Topic 27 - Transferring mortgages Flashcards
From a regulatory perspective, a remortgage is an entirely new arrangement
True or false
True
Therefore, any remortgage after 1 March 2016 will be an MCD regulated mortgage
This means that the normal checks,
including affordability, must be carried out, unless the remortgage is for the same amount, in which case the lender can apply proportionate affordability assessment (covered in section 10.7.1).
What is a remortgage?
A remortgage is a replacement loan for one already in force. The replacement
loan may be with the original lender or with a different lender
Do not confused with a further advance which is an additional loan with the same lender ontop of the original one
When remortgaging why should the borrower obtain a redemption statement for their old loan?
In order to establish
accurate borrowing requirements for their new mortgage – otherwise there may be a shortfall that
cannot be met from personal resources if the new mortgage is not enough to repay the old one. Especially important when remortgaging to a new provider
Tell me some of the issues with remortgaging
Because the remortgage is a completely new loan the new lender will treat it as one. All the processes of a mortgage application will need to be repeated again. This will result in fees and costs for local authority searches, conveyancing searches and so on which have already been paid before
When remortgaging is SDLT charged again?
NO
Other costs will be charged again however, such as valuation and conveyancing fees (NOTE some lenders will offer free valuations as an incentive when remortgaging to them)
What are the risks of moving unsecured loans to secured status? Ie, remortgaging to consolidate debts
The borrower’s equity in the property will be reduced, which could
reduce their options if they wanted to move in future
If the borrower has difficulty meeting monthly costs and defaults
on a mortgage, the lender might commence possession proceedings,
whereas this would not happen with an unsecured loan
The borrower will be paying interest on the consolidated debt until the
end of the mortgage term, which will usually be longer than the original
loan it replaced
What is the risk of remortgaging to raise additional
money for non property purchases (ie car purchase, hoildays etc)
Mortgage rates are generally lower than other forms of
borrowing which is good.
However, the borrower will be repaying the increased borrowing
to the end of the mortgage term; this could mean the car is financed for upwards of 20 years, even though it will lose value rapidly
What is portability?
The facility to transfer an existing mortgage to a new property during the term of a special deal (ie a fixed deal) without penalty.
For example, a borrower with a £75,000 five‑year fixed‑rate deal would be allowed to move homes without penalty within the five‑year term, providing that £75,000 of their new mortgage was on the same deal. Any additional borrowing would be on a separate deal likely with different rates. This is especially useful where market rates have become poor and you have long left on your existing special deal which is at a much better rate
What is a ‘transfer of equity’?
When a joint owner transfers their ‘share’ of the property into the other owner’s sole name (for reasons such as a divorce)
OR
When a sole owner wishes to add another person as joint owner
Can lenders refuse a transfer of equity?
Yes the lender can refuse
The lender will likely refuse if there is a threat to the security of the mortgage. For example, a couple with a joint mortgage divorce and one party is moving out. This will mean the mortgage will need to be repaid fully by the sole party and affordability may not allow.
This has led to a situation where
divorced couples are still joint mortgagors and, to compound their problem, are unable to arrange a mortgage on a new property because the existing mortgage affects their affordability assessment
A transfer of equity request is often made at the same time as a request for a further advance. Why is this
likely where a couple divorces and no longer want to live togther.
The further advance is requested by the remaining borrower as they need to raise
finance to buy out the borrower who is leaving the property and the transfer of equity request is raised by the remaining borrower because they are transferring the property fully into their own name since they will still live there
1) A party is added to a mortgage contract. Does the lender need to provide them with an ESIS for the whole loan?
2) A party is removed from a mortgage contract. Does the lender need to provide them with an ESIS for the whole loan?
3) A party is removed from the mortgage contract due to death. Does the lender need to provide the surviving party with an ESIS for the whole loan?
1 = YES
2 = YES
3 = NO
When a party is removed from a mortgage contract, The lender needs to provide the remaining party with an ESIS for the whole loan. Under what circumstances does the lender not need to do this when a party is being removed from the contract?
When the party is being removed due to death
It is the right of any borrower to redeem a mortgage at any time. True or false
True, the law stops lenders from obstructing this right, although they are allowed to make a reasonable charge to cover their lost income (ie early redemption charges)
WHEN MIGHT A MORTGAGE BE REDEEMED EARLY?
When the borrower:
receives a legacy;
wants to move and take a new mortgage;
has funds to clear the mortgage and feels it will be of benefit to do so
Outline the process for early mortgage redemption
Date of redemption
agreed
Lender provides
details of the amount
needed to pay off loan
(redemption statement)
Borrower makes
all payments
Loan is redeemed, and
if the lender is satisfied the borrower is released from the mortgage
This is a vacation
of the mortgage
(or discharge in
Scotland). An officer
of the lender signs a
receipt and a solicitor
completes legal work
A release fee may then be charged
Why do lenders impose early repayment charges?
Many lenders impose an early repayment charge to offset loss of anticipated interest from special deals ( remember the lender has borrowed from the wholesale market at a set rate for a set period to finance the mortgage so by redeeming early they will lose out due to the lost interest)
These fees are usually expressed in terms of so many months’ interest or a
percentage of the loan and can be significant
As well as the early repayment charge, lenders often also charge a mortgage exit fee. Lenders charge the ERC to offset the loss of anticipated interest from the special deal. Why do lenders charge the mortgage exit fee?
To cover its costs in
closing the account and carrying out the required procedures when the borrower redeems a mortgage
Accepatable components of the mortgage exit fee, as stated by the FCA are the following:
deed release fees;
Land Registry charges;
staff processing cost;
a reasonable proportion of general overheads
NOTE : Where a borrower considers a mortgage exit fee to be unfair, they have the
right to refer the case to the Financial Ombudsman Service where the case will
be considered on the basis of fairness.
What is a Part‑redemption?
Where a borrower pays a lump sum to reduce the mortgage
balance.
Not pay it off in full basically
Define the following:
Remortgage
Early Repayment Charge
Portability
Transfer of equity
Early Redemption
Legal date of redemption
Clog on the equity of redemption
Remortgage = Transferring an existing mortgage to a new lender to take advantage of a better deal or raise further funds. On rare occasions a remortgage may be with the existing lender.
Early Repayment Charge = A charge applied by a lender for ending a mortgage arrangement or repaying some of the loan early. Usually calculated as a number of months’ interest on the mortgage or a percentage of the amount repaid. Typically applies during the initial period when the borrower is benefitting from a special deal
Portability = The facility to transfer an existing mortgage deal to a new property without penalty.
Transfer of equity = Occurs when a new party is added as an owner of the property, or an existing owner transfers their share of the property to someone else. For example, a divorcing couple decide to transfer ownership from a joint basis into one name as part of the divorce settlement. As the mortgage must be on the same basis as property ownership, transferring equity will also require changes to the mortgage and thus the agreement of both borrowers and the lender.
Early redemption = The term used when the mortgage is repaid before the end of its original term
Legal Date of redemption = Contained in the mortgage deed. A date after which both parties have the right to ask for early redemption: typically six months after the start of the mortgage.
Clog on the equity of redemption =Where the mortgage deed contains an unreasonable condition to deliberately discourage or prevent a borrower from repaying a loan. Examples include unreasonably high early redemption charges, or early repayment charges imposed for a long period on a variable-rate mortgage
Mike and Maria took out their mortgage with Prudent Bank in 2019 and now wish to switch to a lower-rate mortgage deal with a new lender. They will not increase their borrowing beyond adding the arrangement fee to the loan. The new lender is required to carry out a full affordability assessment. True or false?
False
MCOB rules allow lenders to carry out a ‘proportionate’ (less stringent) affordability assessment if the amount of borrowing does not increase, other than to cover product or arrangement fees for the new contract
For which of the following reasons would remortgaging not be a sensible option?
Building an extension.
Buying a car.
Refurbishing a kitchen.
Buying a car.
Financing non-property purchases, such as a car, can be attractive at the time, as mortgage rates are generally lower than other forms of borrowing. However, the borrower will be repaying the increased borrowing to the end of the mortgage term; this could mean the car is financed for upwards of 20 years, even though it will lose value rapidly
Which of the following is least likely to happen when consolidating an unsecured debt into a remortgage?
The borrower’s equity in the property will be reduced.
The total interest payable will be roughly the same.
There will be a higher risk of repossession on default.
The total interest payable will be roughly the same.
Moving unsecured loans to a mortgage will reduce the equity in the property, which in turn will increase the risk of repossession if the borrower cannot keep up the mortgage payments. As the term of unsecured loans is generally much shorter than a mortgage, moving such debts to a mortgage is likely to result in interest being paid for a much longer period and a consequent increase in the total payable
Joe has 3 years remaining on a 5-year fixed-rate mortgage for £100,000. The mortgage carries an early repayment charge of 2% but has a portability option. Joe is moving to a different part of the country where property prices are lower, and he needs a new mortgage of £80,000. Assuming he stays with his existing lender, it is most likely he:
will have to take out a new fixed-rate mortgage for £80,000 and pay an early repayment charge of £400.
will have to redeem the existing mortgage and pay an early repayment charge of £2,000.
can transfer £80,000 of the existing mortgage to the new property and pay an early repayment charge of £400
can transfer £80,000 of the existing mortgage to the new property and pay an early repayment charge of £400.
Portability allows a borrower to take an existing mortgage to a new property, subject to the lender’s current affordability criteria and lending policies. If the new property requires a higher mortgage, the existing amount can be transferred on the same terms, but any additional borrowing will be on a current mortgage deal offered by the lender. If the new property requires a smaller mortgage, the mortgage can usually be transferred, but early repayment charges will usually apply to the difference between the original new mortgage and the new borrowing
