Topic 3 - Mortgage Regulation Flashcards
Regulations for regulated mortgages, including lifetime, second-charge, CBTL, bridging loans and home reversion plans are found in…
…the Mortgages and Home Finance: Conduct of Business sourcebook (MCOB), which forms part of the FCA Handbook.
The Mortgage Credit Directive (MCD)…
…is designed to set minimum regulatory requirements in member states for credit agreements relating to residential property. Implemented in March 2016
MCOB already covered most of its requirements. New MCD sections were added where new rules were required for buy-to-let mortgages and second charges.
MCD also introduced the CBTL.
What is a mortgage entered into after 21 March 2016?
A MCD regulated mortgage.
It includes remortgaged as these are a new contract.
Any change to the mortgage that isn’t a new contract will still be MCOB rules
Which types of mortgage are MCD exempt?
Lifetime mortgages and business BTL.
Home purchase plans -
Involve the provider buying the property and then selling it to the ultimate owner via a special agremeent, either through the regular payments or capital. Or capital payments and rent.
(islamic)
Consumer Protection (Amendment) Regulations 2014 have 3 main parts:
- General ban on unfair commercial practices
- Misleading and aggressive practices are assessed to determine their influence on the average consumers’ decisions
- There is a blacklist of practices banned as they’re deemed to be unfair
Example is estate agent giving misleading information about a property they are selling.
What is a mortgage
A mortgage is an arrangement where an asset is used as a security . The loan is secured on property as a legal charge.
What’s is a legal charge
A legal charge gives a lender certain rights over a property. Such as repossession.
What is a back book loan in terms of the MCD
In general a new regulation covers only arrangement entered into on or after the implementation date.
However second charge mortgages entered into before 21st March 2016 are subject to MCOB as back book loans I’d they meet certain criteria.
What is a regulated mortgage
FCA regulated the sale and and administration of mortgages that meet the definition of a regulated mortgage.
A regulated mortgage contract meets the following conditions:
A lender provides credit roan individual or to trustees (the borrower)
The borrowers obligation is to repay is secured by a mortgage on land in the EU, where at least 40% of the land is used or is intended to be us, as or in connection with a dwelling.
What do mortgages before 21st March 2016 fall under?
MCOB
What is a lifetime mortgage
Homeowners over a certain age release some equity in their property. The lender agrees to advance a percentage of a property on a first charge basis, when the borrower, moves , goes into residential care or does the lender can exercise its legal right to take possession
On a lifetime mortgage although full capital is not required until the mortgage ends during the term the arrangement can include the following:
No capital repayments and interest is added to the capital to be repaid when the mortgage ends (rolled up) Most common type.
Less common:
No capital payments are required but interest payments must be made
Some capital repayment and interest payments are required but no requirement for full repayment until the end of the mortgage
What is a retirement interest only mortgage:
Due to difficulty Of borrowers repaying and interest only mortgage at the end of the term. Lenders are permitted to arrange mortgages on an interest only basis for borrowers over a certain age. Affordability can be assessed on an interest only basis.
MCOB defines an interest only mortgage as an interest only mortgage which:
Is not interest roll up
Restricted to older customers
Lender is not entitled to seek full repayment until specific life events unless the customer breaches their contractual obligations. Including obligation to pay interest. In such cases the lender can term it the agreement.
What is a home reversion plan
Provider buys whole or a proportion of the property at a significant discount.
Former owner lives in property
On change of circumstances the provider sells the property. The lender gets its percentage in proceeds back after the sale.
FCA criteria on regulated home reversion plans:
The reversion occupier must occupy at least 40 percent of the land.
The plan will end if the occupier dies, Residental care, or at the end of a specified term of at least 20 years.
Providers will limited those who occupy the property to a spouse or civil partner.
CBTL covers:
Covers accidental landlords not predominantly using the property for business.
Need to go through same assessments as residential mortgages and need special authorisation from FCA to use them
Are business BTL regulated?
No
What is the criteria for a business BTL mortgage.
The property was purchased with the intention of renting it out and neither the borrower or relative have ever lived in it.
The borrower has a portfolio (more than one) of rental properties.
The lender is satisfied the property is solely for business.
Less than 40% of the property is used as a residence
More than 40% of the property is for residential use but the property is primarily for business (such as bed and breakfast)
