Topic 24: Other mortgage products Flashcards
What is a Foreign currency mortgage?
Taken out in a currency that differs from the borrower’s income, eg a euro mortgage secured on a UK house for an individual working in the UK. While interest rates may be lower than the borrower’s ‘home’ currency, currency fluctuations could result in higher payments, such as when the home currency is weak.
What is Islamic home finance?
Sharia-compliant finance to help Muslims to buy property. Sharia law does not permit the payment of interest, so Islamic home finance is based on a different principle.
What is Ijara?
Form of Islamic home finance, whereby the bank buys the individual’s selected property and then sells it to them under a promise to purchase agreement. The buyer makes monthly payments of capital and rent for an agreed term, at the end of which the property will be transferred into their name. The rent element is reviewed annually and may be adjusted to reflect changes in interest rates.
What is Murabaha?
Form of Islamic home finance, whereby the bank buys the individual’s selected property and immediately sells it to them at a higher price, with the property transferred into their name. The buyer makes an initial payment, effectively a deposit, and then makes regular fixed payments for the rest of the repayment term.
What is a Self-build mortgage?
Designed for those who wish to build their own house. Money is usually advanced in stages, usually on the completion and inspection of key phases of the build.
What is a Guarantor mortgage?
As property prices escalate, first‑time buyers find it increasingly difficult to
raise mortgages large enough to purchase a property. Typically they cannot raise a large enough deposit, or their income will not stretch to meet the repayments using the lender’s standard affordability criteria. Many lenders
have recognised this dilemma and have introduced ‘guarantor mortgages’. A
guarantor mortgage operates on the same principle as any other mortgage supported by a guarantee but the difference is that it is formally marketed as
a specific product.
How does a mortgage for a self‑build project differ from a standard mortgage?
A limited number of lenders provide finance for people wishing to build or supervise the building of a property, generically termed self‑build mortgages.
The self‑build mortgage allows the borrower to purchase the land and finance the construction as well, with funds released at key completion stages of the build process, ie stage payments in arrears. Lenders generally release the
initial funding on purchase of the land (see Figure 24.3). They usually require an inspection to confirm that each stage has been completed satisfactorily.
What is a buy‑to‑let mortgage?
A buy‑to‑let mortgage is designed to enable an individual to finance a property for letting rather than for owner occupation. Consequently, most buy‑to‑let (BTL) mortgages are not regulated by the FCA and are outside the scope of MCOB. The exception is when it meets the criteria for a regulated consumer
buy‑to‑let (CBTL) mortgage, a new category of BTL mortgage, which was
described in Topic 2.
Whats a Consumer Buy to let mortgage?
A CBTL mortgage contract is one ‘which is not entered into
by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower’ (Mortgage Credit Directive Order, 2015). Borrowers in this category are sometimes described as ‘accidental landlords’ – in other words, they are people who need to let out a property because of personal circumstances, rather than because they have made a conscious choice to buy a property for rental. Such circumstances might include those who inherit a property, or people who need to move quickly because they have a new job
and do not have time to sell their family home before moving.
Whats rental cover ratio?
The proportion of the mortgage payment covered by the
anticipated rental income.
What is Interest coverage ratio (ICR)?
The ICR is the ratio of rental income to mortgage payments and associated costs and tax, and can be set by each lender. The ICR factors in assumptions
for tax and other costs, and so is applied to the actual rent received. The PRA requires the lender to set an ICR based on rental demand and typical rent
levels in the area, with expected rental income verified by an independent, qualified surveyor, the use of automated valuation models or an existing rental agreement. The assessment must allow for property running costs for which the owner is responsible, together with tax liabilities. The statement quotes a minimum standard as 125 per cent, and makes it clear that it does not see ICRs
reducing; if anything, they are expected to increase, and many lenders use an ICR of 145 per cent. Due to changes to tax relief on mortgage interest, many lenders require a higher ICR for higher‑rate taxpayers because higher‑rate tax
will reduce their net rental profit.
What is the Income Affordability test?
If the borrower intends to use personal income to supplement rental income to support the mortgage, the lender must carry out a detailed affordability
assessment.
Income could be income from all rental properties, employment, pensions,
savings and investment after deductions for tax and National Insurance, and taking into account any likely changes to the income in the future, such as retirement. The lender can take into account the overall wealth of a high‑net‑worth
customer, as defined in MCOBS, as part of the affordability assessment.
Expenditure is calculated using the same methodology as a FCA regulated
mortgage.
Expenses deductible from rental income?
- Repairs and maintenance
- Insurance
- Letting agent fees
- Ground rent and service charges on leasehold property
- Actual costs of replacing furnishings
What is a Second charge?
Second charges are ranked after first charges for repayment, which means that
the lender is taking a higher level of risk than with a conventional mortgage, and will charge a higher rate of interest to reflect that risk
What is Bridging finance?
Bridging finance is secured lending designed to enable a home owner to bridge
the funding gap when they have to complete on the purchase of a property before they have received the funds from the sale of their existing property.
