Topic 3: Mortgage Regulation Flashcards
What is a mortgage?
Does it only apply to property?
A mortgage is an arrangement where an asset is used by the lender as security for a loan
Property is not the only asset that can be
mortgaged: other assets, such as share portfolios can also be mortgaged, so no, it doesn’t just apply to property
If a loan is ‘secured’ against an asset what does this mean?
Secured’ means that there is a legal agreement giving the lender rights over the property until the loan is repaid
What is a legal charge?
A legal charge gives the lender certain rights over the property while the mortgage is outstanding.
These include the right to take possession of the property (subject to court sanction) if the borrower fails to make payments or repay the mortgage as agreed
What is a ‘first charge’ and a ‘second charge’ on a mortgage?
The first charge is a legal charge that is registered first at the Land Registry has
priority over other charges. This means that the debt to which it relates will be repaid first
The second charge is A legal charge that is registered after a first charge will rank second in line for repayment on sale or repossession. This means that it will be repaid from any money left over after the first‑charge holder
has been repaid. These are riskier for lenders.
Who took over regulatory responsibility for the marketing and sale of mortgages and home finance from the Financial Services Authority in 2013
Financial Conduct Authority
What were the aims of the EU mortgage credit directive?
It is an EU directive (The UK has still absorbed most of the
The Directive is designed to set minimum regulatory requirements in member states for credit agreements relating to residential property.
The Directive
also aims to provide a platform for a cross‑border European mortgage market
What are ‘back book loans’?
Second‑charge mortgages entered into before 21 March 2016
For an Act Of Parliament to be created and used what must happen?
What is primary legislation?
What is secondary legislation?
An Act of Parliament is created when a Bill is approved by Parliament through a:
Vote in the House of Commons
Vote in the House of Lords
Receives Royal Assent
Primary legislation is introduced through Acts of Parliament, which must be voted through both houses of Parliament
Secondary legislation is created by government ministers. It is mainly used to amend or add details to primary legislation to ensure it can be put into practice.
What two conditions must be met for a mortgage contact to be regulated by the FCA?
NOTE: by being regulated by the FCA, it means its subject to MCOB
Mortgage contracts entered into before 31 October 2004 are not regulated mortgages even if they satisfy the two conditions referenced above. Why is this?
A lender provides credit to an individual or to trustees (the
‘borrower’)
The borrower’s obligation to repay is secured by a mortgage
on land, where at least 40% of the land is
used, or is intended to be used, as or in connection with a
dwelling
They are not regulated before this date because this is before mortgages came within the remit of the then regulator, the Financial Services Authority. (Lenders can choose if the mortgage is subject to MCOB tho) READ 3.3
What is a lifetime mortgage?
Look back at Cemap 1 and read 3.3.2 in cemap 2
The lender agrees to advance a percentage of the property value on a first‑charge basis, with the mortgage
repaid when the borrower moves, goes into residential care or dies
Generally for older people who have little or no mortgage left.
What are retirement interest only mortgages?
A type of interest only mortgage available to older customers
The lender cannot seek full repayment of the loan unless a specified life event happens
Affordability can be assessed on an interest‑only basis only. It doesn’t need to take in account any repayment vehicle, which is what is needed for normal interest-only mortgages
Was introduced because many found it difficult to repay interest only mortgages at the end of the term
What are home purchase plans and how do they differ to regulated mortgages?
NOTE: Be careful not to mix home reversion plans with a home purchase plan. Two different things>]
Home purchase plans are know as Islamic mortgages
Home purchase plans are where a financial institution buys a property and then sells it to the ultimate owner via a set agreement such as regular payments of capital.
The financial institution makes their profit by selling the property back at a higher market value or by charging rent
Conventional mortgages are where the property buyer uses money borrowed from a lender to buy the property. The buyer will pay interest for borrowing
Muslims often use home reversion plans as it removes the interest element
How do home reversion plans work?
How do the FCA define regulated home reversion plans?
Provider buys the property or a proportion of it
Former owner continues to live in the property on a lifetime lease
If the former owner or ‘reversion occupier’, moves into care, dies etc the provider sells the property and keeps the proceeds
A home reversion plan is regulated by the FCA if it meets two requirements:
The reversion occupier must occupy at least 40%
The plan ends if the occupier dies, moves into care, or at the end of a specified term with the minimum being 20 years.
Look at figure 3.5
Criteria for business buy to let>
Read MCOB sourcebook
Match the dates to events
Answer
Explain what a regulated mortgage is
