Topic 26 - Raising additional funds from property

Question 1

What is a further advance?

Answer 1

Additional borrowing on existing mortgage with existing provider

Involves considerably less legal and administrative
work than re-mortgages and second‑charge loan

Question 2

To take out a further advance how long do lenders typically require the existing mortgage to have been in force

Answer 2

6 months

Question 3

LOOK OVER 26.2

Question 4

If someone wants to take out a further advance and there is a second charge on the mortgage would implications could this have for the lender

Answer 4

The Law of Property Act 1925 states that the priority of payment is determined by the date of registration at the Land Registry

Therefore, if there is the original loan with lender A and a second loan with lender B, and the borrower is taking out an advance on the original loan with lender A, the advance will rank as 3rd in priority for payment. This may present too much risk to lender A so they may refuse the advance

Question 5

What is the DEED OF POSTPONEMENT?

Answer 5

If you have an original loan with lender A and a second loan with lender B, and the borrower wishes to take out an advance on the original loan with lender A, the advance will rank 3rd in priority of payment in the event of repossession. Being ranked 3rd may present too much risk to lender A so they may refuse the advance.

However, lender A can ask lender B to lower the rank of their loan through a ‘Deed Of Postponement’ where it causes the new loan (the further advance) from the original mortgage lender to ‘jump the queue’ and become part of the first charge.

Lender B has the right to refuse, but lender A may offer a remortgage to consolidate both debts if they do, and Lender B will lose out altogether so it is unlikely they will refuse

Question 6

To set aside a second charge, a deed of postponement must usually be executed. The process of adding a subsequent mortgage to an original one
after postponing an intervening second charge (ie, causing the further advance and original loan to be first charge with the second loan being on second charge, instead of original being first, second first being second and the further advance being third in priority) is called: WHAT????

Answer 6

‘tacking’ – the further
advance is ‘tacked’ on to the original mortgage

Question 7

What is the DEED OF POSTPONEMENT?

Answer 7

Allows a new loan (further advance) from the original mortgage lender to become part of the first charge even where there is a second loan with a second charge with a different lender already in place

Otherwise, the further advance would be a third charge which may present too much risk to the original lender

Question 8

There are three situations where DEED OF POSTPONEMENT is not required (ie, where the original lenders new loan will become part of the first charge even if there is an existing second loan already present - obs normally u would require the deed of postponement to do this) :

Answer 8

If the first charge holder had no notice of the other charge at the time when the further advance was made;

If the mortgage deed obliged the first‑charge holder to make further
advance, the obligation was registered at the Land Registry, and at the time the lender entered into the obligation, it had not received any notice
from a second‑charge lender.

The lender agreed a maximum lending limit with the borrower, with a facility or the borrower to take some of the borrowing now and take the rest at
some future date. An example would be a drawdown mortgage that allowed the borrower to draw down further amounts up to a predetermined limit

In these circumstances, the original mortgagee takes priority and the new advance becomes part of the first charge. If none of the factors above apply, the lender will need to seek a deed of postponement in its favour

Question 9

CASE STUDY: DEED OF POSTPONEMENT NOT REQUIRED

Answer 9

Lynette obtains a mortgage from the Academic Bank: £100,000 towards purchase of the property, which is worth £200,000.
The mortgage deed contains an option that allows Lynette to
take total borrowing up to 75 per cent of the original LTV,
subject to specified conditions

As the mortgage deed commits the lender at the outset to
subsequent advances, all such advances are first mortgages and
the Academic Bank will have priority over any second‑charge
holders

Question 10

Modern flexible and offset mortgages usually offer a ‘drawdown’ facility

What is this?

Answer 10

allows the borrower to take further advances up to an agreed limit without a formal application

Question 11

Modern flexible and offset mortgages usually offer a ‘drawdown’ facility which allows the borrower to take further advances up to an agreed limit without a formal application. Will this require a deed of postponement if there is an existing second charge?

Answer 11

No, the facility is clearly stated as a term of the mortgage in the mortgage
deed so any further funds released will form part of the first charge, and will
not require a deed of postponement over any second or subsequent charges

Question 12

For understanding: Why second mortgages can be used to avoid higher lending charges

Answer 12

Jaysharan and Marie have a property valued at £200,000 and a mortgage of £145,000. They wish to borrow a further £20,000 to build a conservatory.

Their existing lender applies a higher lending charge (HLC) on loans over 75 per cent LTV; this means for them a higher lending charge on £15,000 of the proposed loan.

Taking a second mortgage might incur a higher interest rate but the couple will avoid the higher lending charge, so it might work out as a better deal.

Question 13

What are second mortgages good for?

Answer 13

For borrowers wanting to borrow an additional amount where a further advance is not suitable because it will take the borrower above the lender’s High Lending Charge threshold

A second mortgage is with a different lender so it allows them to avoid the HLC of their existing lender

Question 14

There is no requirement under general property law for the first charge lender to agree to a second charge? True or false?

Answer 14

True, because the first charge lenders security will not be affected

However, saying this, a first charge lender does have the right to include a clause in the mortgage deed (which most major lenders do) allowing them to place a restriction on title at the Land Registry. This means that the Land Registry cannot register any further charges without the first‑charge holder’s agreement

Question 15

If a mortgage is in default, the lender will eventually proceed to possession and exercise its power of sale to recover the debt. The holder of the first charge takes what is legally due to it from the proceeds, then passes the balance of the sale money (if any) to
the second lender, who takes what is due to it. When all secured lenders have been satisfied, what happens to the balance, if any?

Answer 15

The balance is passed to the borrower

Question 16

What are the regulatory requirements for second charge loans?

What are the regulatory requirements for lenders?

Answer 16

Since 21 March 2016, second charges have essentially been subject to the same MCOB rules on advising and selling standards as first‑charge mortgages,
and are subject to the same definition – ie 40 per cent of the land to be used as a dwelling, etc.

The rules relating to advising and selling are the same as those for first‑charge
mortgages, including execution‑only sales. This means the lender must assess
affordability, including the stress test for future interest rates

Lenders requirements (same as 1st charge loans)

Meet the Initial Disclosure requirements, including an
outline of the firm’s scope of service and its remuneration;

provide an ESIS for product disclosure;

provide an ‘adequate explanation’ of the product, its
key features and how they will impact on the customer, including what happens if the customer defaults;

confirm key details when the contract starts;

follow the same post‑sale procedures as for first‑charge
mortgages

Question 17

Since 21 March 2016, second charges have essentially been subject to the same MCOB rules on advising and selling standards as first‑charge mortgages, and are subject to the same definition – ie 40 per cent of the land to be used as a dwelling, etc. This aims to ensure that people use second‑charge loans only when they are suitable and affordable, and that the lender will treat them fairly, particularly if they go into arrears.

The rules apply retrospectively to second‑charge loans in place before 21 March 2016 . What are second charge loans before 21 March 2016 known as? known as ‘back book
loans

Answer 17

known as ‘back book
loans

Question 18

Do MCOB rules apply to second charge loans for businesses?

Answer 18

MCOB rules only apply to second charges taken out for business purposes if the loan is for £25,000 or less

Question 19

Can lenders roll up interest for second charge loans?

Answer 19

Lenders can ONLY roll up interest and charges into the loan if the borrower decides to do so. The lender cannot do so automatically.

Question 20

There are two types of bridging finance. What are they?

Answer 20

Closed Bridging: - The borrower has a confirmed ‘exit strategy’ (ie feasible plan) for repaying the loan within an agreed timescale. Typically, this is
through the sale of the existing property

Open bridging – the borrower needs finance to buy the new property but does not have a firm buyer for their existing property (risky, high rates)

Question 21

What is bridging finance?

Answer 21

Required when a borrower wishes to move property but has not yet managed to sell their existing property so do not have the funds available for the new property. The bridging loan gives them the funds which is then paid off when the old property is sold. It bridges the gap for a temporary period

Bridging loan terms can range from hours to years, although most lenders limit open
bridging to 12 months.

Question 21

Bridging loans are short-term mortgages and are regulated in the same way. How are bridging loans regulated?

Answer 21

Regulated through MCOB if it is:

• taken out by an individual/individuals or trustees;
• secured on land in the UK, of which at least 40% will be (or is intended to be) used as a dwelling by the borrower (or trust beneficiary) or a member
  of their immediate family

Question 22

Can bridging loans be arranged on an interest roll up basis?

Answer 22

Bridging loans are usually on an interest‑only basis.

They can either be on an interest roll‑up basis, or
requiring interest payments during the term

Question 23

What is a MCD‑EXEMPT BRIDGING LOAN

Answer 23

If a bridging loan meets certain criteria, it will be
defined as an MCD‑exempt bridging loan and therefore not subject to the full MCOB requirements

If it is MCD exempt, the lender must of course still ensure it is suitable, the borrower can afford it if payments are required and there is an acceptable exit strategy

Question 24

To be a MCD‑EXEMPT BRIDGING LOAN how long must the term be?

Answer 24

To be an MCD‑exempt bridging loan, it must have a
term of less than 12 months

Question 24

In relation to affordability, if an MCD bridging loan requiring regular repayments extends beyond 12 months what must the lender do?

Answer 24

the lender must assess affordability as if it were a new loan

Question 25

A bridging loan is not a regulated mortgage if it is taken out for business or investment purposes

True or false

Answer 25

True

Question 25

A bridging loan is not a regulated mortgage if it is intended that it will never be occupied by the
borrower or their family

Answer 25

True

Question 25

Where the borrower intends to use the sale of their existing property to repay the bridging finance, rules in MCOB 11 state that the lender should ask for an independent survey of the property in order to satisfy itself that the property represents a valid repayment strategy

True or false

Answer 25

True and false

It is guidance, not rules. everything else is true

Question 26

There is NO requirement for the lender to carry out a review of the repayment strategy during the term of an interest‑only bridging arrangement - true or false

Answer 26

True

Question 27

Homeowners in, or nearing, retirement often have a requirement for additional cash or income, whether to improve the home, pay unsecured debts, take a
holiday or clear a mortgage.

They have equity in their property, which will
normally allow them to raise additional finance by a conventional remortgage or a further advance. This route is likely to pose problems because:
„ any additional income produced by investing the cash raised will be eroded
by the increased mortgage payments;
„ they may not have sufficient income to validate the extra borrowing;
„ to make payments affordable they may have to extend the mortgage term
past retirement age, or they may already be in retirement.

There are potential alternatives in this situation: WHAT ARE THEY

Answer 27

• Lifetime mortgage – the mortgage is on an interest‑only basis, with no defined term. The interest payable is usually rolled up rather than paid
  when due.
• Home reversion plan – the property is sold to a reversion provider in return for a lump sum or an income, together with a guaranteed tenancy for life.
• Retirement interest-only mortgage – as only interest is payable on the mortgage, the monthly cost will be lower than a conventional repayment mortgage. However, affordability may still be a problem

Question 28

Tell me the advantages/disadvantages of life time mortgages?

Answer 28

Advantages:

With an interest roll‑up plan (common with lifetime mortgages) , no monthly payments are required meaning more disposable income

Most lifetime mortgages offer a
no‑negative‑equity guarantee

The borrower can benefit from the
additional finance without having to
move house.

The borrower retains ownership of
the property.

If the property increases in value at a
higher rate than the interest accrues,
the borrower’s estate will benefit.

A hybrid scheme starts with regular
interest payments, but allows the
borrower to switch to interest roll‑
up whenever they wish. This allows
them to reduce and control the effect
of interest roll‑up.

Disadvantages:

Interest may roll up quickly,
depending on the rate charged, resulting in much higher debts

‘Younger’ borrowers (say 68) are likely to live
for many years, allowing the debt to
increase significantly due to interest roll up so less money for heirs

Many products now offer
the facility to repay up to 10% of the
initial borrowing each year, which
does offer some control to those who
can afford to make such payments but it is hard for such borrowers to afford this

It may not be possible to move
house, because repaying the
mortgage plus rolled‑up interest
may leave insufficient capital to buy
another property

Question 29

Lifetime mortgage lenders often offer a no negative equity guarantee meaning the loan does not exceed the value of the property

Is this a regulatory requirement?

Answer 29

No it is not. It is instead
a requirement of the Equity Release
Council’s statement of principles,
rules and guidance and product
standards

Question 30

What are the advantages/disadvantages of home reversion plans?

Answer 30

Advantage:

No interest is payable or rolled up.
This means that the planholder does
not have to worry about repayment.

The scheme will probably provide
more cash for a given age than a
mortgage‑based scheme like a lifetime mortgage

Although losing ownership, the
planholder is guaranteed tenancy for
life.

Part‑reversion is available, allowing
the planholder to retain an interest in
some of the equity in the property

Disadvantage:

The cash or income provided will
be at a discount to the value of the
property given up. eg, property is 200k but lump sum provided is 100k. (it is because the reversion provider is not receving any interest so this is how they resolve it)

The owner loses all rights to the
increase in value of the part of the
property given up.

If the planholder dies relatively
shortly after starting the arrangement, it will have been a very costly way of raising the cash or
income (because of the large discount on the provided cash)

Schemes are quite inflexible and
moving may be a problem.

Any improvements made to the
property will not benefit the
plan holder, as the provider owns it

Question 31

Briefly Define the following terms:

Further advance
Deed of postponement
Tacking
Second Charge Business Loan Exemption

Answer 31

Further advance - Further borrowing secured on a property from the existing mortgage lender, by the same legal charge

Deed of postponement - Allows a further advance to ‘jump the queue’ and become part of the first charge

Tacking - The process of adding a subsequent mortgage to an original one after postponing an intervening second charge – the further advance is ‘tacked’ on to the original mortgage

Second Charge Business Loan Exemption - A second charge will not be subject to MCOB rules if it is for business purposes and for more than £25,000

Question 32

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?

Answer 32

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

Question 33

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

Answer 33

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.

Question 34

What establishes the order of priority for charges secured on registered land?

Answer 34

The date of registration of the loan at the Land Registry

Question 35

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: WHY?

Answer 35

James has a drawdown mortgage arrangement with the bank.

Explained: 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.

Question 36

MCOB 7 rules require lenders to provide a European Standardised Information Sheet (ESIS) to customers applying for a further advance on an MCD regulated mortgage. The ESIS must be based on the:

total borrowing but with the annual percentage rate of charge (APRC) calculated on just the further advance.

further advance only but with the APRC calculated on the total borrowing.

further advance only, with the APRC calculated on just the further advance

Answer 36

further advance only, with the APRC calculated on just the further advance

For an MCD 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

Question 37

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

Answer 37

They will be able to avoid a higher lending charge.

Explained: 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

Question 38

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:

exempt from MCOB rules.

subject to MCOB rules if it exceeds £25,000.

subject to MCOB rules if it is for £25,000 or less

Answer 38

subject to MCOB rules if it is for £25,000 or less

Question 39

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?

Open bridging.

MCD-exempt bridging.

Closed bridging.

Answer 39

Closed

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. An MCD-exempt bridging loan refers to the regulatory status of the arrangement, and can be open or closed.

Question 40

Steve took out an 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?

Answer 40

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

Question 41

Ben 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

Answer 41

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

Question 42

Which of the following is true of a further advance?

It must finish at the same time as the original mortgage.

The same loan‑to‑value limit will apply, regardless of the purpose of the further advance.

The existing mortgage must usually have been in place for at least six months.

The lender will not need to reassess the property as security, as it would have been valued for the original mortgage

Answer 42

The existing mortgage must usually have been in place for at least six months.

Question 43

Karen has requested a further advance but her personal circumstances have changed since she obtained the original mortgage. Her partner has now moved into the property and her son has returned to live at home since graduating from university. Assuming Karen meets all the other criteria for a further advance, what action would the lender need to take in relation to the change in occupants?

Answer 43

Completion of a consent to mortgage form by Karen’s partner and her son.

Explained: The lender would require the completion of a consent to mortgage form by Karen’s partner and her son. Alternatively, they might become parties to the mortgage, assuming joint and several liability for payment; this would require a variation of the mortgage deed

Question 44

When a second charge is sought, there is no requirement under general property law for the first lender to agree. True or false

Answer 44

True. There is no requirement under general property law for the first charge lender to agree to a second charge because its own position will not generally be affected. However, a first charge lender has the right to include a clause in the mortgage deed (which most major lenders do) allowing them to place a restriction on title at the Land Registry. This means that the Land Registry cannot register any further charges without the first charge holder’s agreement.

Question 45

An advantage of a lifetime mortgage is that the planholder is guaranteed a tenancy for life. True or false?

Answer 45

False. With a lifetime mortgage the planholder retains ownership of the property