U3: T2 - TYPES OF BORROWER Flashcards

1
Q

Which of the following does not classify as one of the 3 ‘P’s of Mortgage Assessment?

A) Purpose
B) Person
C) Proportion
D) Property

A

C) Proportion - Is not

Those which are:
A) Purpose: Is the purpose of the mortgage acceptable?
B) Person: Is the lender legally able and willing to lend to the applicant?
D) Property: Is the property a suitable security for the required mortgage?

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2
Q

What is an ICR?

A

Interest coverage ratio (ICR) – the ratio of rental income to mortgage payments (including associated costs and tax).

Each lender can set an ICR based on rental demand and typical rent levels in the area, with the PRA setting 125 per cent as a minimum industry standard, meaning that rent must be at least 125 per cent of the landlord’s costs, although some lenders set a minimum as high as 145 per cent.

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3
Q

In 2016, the PRA introduced requirements for lenders to assess more stringently a number of affordability factors when considering buy‐to‐let applications.

With of the following is not a factor?

A) Interest Coverage Ratio
B) Affordability of Tenants
C) Income Affordability Test
D) Interest Rate Affordability Stress Test

A

B) Affordability of Tenants - not a factor

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4
Q

BTL mortgages are regulated by the FCA’s regulation.

True or False?

A

False.

In general, mortgages for BTL property are not subject to FCA regulation because they are defined as business loans and are not secured on the borrower’s main residence.

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5
Q

CBTL mortgages are regulated by the FCA’s regulation.

True or False?

A

True.

CBTL mortgages are subject to legislation resulting from the Consumer Credit Directive 2015. Firms with Section 4a permission to carry out regulated activities that wish to deal in CBTL business must register as CBTL firms with the FCA.

CBTL mortgages are subject to the Mortgage Credit Directive Order 2015, but the requirements for firms are similar to the MCOB rules and, where advice is given, the firm must assess the client’s circumstances, meet initial and product disclosure requirements and assess affordability.

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6
Q

What does the FCA defines a high‐net‐worth customer?

A

A minimum annual net income of £300,000 OR;
or minimum net assets of £3m

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7
Q

Who does the FCA define as a ‘Professional Customer’?

A

The FCA defines a ‘professional customer’ as one who has worked in the home finance sector for at least a year, in a professional position that requires knowledge of the product or service to be arranged, and who the firm reasonably believes to be capable of understanding the risks involved in the proposed arrangements.

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8
Q

Mortgages taken out by individuals for business purposes can be regulated and subject to MCOB.

True or false?

A

True

Mortgages taken out by individuals for business purposes are regulated and
subject to MCOB if:
A)„ the borrowing is secured by a legal charge on a property where at least 40 per cent of the land is used as a residence (the standard definition of a regulated mortgage); and
„B) the sole purpose of the mortgage, remortgage or further advance is to raise funds for use by a small business (ie one with turnover of less than £1m per year).

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9
Q

If the mortgage is taken out by a business, or by individuals in the business, and is secured on business premises, the mortgage is not a regulated mortgage.

True or false?

A

True

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10
Q

Mortgages for business partners for business purposes can be regulated.

True or false

A

True.

Mortgages for business partners for business purposes are regulated if the criteria for regulated business mortgages are met:

A)„ the borrowing is secured by a legal charge on a property where at least 40 per cent of the land is used as a residence (the standard definition of a regulated mortgage); and
„B) the sole purpose of the mortgage, remortgage or further advance is to raise funds for use by a small business (ie one with turnover of less than £1m per year).

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11
Q

Elena and Rita are in a business partnership together, and have arranged a mortgage loan of £240,000. They agree between them that Elena will pay for a third of the mortgage and Rita for two thirds. However, Rita very suddenly leaves the country and does not leave any contact details.

How much of the loan is Elena liable to repay?

a) £80,000
b) £160,000
c) £240,000

A

c) £240,000

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12
Q

Mortgage lending directly to an LLP is not regulated.

True or false?

A

True

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13
Q

As the SPV is a business, any BTL mortgage would be a regulated CBTL mortgage.

True or false?

A

False

As the SPV is a business, any BTL mortgage would not be a regulated CBTL mortgage.

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14
Q

Corporate mortgages are not regulated by the FCA, regardless of the type of property, because the loan is to a company, not an individual, but it will be covered by MCOB rules if the firm has a turnover of less than £1m.

True or false

A

True

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15
Q

A maximum of what percentage of a building society’s commercial assets can be held in loans to limited companies secured on land?

A

25%

A maximum of 25 per cent of a building society’s commercial assets can be held in loans to limited companies secured on land.

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16
Q

A commercial mortgage can be offered either to an individual or to a company, but will not be a regulated mortgage.

True or false?

A

True

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17
Q

What are the two categories of borrower specifically referred to by the FCA in MCOB?

A

They are ‘mortgage prisoners’ and vulnerable customers.

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18
Q

What is a mortgage prisoner?

A

‘Mortgage prisoners’ is a term to describe customers who have a regulated mortgage and may be prevented from changing to another arrangement with their existing lender or moving to another lender if they are subject to the standard affordability requirements under MCOB.

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19
Q

What is a vulnerable customer?

A

The FCA’s Occasional Paper No. 8 (2016) describes a vulnerable customer as someone who is “[. . .] especially susceptible to detriment as a result of their personal circumstances, particularly when a firm is not providing appropriate levels of care”.

An individual may be vulnerable because of a wide range of circumstances including (but not limited to) physical or mental disability, poor health, or weak numeracy and literacy skills. Their vulnerability might be short term, for example because of a job loss, a recent bereavement or release following a prison sentence.

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20
Q

Which of the following would the FCA not consider a vulnerable customer?

„A) using the statutory right to buy; „
B) entering a sale‐and‐rent‐back agreement;
„C) equity‐release applicants;
„D) customers whose main purpose is debt consolidation.
E) CBTL

A

E) CBTL - not a vulnerable customer

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21
Q

Which of the following is able to borrow?

A) Minors
B) Mentally incapacitated
C) Bankrupt
D) Very poor credit rating
E) Elderly

A

E) Elderly

Are potentially able to borrow

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22
Q

An individual can petition for their own bankruptcy regardless of how much they owe.

True or false?

A

True

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23
Q

In England, Wales and Northern Ireland, creditors can petition for a debtor’s bankruptcy if the debt is at least how much?

A) £2,000
B) £5,000
C) £10,000

A

B) £5,000

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24
Q

An undischarged bankrupt cannot borrow.

True or False?

A

False - there is no law preventing them, though in practice it would be VERY difficult.

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25
Q

A borrower must declare a previous bankruptcy regardless of whether the lender asks.

True or false

A

False.

A borrower must declare a previous bankruptcy if asked by the lender

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26
Q

Failure to declare a previous bankruptcy when asked can render the person guilty of what?

A

Fraud

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27
Q

How long does details of bankruptcy remain on a person’s credit file?

A

6 years

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28
Q

Define an Individual Voluntary Arrangement?

A

A formal agreement between a debtor and their creditors to make reduced payments towards their total debt over an agreed period, typically five years, after which the debt is deemed to be settled.

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29
Q

Define an Individual Voluntary Arrangement (IVA)?

A

A formal agreement between a debtor and their creditors to make reduced payments towards their total debt over an agreed period, typically five years, after which the debt is deemed to be settled.

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30
Q

What is Debt Relief Order (DRO)?

A

An order granted by the official receiver to a non‐property owning individual with debts of less than £30,000 and limited assets who cannot repay their debts. It prevents creditors from seeking repayment without the approval of a court while the DRO is in place; after 12 months the debts are usually written off.

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31
Q

If someone is an EPA (Enduring Power of attorney) it means:

A) They must have been appointed prior to 1/10/07
B) They must have been appointed after 1/10/07

A

A) They must have been appointed prior to 1/10/07

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32
Q

An LPA must be registered with who before it becomes effective?

A

The Office of the Public Guardian (OPG)

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33
Q

Helena and Cath have a £120,000 mortgage in their joint names on their flat, which they bought two years ago. Helena and Cath have split up, Helena has moved out and Cath has not been able to contact her about paying the mortgage.

Who will the lender hold liable if the mortgage payments are not made? (Assume that Helena and Cath own the flat on a joint tenancy basis.)

a) Cath for the whole amount, because she is the only person actually living in the flat.
b) Helena and Cath, but the lender will pursue Cath for the whole amount if Helena cannot be contacted.
c) Cath for 50 per cent of the outstanding payments and Helena for the remainder.
d) Cath for 50 per cent because she is only liable for half the amount borrowed.

A

b) Helena and Cath initially, but ultimately Cath for the whole amount because they have joint and several liability for the loan.

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34
Q

What are the three main reasons why a personal borrower might require a mortgage?

A

To purchase a family home;
to arrange additional finance on a second‐charge basis;
or to provide bridging finance.

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35
Q

What must a lender establish before agreeing to lend to trustees?

A

That the trustees have authority to borrow for the proposed transaction under the terms of the trust deed.

36
Q

A partnership business has a legal existence of its own, separate from that of the individual partners.

True or false?

A

False.

A partnership is not a separate legal entity. Assets and liabilities are jointly owned by the partners.

37
Q

James wishes to raise £30,000 for his small business by arranging a further advance on the mortgage on his family home.

Would the further advance be a regulated mortgage?

A

Yes.

Even though the further advance is for business purposes it would be secured on the family home, so it would be regulated, as long as at least 40 per cent of the land is used as the main residence.

38
Q

Vanda has mortgages on two BTL properties, which she owns via a special purchase vehicle.

Are the mortgages regulated under MCOB?

A

No.

39
Q

An undischarged bankrupt cannot own property.

True or false?

A

False – an undischarged bankrupt can own property, although the trustee in bankruptcy may take it to pay their debts.

An undischarged bankrupt cannot acquire an interest in property, which means they cannot buy property while undischarged.

40
Q

Alan was declared bankrupt for the first time in London on 5 May this year. He will be discharged on:

a) 5 May next year.
b) 5 May two years later.
c) 5 May three years later.
d) 5 May five years later.

A

a) 5 May next year – his bankruptcy lasts for 12 months from the date he was declared bankrupt.

41
Q

A person who makes a power of attorney is known as a donor.

True or false?

A

True

42
Q

Jack established an enduring power of attorney in 2006, with his daughter as his attorney. Jack is now suffering from dementia and his daughter wishes to sell his house and use the proceeds to extend her own home so that Jack can move in with her.

Is she permitted to do this?

A

Only if the EPA is registered with the Office of the Public Guardian; an EPA must be registered when the donor loses mental capacity.

43
Q

What is a donor?

A

The person granting powers to their representative.

44
Q

A ‘consumer buy to let’ mortgage would apply to which of the following mortgage applicants?

A) Francesca, who needs a mortgage to buy a flat to rent out on a long-term basis.

B) Ann, who has inherited her parents’ house and needs a small mortgage to carry out improvements so that she can rent it out until she decides what to do with it.

C) Parvinder, who wishes to buy a semi-detached house to add to his investment portfolio.

A

B) Ann, who has inherited her parents’ house and needs a small mortgage to carry out improvements so that she can rent it out until she decides what to do with it.

A ‘consumer buy to let’ mortgage is one where the purpose of arranging a mortgage is not ‘wholly or predominantly’ for business purposes. Borrowers in this category are sometimes described as ‘accidental landlords’ – in other words, they are people who need to let out a property because of personal circumstances rather than because they have made a conscious choice to buy a property for rental.

45
Q

Complete the Sentence:

A joint mortgage means that the borrowers have
______ and ______ liability for the mortgage.

A

1) Individual and 2) Joint

If two or more people take out a mortgage, the mortgage deed (the contract) makes them jointly and severally liable for that loan. This means all parties are individually liable for the whole amount of the loan, not just their ‘share’ of it.

46
Q

True or false:

A ‘professional customer’ is someone who has a financial services qualification.

A

False.

The FCA defines a professional customer as one who has worked in the home finance sector for at least a year, in a professional position that requires knowledge of the product or service to be arranged, and who the firm reasonably believes to be capable of understanding the risks involved in the proposed arrangements. There is no mention of the need for a qualification.

47
Q

True or false.

Trust deeds automatically give trustees the power to borrow on behalf of the trust.

A

False.

Trustees only have the power to borrow if it is specifically stated in the trust deed.

48
Q

True or false

Firms are able to apply more flexible processes to mortgage applications from high-net-worth customers.

A

True

49
Q

True or false

The FCA defines a high-net-worth mortgage customer as one with a minimum annual net income of £100,000, or minimum net assets of £1m.

A

False.

The FCA defines a high-net-worth customer as one with a minimum annual net income of £300,000, or minimum net assets of £3m. Lenders can apply more flexible processes to high-net-worth customers than for mainstream mortgages.

50
Q

True or false

Lenders are not permitted to lend to the personal representatives of a deceased person’s estate to buy property for a beneficiary.

A

False.

Lenders can lend to the personal representatives of a deceased person’s estate to buy property for a beneficiary.

51
Q

Colette, Craig and Christine each wish to raise cash for their businesses by arranging a mortgage on a property they own and use as a dwelling.

Which of the following mortgages would be a regulated mortgage?

A) The mortgage of Colette, who wishes to raise money for her limited company.
B) The mortgage of Craig, who is a sole trader with annual business turnover of £1.2m.
C) The mortgage of Christine, who is in a business partnership with her husband, and has annual business turnover of £450,000.

A

C) The mortgage of Christine, who is in a business partnership with her husband, and has annual business turnover of £450,000.

Mortgages to raise money for limited companies and limited liability partnerships are not regulated. Mortgages to raise money for partnerships or sole traders are regulated if annual turnover is below £1m. This assumes that the property meets the criteria for a regulated mortgage.

52
Q

Which of the following statements are true in relation to a special purpose vehicle (SPV) used to hold property? Select all the true statements.

A) The SPV is owned and controlled by shareholders.
B) The property is owned by the shareholders.
C) The SPV forms a joint legal entity with the shareholders.
D) Shareholders have no liability for any SPV debts.
E) A mortgage lender is likely to require personal guarantees from directors.

A

A) The SPV is owned and controlled by shareholders.
D) Shareholders have no liability for any SPV debts.
E) A mortgage lender is likely to require personal guarantees from directors.

The property is owned by the SPV, which is a separate legal entity and able to hold property and borrow in its own right. While the shareholders own the SPV, the SPV is the legal owner of the property. The shareholders’ liability for SPV debts is limited to the money they invested when buying the shares, although directors (who may be shareholders) are liable to the limit of any guarantees provided to mortgage lenders.

53
Q

Clive’s wife died unexpectedly last month, while the couple were in the process of remortgaging their home. The FCA would expect financial firms to treat Clive as a:

A) mortgage prisoner.
B) vulnerable customer.
C) exposed customer.

A

B) vulnerable customer.

‘Mortgage prisioners’ are those who have a regulated mortgage taken out before 26 April 2014 and may be prevented from changing to another arrangement with their existing lender or moving to another lender, due to the tightening of affordability requirements under MCOB.

We have no indication of affordability, but we know that bereavement is one of the circumstances identified by the FCA that could make an individual ‘vulnerable’.

54
Q

True or false

A trustee in bankruptcy can seize all of a bankrupt’s assets to settle their debts.

A

False.

A trustee in bankruptcy can seize all of a bankrupt’s assets to settle their debts, apart from items they need for work and to provide a basic standard of living.

55
Q

True or false

A person subject to an individual voluntary arrangement can legally take out a mortgage.

A

True.

A person subject to an individual voluntary arrangement can legally take out a mortgage, but lenders may not consider such an application.

56
Q

True or false

For creditors to petition for a debtor’s bankruptcy in England, the minimum debt is £1,500.

A

False.

The minimum debt in England for creditors to petition for a debtor’s bankruptcy is £5,000.

57
Q

True or false

An undischarged bankrupt cannot buy property.

A

True.

An undischarged bankrupt cannot buy or acquire an interest in a property, but theoretically they can raise a mortgage on a property they already own, although it is unlikely that a lender would agree.

58
Q

True or false

It is not possible for someone to petition for their own bankruptcy.

A

False.

An individual can petition for their own bankruptcy, and there is no minimum debt for them to do so.

59
Q

Which of the following people could arrange a power of attorney?

A) Barry, who has been diagnosed with dementia.

B) Gary, who has moved from Essex to Canada for a two-year work contract.

C) Harry, who is 17 and living apart from his parents.

A

B) Gary, who has moved from Essex to Canada for a two-year work contract.

Those lacking capacity to enter into a contract cannot appoint an attorney. Capacity to contract includes having mental capacity and being aged 18 or over.

60
Q

Janet is 65 and considering arranging a power of attorney, appointing her sister Gill as her attorney. She would like Gill to be able to deal with her financial affairs now, where necessary, and later if Janet becomes confused mentally.

Which arrangement would be appropriate?

A) Lasting power of attorney: property and affairs.
B) Enduring power of attorney.
C) Ordinary power of attorney.

A

A) Lasting power of attorney: property and affairs.

A property and affairs lasting power of attorney allows the attorney to look after the donor’s finances and property, including before the donor loses mental capacity if they consent. An enduring power of attorney would have been suitable before 30 September 2007, but new ones can no longer be set up. An ordinary power of attorney would allow Gill to deal with Janet’s finances while Janet remained mentally capable, but would cease if she became mentally incapacitated.

61
Q

Complete this sentence.

An enduring power of attorney must be registered with the ______ of the public ______ for the attorney to continue to act for the donor after the donor loses mental capacity.

A

Office of the public Guardian

62
Q

Helena and Cath have a £120,000 mortgage in their joint names on their flat, which they bought two years ago. Helena and Cath have split up, Helena has moved out and Cath has not been able to contact her about paying the mortgage. Who will the lender hold liable if the mortgage payments are not made? (Assume that Helena and Cath own the flat on a joint tenancy basis.)

A) Cath for 50% because she is only liable for half the amount borrowed.
B) Cath for 50% of the outstanding payments and Helena for the remainder.
C) Cath for the whole amount, because she is the only person actually living in the flat.
D) Helena and Cath, but the lender will pursue Cath for the whole amount if Helena cannot be contacted.

A

D) Helena and Cath, but the lender will pursue Cath for the whole amount if Helena cannot be contacted.

63
Q

What are the three main reasons why a personal borrower might require a mortgage?

A) To purchase a family home.
B) To purchase a business property.
C) To arrange additional finance on a second-charge basis.
D) To provide bridging finance
E) To let a home to tenants.

A

A) To purchase a family home.
C) To arrange additional finance on a second-charge basis.
D) To provide bridging finance

64
Q

Before agreeing to lend to trustees, a lender must establish that the trustees have authority to borrow for the proposed transaction under the terms of the trust deed.

True or false?

A

True

65
Q

A partnership business has a legal existence of its own, separate from that of the individual partners.

True or false?

A

False.

A partnership is not a separate legal entity. Assets and liabilities are jointly owned by the partners.

66
Q

James wishes to raise £30,000 for his small business by arranging a further advance on the mortgage on his family home.

Would the further advance be a regulated mortgage?

A) Yes.
B) No.

A

Yes.

Even though the further advance is for business purposes it would be secured on the family home, so it would be regulated, as long as at least 40% of the land is used as the main residence.

67
Q

Vanda has mortgages on two BTL properties, which she owns via a special purchase vehicle. Are the mortgages regulated under MCOB?

A) Yes.
B) No.

A

B) No.

The properties are regulated under the Mortgage Credit Directive Order 2015.

68
Q

An undischarged bankrupt cannot own property.

True or false?

A

False – an undischarged bankrupt can own property, although the trustee in bankruptcy may take it to pay their debts. An undischarged bankrupt cannot acquire an interest in property, which means they cannot buy property while undischarged.

69
Q

Alan was declared bankrupt for the first time in London on 5 May this year. He will be discharged on:

A) 5 May next year.
B) 5 May two years later.
C) 5 May three years later.
D) 5 May five years later.

A

A) 5 May next year.

70
Q

A person who makes a power of attorney is known as a donor.

True or false?

A

True

71
Q

Jack established an enduring power of attorney in 2006, with his daughter as his attorney. Jack is now suffering from dementia and his daughter wishes to sell his house and use the proceeds to extend her own home so that Jack can move in with her. Is she permitted to do this?

A) Yes, regardless of the circumstances.
B) No.
C) Yes, if the EPA is registered with the Office of the Public Guardian.

A

C) Yes, if the EPA is registered with the Office of the Public Guardian.

72
Q

What is the minimum ICR (Interest Coverage Ratio) set by the PRA?

A

125%

Each lender can set an ICR based on rental demand and typical rent levels in the area, with the PRA setting 125 per cent as a minimum industry standard, meaning that rent must be at least 125 per cent of the landlord’s costs, although some lenders set a minimum as high as 145 per cent.

73
Q

What are the 3 requirements for lenders the PRA introduced for BTL mortgages in 2016?

A

1) Interest Coverage Ratio (ICR)
2) Income Affordability Test
3) Interest Rate Affordability Stress Test

74
Q

After the 2016 PRA requirements for lenders was introduced, what is the minimum period the lender is required to consider the effect of interest rate increases over?

A

5 years from the start of the mortgage.

The lender is required to consider the effect of interest rate increases on the borrower’s ability to service the mortgage over a minimum period of five years from the start of the mortgage, unless the mortgage is on a fixed or capped rate for at least five years or the mortgage term is less than five years.

75
Q

What is a Consumer BTL mortgage (CBTL)?

A

A CBTL mortgage is one where the purpose of arranging a mortgage is not ‘wholly or predominantly’ for business purposes. Borrowers in this category are sometimes described as ‘accidental landlords’ – in other words, they are people who need to let out a property because of personal circumstances rather than because they have made a conscious choice to buy a property for rental.

76
Q

Generally speaking are BTL mortgages regulated by the FCA?

A

No.

In general, mortgages for BTL property are not subject to FCA regulation because they are defined as business loans and are not secured on the borrower’s main residence.

77
Q

Generally speaking are CBTL mortgages regulated by the FCA?

A

Yes.

CBTL mortgages are subject to legislation resulting from the 1) the Mortgage Credit Directive 2015 and 2) Consumer Credit Directive 2015.

Firms with Section 4a permission to carry out regulated activities that wish to deal in CBTL business must register as CBTL firms with the FCA.

78
Q

If one of two joint applicants are a HNW individual - the application is considered in total as a HNW application. True or false?

A

True.

In the case of joint applicants, at least one of them must meet the definition in their own right.

79
Q

If an applicant is guarantoored by a HNW individual - the application is considered in total as a HNW application. True or false?

A

True.

A high‐net‐worth customer can also be someone whose obligations under the mortgage contract are guaranteed by a person with a minimum annual net income of £300,000, or minimum net assets of £3m.

80
Q

Under what conditions is the lender not required to consider the Interest Rate Stress Affordability Stress Test?

A

If, the mortgage is:
- a fixed rate
- a capped rate
- the mortgage term is less than 5 years

81
Q

What are the 4 key ‘drivers’ of mortgage vulnerability?

A

1) Health
„2) Life events – bereavement, job loss or relationship breakdown.
„3) Resilience – financial or emotional
„4) Capability – low knowledge of financial matters, literacy, mathematics etc

82
Q

How long does bankruptcy remain on the Insolvency register?

A

3 months after discharge

83
Q

How long does bankruptcy remain on the persons credit file?

A

6 years after declaration

84
Q

Which power of attorney is for mental health only:

A) Lasting
B) Enduring
C) Ordinary

A

C) Ordinary

85
Q

Which power of attorney is for finances only:

A) Lasting
B) Enduring
C) Ordinary

A

B) Enduring

86
Q

Which power of attorney can be for finances, property and mental healthy:

A) Lasting
B) Enduring
C) Ordinary

A

A) Lasting