulated if it is for an individual ( and a few other things )

Question 25

What are ‘mortgage prisoners’?

Answer 25

Customers who have a regulated mortgage who are not able to alter their arrangement with their existing arrangement or switch lender if they are subject to the affordability requirements under MCOB

Question 26

In terms of mortgages, who do the FCA regard as being vulnerable customers?

Answer 26

Those buying a property using the statutory right to buy scheme

Those entering a sale-and rent-back agreement

Equity release applicants

Customers who main purpose is debt consolidation

Question 27

Which 3 groups of people are not able to have mortgages?

Answer 27

Minors (under 18) - minors cannot enter into contract unless for ‘necessities’ . And minors cannot hold legal estate on land ( property) hence why they cannot have mortgages

Mentally incapacitated - they cannot borrow themself, they must have someone borrow on behalf of them (can be a deputy appointed by court of protection or an attorney if POA has been set up prior to losing mental capacity)

Undischarged bankrupts and those with poor credit records

Question 28

When can someone be classed as insolvent?

When can someone be classed as bankrupt?

Answer 28

Insolvent= If their liabilities exceed their assets

If they cannot meet their financial obligation within a reasonable time period

Bankrupt= A person who is insolvent and has been declared bankrupt by the county court (the court issues a ‘bankruptcy order’). To get to the court stage, the individual themselves or their creditor must petition for them to be declared bankrupt (the creditor can only do this when their liabilities exceed £5000 but the individual can petition for this no matter how much they owe)

Question 29

What does Scottish law call bankruptcy?

Answer 29

‘sequestration’

Scottish sequestration law is different from bankruptcy laws in the rest of the UK.

Question 30

What happens to an individuals assets once they have been declared bankrupt?

Answer 30

Their case moves into the hands of a trustee in bankruptcy, who seizes their assets, sells them and use the proceeds to pay the court costs and settle as many of their debts as possible.

The individual can keep some assets that they need for work or to provide a basic
standard of living, but everything else, including property, may be at risk

Question 31

Can undischarged bankrupts acquire interest in property?

Answer 31

An undischarged bankrupt cannot acquire an interest in property, which means
they cannot buy a property or apply for a mortgage to buy a property

(NOTE: if they have an existing property they may seek a further advance or remortgage, as they are not technically ‘acquiring interest in a property’ but this realistically is almost impossible.

Question 32

How long are details of bankruptcy held on an individuals credit file?

Answer 32

6 years

Question 33

When can health and welfare lasting POA be activated

When can property and finance lasting POA be activated?

Answer 33

H&W Lasting POA can only b activated once the donor has lost mental capacity ( it can be registered before then obvs…)

P&F lasting POA can be activated before and after someone loses mental capacity (it can be registered anytime)

lasting POA is registered with the office of public guardian

Question 34

What is continuing POA?

What is welfare POA?

What is combine POA?

Answer 34

These are the Scottish’s equivalent to Lasting POA

A continuing POA, is equivalent to a property and financial affairs LPA;

A welfare power of attorney, is the equivalent to a
health and welfare POA;

A combined POA, combines both the above

Question 35

Read 2.8.3 about enduring POA

Question 36

When allowing an attorney to borrow who has LPA or EPA, what important considerations must the lender take in to account?

Answer 36

The EPA or LPA is currently in force (ie not revoked, or unregistered where registration is required);

The EPA or LPA gives the attorney authority to borrow!!!

The purpose for which the borrowing is required is not excluded