Topic 2 - Types of Borrower

Question 1

Private (personal) borrowers seek mortgage finance for three main reasons:

Answer 1

1) Borrowing to buy a home
2) Second charges
3) Bridging finance

Question 2

Buy-to-let (BTL) borrowers mortgages tend to have a criteria that rental income is…

Answer 2

…145% of the loan repayments. This is known as interest coverage ratio (ICR).

Question 3

A consumer buy to let (CBTL) -

Answer 3

Where the purpose of arranging a mortgage is not wholly or predomianntly for business purposes.

Question 4

High-net-worth customers -

Answer 4

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.

Question 5

Professional customers -

Answer 5

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.

Question 6

Personal representatives -

Answer 6

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.

Question 7

Attorneys -

Answer 7

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.

Question 8

Trustees -

Answer 8

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.

Question 9

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

Answer 9

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).

Question 10

A special purpose vehicle (SPV) -

Answer 10

A way of holding business property through a limited company rather than individuals holding it in their own name.

In most cases, the lender requires personal guarantees from the directors before agreeing to the mortgage.

Question 11

Corporate borrowing -

Answer 11

Lending to a limited company, for residential or commercial purposes.

Question 12

Commercial mortgage -

Answer 12

One secured on a commercial property as opposed to a residential property.

Question 13

There are two categories of borrowers who are considered special by the FCA as they require careful treatment in relation to mortgages:

Answer 13

1. Mortgage trapped customers - those who were not able to switch to another lender after 2014 due to tightening of affordability requirements by MCOB.
2. Vulnerable customers:
   - Those buying a property using the statutory right to buy
   - Those entering a sale and rent back agreement
   - Equity-release applicants

Question 14

Groups of people unable to borrow:

Answer 14

• Minors
• The mentally incapacitated
• Undischarged bankrupts and those with poor credit records

Question 15

Insolvency occurs when:

Answer 15

A persons liabilities exceed their assets and they cannot meet their financial obligations within a reasonable period of them falling due.

Question 16

A borrower must declare a previous bankruptcy…

Answer 16

…if asked by the lender. Failure to do so can render the person guilty of fraud.

Many lenders will automatically decline applications from those with a previous bankruptcy.

Question 17

Bankruptcy is recorded on the Insolvency Register until

Answer 17

3 months after discharge, and details are held on the credit file for 6 years from declaration of bankruptcy.

Question 18

A bankruptcy order results from…

Answer 18

…a petition for bankruptcy, either from the individual or a creditor.

An individual can petition for their own bankruptcy regardless of how much they owe, and creditors can petition for a debtor’s bankruptcy is the debt is at least £5,000.

Question 19

Individual Voluntary Arrangement -

Answer 19

A formal agreement between debtor and creditors to make reduced payments towards their total debt over an agreed period, typically 5 years.

An alternative to bankruptcy. It does not legally prevent an individual from taking out a mortgage.

Question 20

Debt Relief Order -

Answer 20

An order granted by the official receiver to an individual with debts of less than £20,000 and limited assets who cannot repay their debts.