Topic 24 - Other Mortgage Products

Question 1

Ben, a London-based solicitor, has a Swiss franc foreign currency mortgage on his UK home. If the value of sterling goes down against the Swiss franc, what effect will it have on his mortgage?

a)
His monthly sterling payments will reduce but the mortgage outstanding will increase in sterling terms.

b)
His monthly sterling payments will increase but the mortgage outstanding will remain the same in sterling terms.

c)
His monthly sterling payments will increase, as will the mortgage outstanding in sterling terms.

Answer 1

His monthly sterling payments will increase, as will the mortgage outstanding in sterling terms.- A decrease in the value of the pound would result in fewer francs to the pound, so it would cost Ben more each month in sterling to buy or exchange the required francs. For the same reason, the outstanding mortgage would increase in sterling terms, as it would require more pounds to buy the francs to pay off the capital.

Question 2

Which of the following circumstances would not be defined as a foreign currency mortgage? The borrower:

a)
has a euro mortgage on their Spanish family home but is paid in sterling.

b)
lives and works in Berlin but has a UK mortgage on a flat in London.

c)
is French, living and working in London and buying a UK property with a mortgage from a UK lender.

Answer 2

c) is French, living and working in London and buying a UK property with a mortgage from a UK lender. - The Mortgage Credit Directive defines foreign currency mortgages as those in a currency other than the borrower’s income or a currency different from that in the country where the borrower lives. The nationality of the borrower is not, in itself, a defining factor.

Question 3

Which of the following is true of sub-prime mortgages?

MCOB rules mean they cannot be arranged for borrowers with a good credit rating.

Interest rates tend to be higher than for standard mortgages.

The maximum loan-to-value ratio is likely to be higher than for a standard mortgage.

Answer 3

Interest rates tend to be higher than for standard mortgages. -
There are no restrictions in MCOB rules about arranging a sub-prime mortgage for a borrower with a good credit rating. However, the firm would have to show that the borrower did not suffer any disadvantage in relation to costs and terms of the mortgage in comparison with a standard mortgage. Interest rates tend to be higher, and loans to value lower, for sub-prime compared with standard mortgages.

Question 3

Which of the following is true of both Ijara and Murabaha methods of Islamic home finance?

a)
The bank buys the property initially.

b)
The term can be up to 25 years.

c)
They require the payment of rent.

d)
Monthly payments are fixed for the term.

Answer 3

a) The bank buys the property initially.In Ijara and Murabaha methods of Islamic home finance, the bank buys the property initially.

Question 3

Gemma’s father, Dan, has agreed to deposit 15% of the purchase price of Gemma’s new flat into a savings account with her lender as a guarantee for her mortgage. This means that:

Dan’s savings will be assigned to the lender for as long as the lender feels it is necessary.

Dan will not earn any interest on the savings.

Dan will not have access to his savings for an agreed period.

Answer 3

Dan will not have access to his savings for an agreed period. - This arrangement means that Dan will assign his savings to the lender for an agreed period, during which he will not have access to the savings and the lender can use the funds to settle any shortfall should Gemma fail to meet her obligations. However, he will earn interest on the savings, and as long as Gemma meets the mortgage terms and conditions and maintains her payments, he will be able to take his savings at the end of the agreed period. If Gemma has problems maintaining payments, the lender may hold onto Dan’s savings beyond the agreed period until it is satisfied that the account is up to date and the problems have been resolved.

Question 3

Which of the following is true in relation to a guarantor mortgage?

a)
The lender will consider the guarantee separately from any other financial commitments the guarantor has.

b)
The arrangement will commit the guarantor until the earlier of the end of the mortgage term or the lender deciding that a guarantor is no longer needed.

c)
The lender is likely to offer fixed or variable rates in line with their standard products.

Answer 3

C) The lender is likely to offer fixed or variable rates in line with their standard products. - The lender will need evidence that the guarantor can afford their own commitments as well as the payments on the guarantor mortgage. Guarantor mortgages tend to be short-term arrangements, perhaps for three to four years.

Question 3

Which of the following is true in relation to self-build mortgages? Lenders will typically:

a)
advance up to 70% of the land cost.

b)
insist on advance stage payments.

c)
advance between 75% and 85% of build costs.

Answer 3

c)
advance between 75% and 85% of build costs. -A typical lender would advance between 75% and 85% of the land cost initially, and then 75–85% of the build costs or final value in stages. Arrears payments are more common than advance payments, but the policy varies between lenders.

Question 3

Under the Murabaha method of Islamic home finance, stamp duty land tax is:

a)
not payable on the purchase.

b)
paid when the lender buys the property and also when the property is transferred to the buyer.

c)
paid only once, when the lender buys the property.

Answer 3

c) Paid only once, when the lender buys the property. - With both the Ijara and Murabaha methods, stamp duty land tax is paid once, when the property is initially purchased by the lender.

Question 3

With the Ijara method of Islamic home finance, the lender buys the property and:

a)
immediately sells it to the client at a higher price, with the client required to make monthly payments of rent and capital to buy the property over an agreed term.

b)
makes a ‘promise to purchase’ agreement with the borrower, who makes monthly payments of rent and capital to buy the property over an agreed term.

c)
immediately sells it to the client at a higher price, with the client required to make monthly capital payments to buy the property over an agreed term.

Answer 3

b) makes a ‘promise to purchase’ agreement with the borrower, who makes monthly payments of rent and capital to buy the property over an agreed term. - The Murabaha method involves the lender buying the property and immediately selling it to the client at a higher price. With the Ijara method, there is a ‘promise to purchase’ agreement and the property is transferred to the client at the end of the term, during which the client pays rent.

Question 4

Jonathan, a higher-rate taxpayer, is buying a buy-to-let flat as an investment and is considering the pros and cons of buying it through a special purpose vehicle (SPV). The advantage of this approach compared to buying it in his own name is that the SPV:

a)
would not have to pay the stamp duty land tax surcharge.

b)
can claim all mortgage interest as a business expense.

c)
would not pay tax on any gain made on a later sale of the property.

Answer 4

b) can claim all mortgage interest as a business expense. - SPVs have to pay the same SDLT surcharge as individual buyers, but can claim all mortgage interest payments as a business expense. SPVs have to pay corporation tax on all profits, including the sale of a property.

Question 4

Which of the following is true in relation to a guarantor mortgage?

a)
The guarantor must agree to guarantee the whole mortgage.

b)
The guarantor must be able to afford their own commitments as well as the guarantor mortgage.

c)
The lender cannot take a charge over the guarantor’s own property.

d)
The guarantee usually lasts for the term of the mortgage unless the lender is satisfied it is no longer needed.

Answer 4

b) The guarantor must be able to afford their own commitments as well as the guarantor mortgage.

Question 4

Islamic home purchase plans reflect the principle that Muslims must not enter into transactions where interest is paid. True or false?

Answer 4

True. Sharia principles and law forbids the payment or receipt of interest. Islamic home finance has been developed to allow Muslims to raise the finance to buy property without compromising religious principles.

Question 4

Which of the following is true of the Prudential Regulation Authority’s interest rate affordability stress test for buy-to-let mortgages?

a)
The minimum interest rate increase to be used is 3%.

b)
The minimum future rate to assume is 5.5%.

c)
The test applies to all non-FCA-regulated buy-to-let mortgages.

Answer 4

b) The minimum future rate to assume is 5.5%.The minimum increase to use is 2%, but lenders must assume a minimum future rate of 5.5%, even if adding 2% to the starting rate results in a future rate below 5.5%. The stress test applies to all non-FCA-regulated buy-to-let mortgages except those with a term of less than five years, or fixed- or capped-rate mortgages with a term of five years or more.

Question 4

Foreign currency mortgages can be secured on UK properties. True or false?

Answer 4

True. Foreign currency mortgages can be secured on UK properties.

Question 4

Which of the following is true of a typical sub‑prime mortgage compared with a standard mortgage?

a)
Interest rates are usually slightly lower.

b)
Application and/or product fees tend to be higher.

c)
Maximum loan to value tends to be higher.

d)
The range of interest‑rate options is very limited.

Answer 4

b) Application and/or product fees tend to be higher.

Question 4

Self‑build mortgages usually provide funds for up to 90% of the cost of the land. True or false?

Answer 4

False. Self‑build mortgages usually provide funds for up to 85% of the land cost.

Question 5

Which, if any, of the following is not an allowable expense for a buy-to-let landlord?

a)
Buildings and contents insurance.

b)
Repairs to a broken window.

c)
Replastering the kitchen ceiling following a water leak.

d)
A standard flat-rate allowance for damage caused by wear and tear to furnishings.

Answer 5

D - The landlord could claim for actual expenses incurred in replacing or repairing furnishings but cannot claim a specific standard allowance under the general description of wear and tear.

Question 5

Capital gains made on sale of a property by a special purpose vehicle are subject to:

a)
corporation tax.

b)
capital gains tax.

c)
income tax.

d)
stamp duty land tax.

Answer 5

a) corporation tax. - Capital gains made by an SPV are treated as trading receipts and are subject to corporation tax.

Question 6

Joe is planning to invest in a buy‑to‑let property when he gains access to his pension fund in August this year and is unsure whether to use a special purpose vehicle (SPV) or buy a property in his own name. Which of the following would be an important consideration for him?

a)
The SPV will pay higher stamp duty land tax.

b)
The SPV will be able to claim mortgage interest as a business expense in full.

c)
Holding the property in his own name will enable him to avoid paying income tax on rental income he does not withdraw from the business.

d)
Joe would lose control of the property if he bought it through a SPV.

Answer 6

b) The SPV will be able to claim mortgage interest as a business expense in full.

Question 6

If Joe were to go ahead and set up the special purpose vehicle and later sell his shares in it, the buyer of the shares would be liable for stamp duty. True or false?

Answer 6

True. Stamp duty is payable on the transfer of shares within an SPV, but there is no liability to stamp duty land tax because the property itself does not change hands.