Topic 26 - Raising additional funds from Flashcards
Graham is hoping to raise additional funds to build an extension to his house. He has approached his existing mortgage lender for a further advance. What do MCOB rules require the lender to do?
Advise Graham to shop around for the best arrangement.
Inform Graham that a second charge or remortgage might be suitable alternatives.
Base the further advance amount on the house’s projected post-extension value.
Inform Graham that a second charge or remortgage might be suitable alternatives.- MCOB rules require the lender to inform a borrower considering a further advance, second-charge loan or remortgage that the other options could be suitable alternatives. The lender is not required to provide further advice on the suitability of those alternatives.
A bank has received an application for a further advance from an existing mortgage customer. Which of the following is true of the bank’s assessment of the property as security for the mortgage?
The bank must carry out a formal assessment of the property as security, but it can choose an appropriate method.
The bank can assess the property in any way it considers appropriate to its lending practices.
The bank must carry out a mortgage valuation.
The bank can assess the property in any way it considers appropriate to its lending practices - Building societies must conduct a formal assessment of the property, but banks and other lenders have no similar statutory duties: they can assess the security in any way that meets their lending practices.
Steve took out a Mortgage Credit Directive (MCD) exempt bridging loan with a specialist company for a maximum term of 12 months, to provide finance for his new house while he sold his former home. After 12 months he has still not sold his home and so has asked to extend the bridging arrangement. What is the position now?
a)
The bridging loan can be extended with the lender’s agreement but will become an MCD regulated mortgage.
b)
The bridging loan must be converted to a second charge.
c)
The arrangement can continue as an MCD-exempt bridging loan, with the lender’s agreement.
a) The bridging loan can be extended with the lender’s agreement but will become an MCD regulated mortgage. - An MCD-exempt bridging loan must have a term of 12 months or less. If a bridging loan has an original term exceeding 12 months, or is extended beyond 12 months, it will be (or become) an MCD regulated mortgage.
A second-charge lender can roll up interest and charges into the loan automatically. True or false?
False. Lenders can only roll up interest and charges into the loan if the borrower decides to do so. The lender cannot do so automatically.
James has a mortgage with his bank and a second-charge loan with a specialist loan company. He has applied for a further advance from his bank, which will not need to ask for a deed of postponement from the second-charge lender. This is because:
the bank had notice of the second charge when James’s request was received.
James has a drawdown mortgage arrangement with the bank.
the further advance is below the minimum for a deed of postponement to be needed.
James has a drawdown mortgage arrangement with the bank. - A deed of postponement is needed when a first-charge lender wants to ‘tack’ a further advance on to a first-charge mortgage, so that it forms part of the first charge. If the first-charge deed contains an obligation to make further advances, subject to certain conditions, then any further advance will automatically become part of the first charge. James’s drawdown mortgage does that, so a deed of postponement is not necessary.
Basu and Mina intend to build an extension to their house and need to borrow additional funds to do so. They have chosen a second-charge loan rather than a further advance from their existing mortgage lender. What is the most likely reason for their decision?
The interest rate on the second charge will be lower.
They will be able to avoid a higher lending charge.
The second-charge lender can take a less stringent approach to affordability.
They will be able to avoid a higher lending charge. - They may have to pay a higher lending charge if the further advance takes their mortgage above the lender’s threshold. As a second charge will not affect the mortgage lender’s security, the higher lending charge can be avoided.
Second-charge interest rates are usually higher than for first-charge mortgages because of the additional risk to the lender. Second charges are now subject to MCOB rules on affordability, so the lender must use the same affordability criteria.
MCOB 7 rules require lenders to provide a European Standardised Information Sheet (ESIS) to customers applying for a further advance on a Mortgage Credit Directive regulated mortgage. The ESIS must be based on the:
a)
total borrowing but with the annual percentage rate of charge (APRC) calculated on just the further advance.
b)
further advance only but with the APRC calculated on the total borrowing.
c)
further advance only, with the APRC calculated on just the further advance.
C) Further advance only, with the APRC calculated on just the further advance - For a Mortgage Credit Directive regulated mortgage that requires the lender to approve further advances, MCOB 7B.1 requires the lender to provide an ESIS based on the further advance only, with the APRC calculated on the further advance only.
The value of the security should be reassessed if a further advance is requested. True or false?
True. The value of the security should be reassessed if a further advance is requested.
In respect of a new second-charge loan taken out on a borrower’s family home for business purposes, it is true to say that it will be:
a)
exempt from MCOB rules.
b)
subject to MCOB rules if it exceeds £25,000.
c)
subject to MCOB rules if it is for £25,000 or less.
C) subject to MCOB rules if it is for £25,000 or less. - A new second-charge loan taken out on a borrower’s family home for business purposes will be subject to MCOB rules if it is for £25,000 or less.
Ken and Dorothy are retired and able to live comfortably but not extravagantly. They are considering equity release to raise funds to help their son now, but would like to leave their daughter as much as possible when they die. They have been offered the options of 45% of the value of their house by a home reversion provider and 35% by a lifetime mortgage company. Which arrangement is most likely to enable them to achieve their goals?
The home reversion plan.
The lifetime mortgage.
An interest-only mortgage.
The lifetime mortgage - A home reversion plan would provide more money now, but Dorothy and Ken would not own the property. This would mean none of its value could be left to their daughter. The lifetime mortgage would provide a little less cash now, but they would still own the house. The surplus between the property value on the second death and the mortgage plus accrued interest would pass into their estate to benefit their daughter. A conventional interest-only mortgage would not be suitable, because affordability is likely to be an issue for both the couple and the lender, and most lenders would not be keen to lend to retirees over an extended term.
Maureen and Peter have exchanged contracts on the sale of their existing home, but their buyer cannot complete the purchase for two months. Peter and Maureen have been told they must exchange contracts and complete the purchase of their new home within three weeks or lose the house. Which type of bridging finance would suit them?
a)
Open bridging.
b)
MCD-exempt bridging.
c)
Closed bridging.
c)
Closed bridging.
As they have exchanged contracts on their sale, Maureen and Peter can be confident that the sale will complete. This means closed bridging would be suitable. Open bridging is for those who have either not yet found a buyer or who have not exchanged contracts. A Mortgage Credit Directive exempt bridging loan refers to the regulatory status of the arrangement and can be open or closed.
A deed of postponement is required for all second charges. True or false?
False. A second charge does not require a deed of postponement.
Which of the following is untrue in relation to MCOB rules and second charges?
a)
MCOB rules apply to new and existing second‑charge loans, regardless of when they started.
b)
When arranging a new second‑charge loan, the lender must provide the borrower with an ESIS.
c)
The lender must provide a suitability report to give an adequate explanation of the product.
d)
A second‑charge loan of £30,000 secured on the borrower’s home for business purposes would not be subject to MCOB.
c)
The lender must provide a suitability report to give an adequate explanation of the product - The lender does not have to provide a suitability report for a second-charge loan.
The order of priority for legal charges on registered property is established by:
a)
the date of the charge’s registration at the Land Registry.
b)
the date the loan came into force.
c)
the date the solicitor received confirmation of the charge from the lender.
d)
the size of the loan.
a) the date of the charge’s registration at the Land Registry. - The order of priority for legal charges on registered property is established by the date of the charge’s registration at the Land Registry.
In relation to a further advance on an existing regulated mortgage, in order to comply with MCOB, the lender must provide the borrower with:
a)
an illustration based on the further advance only.
b)
a European Standardised Information Sheet (ESIS) based on the further advance only.
c)
an ESIS based on the total borrowing.
d)
an illustration based on the total borrowing.
b) a European Standardised Information Sheet (ESIS) based on the further advance only. - The lender must provide the borrower with an ESIS based on the further advance only.
