U4: T10 - ASSESSING THE APPLICANTS FINANCIAL STATUS

Question 1

What 5 pieces of information does the lender need to know about the required loan?

Answer 1

1. Deposit available
2. Repayment Method
3. Loan to value
4. Building and contents insurance required
5. Other insurance requirements

Question 2

True or false. Prison sentences can be imposed for providing fraudulent information on loan application forms.

Answer 2

True. It is not unusual for prison sentences to be imposed, even for first offences.

Question 3

Most lenders will consider which figure for self-employed affordability criteria?

A) Gross Profit
B) Net profit

Answer 3

B) Net profit

Question 4

Gross profit = Turnover minus?

Answer 4

Raw materials required as inputs to generate the turnover

Question 5

Net profit = Gross profit minus?

Answer 5

Other regular business expenses

Question 6

Al is a painter and decorator. What do you think would count as deductions to calculate his:
a) gross profit?
b) net profit?

Answer 6

A) Gross profit is turnover minus the cost of basic materials to enable him to work on a day‐to‐day basis – paint, filler, wallpaper, brushes, etc.

B) Net profit is the gross profit minus routine business expenses, such as motor expenses (petrol, repairs and insurance); postage and stationery; telephone charges, etc.

Question 7

What is a dividend and in what ways the tax treatment is different from that of earned income?

Answer 7

A dividend is a portion of the profits of the company, paid to its shareholders. The level of dividend received depends on the amount of profit made by the company. In the case of small company where directors own the majority of shares, they can decide what dividends to pay. Dividends are paid without deduction of income tax at source and UK taxpayers have a dividend allowance on which no income tax is payable. If dividend income in excess of the allowance is received, the tax is calculated after calculating the tax due on earned income and savings interest.

Question 8

The lender must keep records of their affordability assessment. True or false.

Answer 8

True

Question 9

What section of MCOB is responsible lending?

Answer 9

MCOB 11: Responsible Lending

Question 10

Can you remember what self‐certification is and whether it is permitted?

Answer 10

Self‐certification involved the applicant declaring their own income and no evidence was sought to verify their claim. The rules now prohibit this and insist that evidence of income must be obtained from a source independent of the customer.

Question 11

Affordability must be based on the applicant’s free disposable income – the amount left each month after tax, National Insurance and normal expenses. True or false

Answer 11

True

Question 12

What 3 types of expenditure must be deduced to calculate free-disposable income?

Answer 12

1. Committed expenditure
2. Basic essential expenditure
3. Basic quality-of-life expenditure

Question 13

Which of the 3 types of expenditure do lenders need actual figures?

1. Committed expenditure
2. Basic essential expenditure
3. Basic quality-of-life expenditure

Answer 13

1. Committed expenditure

For basic essential and basic quality‐of‐life expenditure they can use either the borrower’s actual figures or statistical or modelled data from organisations such as the Office for National Statistics.

Question 14

Lender Stress Tests are set out in MCOB?

Answer 14

True.

The FCA sets out the requirements in MCOB 11.6.18 (R).

Question 15

When conducting a stress test - a lender uses the rate agreed at the start of the mortgage to conduct the test. True or false

Answer 15

False.

The lender must use the reversion rate (after the fixed term period of the mortgage finishes) to calculate the stress test.

Question 16

What is the minimum period the lender must consider interest rate increases for?

Answer 16

Minimum of 5 years.

Unless the mortgage is on a 5 year fixed mortgage or the mortgage term is less than 5 years.

Question 17

What is the minimum interest rate increase to be used during a stress test?

Answer 17

1% minimum per year/

Even if the indicators above (including FPC guidance) suggest a rate below 1 per cent would be appropriate.

Question 18

Define credit-impaired customer.

Answer 18

credit‐impaired customer is one who:

„1) within the last two years has owed the equivalent of three months’ payments on a mortgage or other loan, unless late payment was the result of errors by a bank or other third party; or

2)„ within the last three years has had one or more county court judgments, totalling more than £500;

3) or has had an individual voluntary arrangement or bankruptcy order in force within the last three years.

Question 19

Surinder and Kuldip are both applying for mortgages on houses in the UK. Surinder has just got a new job in Northampton and is moving there; Kuldip is buying a house there too for his family but he is working overseas on a long‐term contract. The lender cannot treat Kuldip’s application differently from Surinder’s just because he is not currently living in the UK. True or false?

Answer 19

False.

A lender cannot discriminate on grounds of race or nationality but it can impose different terms on a borrower who is living outside the UK, or decide not to lend at all, because of the increased difficulty of pursing the borrower in the event that they default on the repayments.

Question 20

Last week Sam contacted her bank’s mortgage adviser about applying for a mortgage, and the adviser told her that she and her partner could probably afford to borrow £180,000, which is three times their joint income. A friend who works in a building society has now told Sam that the bank is no longer allowed to assess her application on the basis of an income multiple. Should Sam be concerned about the way the bank dealt with her enquiry?

Answer 20

No – lenders are allowed to give initial assessments based on income multiples. If Sam were to go ahead and make a mortgage application the lender would be required to carry out a full and detailed assessment of her income and that of her partner.

Question 21

A lender may take account of sales‐related income in assessing a borrower’s ability to repay a loan. True or false?

Answer 21

True: variable sales‐related income is usually averaged over three or five years.

Question 22

All sole traders must provide a detailed breakdown of their business expenditure on their tax return. True or false?

Answer 22

False. All businesses must maintain accurate accounts but a detailed breakdown of expenditure is only required on a tax return if the business turnover is above the VAT registration threshold.

Question 23

Which of the following would not be an acceptable reason for a lender to waive affordability checks when varying the terms of a regulated mortgage started in 2013?

a) A further advance is required for essential maintenance to the structure of the property.
b) The borrower has requested a new 2.99 per cent fixed‐rate loan on expiry of their current 3.30 per cent fixed‐rate loan.
c) A further advance is required for home improvements.
d) Borrowing would be increased to cover the cost of the arrangement fee.

Answer 23

c) A further advance is required for home improvements.

Affordability checks cannot be waived for additional borrowing unless it is for essential repairs or maintenance, or to add the cost of a mortgage product fee.

Question 24

A water bill is an example of:

a) committed expenditure.
b) basic essential expenditure.
c) basic quality‐of‐life expenditure.
d) cost of living expenditure.

Answer 24

b) A water bill is basic essential expenditure.

Question 25

Karen is applying for a mortgage but is struggling to provide exact expenditure figures. For which of the following elements of Karen’s expenditure could the lender not use figures from the Office for National Statistics instead?

a) Personal loan repayments.
b) Spending on food.
c) Spending on entertainment.
d) Electricity bill.

Answer 25

A) Personal loan repayments are committed expenditure and the lender needs to use Karen’s actual figures rather than representative data.

Question 26

Andreas, who has been self‐employed for 18 months, wants to buy a house but is concerned that his track record in self‐employment is not long enough for him to be offered a mortgage. A friend has advised him to apply for a self‐certified mortgage. Do you think this would be an appropriate solution for Andreas?

Answer 26

No, this suggestion would not help Andreas, as self‐certified mortgages are no longer available.

Question 27

Rebecca and Rachel want to buy their first house. They have joint net income of £2,800 a month. They have committed expenditure of £400 a month, basic essential expenditure of £800 a month and basic quality‐of‐life expenditure of £600 a month. Their lender has calculated that their desired five‐year fixed‐rate mortgage product would cost £5.90 a month for each £1,000 borrowed. What is the maximum mortgage the lender is likely to offer?

Answer 27

£169,490.

Rebecca and Rachel would have free disposable income of £1,000 per month. Their chosen product is fixed for five years, which means the lender does not have to consider the impact of future interest rate rises.
£1,000 ÷ £5.90 = £169.49, so £1,000 would support a mortgage of £169,490.

Question 28

To comply with MCOB 11, lenders must retain documents that provide a rationale for the decisions taken on mortgage applications:

a) in hard copy for five years after the mortgage application is granted.
b) in hard copy or electronic form for seven years after the mortgage application is granted.
c) in hard copy or electronic form for the length of the mortgage contract.
d) in electronic form indefinitely.

Answer 28

c) Documents that evidence the rationale for decisions should be retained in either hard copy or electronic format for the length of the mortgage contract.

Question 29

Which of the following is true? For a mortgage application form:

A) the applicant must complete the form and it is the adviser’s responsibility to ensure it is accurate.
B) the adviser must complete the form and it is the customer’s responsibility to ensure it is accurate.
C) either the applicant or the adviser can complete the form, but it is the customer’s responsibility to ensure it is accurate.

Answer 29

C) either the applicant or the adviser can complete the form, but it is the customer’s responsibility to ensure it is accurate

The customer can decide who completes the form, but its accuracy is their responsibility.

Question 30

A lender will usually require details of previous employment if a mortgage applicant has been with their current employer for less than:

A) two years.
B) three years.
C) five years.

Answer 30

B) three years.

Question 31

Which of the following types of income is least likely to be included by a lender when assessing mortgage affordability?

A) Secure trust income.
B) Informal child maintenance payments.
C) Company pension.

Answer 31

B) Informal child maintenance payments.

Child maintenance payments will need to be subject to a court order and payable for a specified time. Secure trust income and company pensions are acceptable sources of income.

Question 32

A self-employed person’s income for mortgage purposes is normally calculated as turnover minus:

A) routine business expenses.
B) the cost of necessary raw materials.
C) the cost of necessary raw materials and routine business expenses.

Answer 32

the cost of necessary raw materials and routine business expenses.

Net profit is the figure used by lenders, and is calculated as gross profit (turnover minus the cost of necessary raw materials) less routine business expenses.

Question 33

Certain businesses can submit a ‘short’ tax return rather than providing detailed accounts. The maximum earnings for a business wishing to do so is:

A) net profit below the threshold for making a VAT return.
B) gross profit below the threshold for making a VAT return.
C) turnover below the threshold for making a VAT return.

Answer 33

C) turnover below the threshold for making a VAT return.

A ‘short’ self-assessment tax return is available to businesses with turnover below the threshold for having to make a VAT return.

Question 34

Which of the following statements apply to a director’s loan account? Select all that apply.

A) It records loans from the company to a ‘participator’.
B) It records loans from a ‘participator’ to the company.
C) It can provide loans to the spouse of a shareholder.
D) The term ‘participator’ includes non-shareholding employees of the company.
E) Loans to a shareholding director are not treated as a benefit in kind.

Answer 34

A) It records loans from the company to a ‘participator’.
B) It records loans from a ‘participator’ to the company.
C) It can provide loans to the spouse of a shareholder.

The term ‘participator’ is defined as a person with a share or interest in a company. It does not include non-shareholding employees. Director’s account loans to a shareholding director will not be treated as a benefit in kind if they are below £10,000 in total. Above that figure they will be a taxable benefit in kind unless the borrower pays interest at HMRC’s ‘official rate’.

Question 35

Which of the following factors would prevent a lender from waiving an affordability assessment if a borrower wished to vary the terms of an existing mortgage? Select all that apply.

A) The mortgage started before 26 April 2014.
B) The mortgage amount will increase to cover an arrangement fee.
C) The mortgage is an MCD regulated mortgage.
D) The variation would be from a capped rate to a lower fixed rate.
E) The borrower increased the mortgage in May 2015 to build an extension.
F) The borrower increased the mortgage in July 2014 to carry out essential repairs.

Answer 35

C) The mortgage is an MCD regulated mortgage.
E) The borrower increased the mortgage in May 2015 to build an extension.

MCOB rules do not allow the affordability assessment to be waived for MCD regulated mortgages. For regulated mortgages, the assessment cannot be waived if the change in terms would increase the amount of borrowing, other than to cover product or arrangement fees, or if the new contract would affect affordability, or if the mortgage has been increased since 26 April 2014 other than to pay for essential repairs. An exception can be made if increased borrowing is necessary to pay for essential repairs or maintenance that would put the property value at risk if not carried out.

Question 36

A couple have applied for a mortgage. The lender has established the following during the affordability assessment:

Net income: £2,200 a month.
Personal loan payments: £200 a month for the next 4 years.
Spending for basic day-to-day needs: £600 a month.
Council tax and utilities: £350 a month.
Life, car and home insurance: £75 a month.
Spending on clothes, recreation, household and personal items: £200 a month.
Savings: £200 a month.

The couple’s monthly free disposable income would be assessed as:

A) £975.
B) £775.
C) £575.

Answer 36

B) £775.

The £975 figure incorrectly deducts only committed expenditure (the loan) and basic essential expenditure (day-to-day needs, council tax, utilities and insurances).

The £775 figure correctly deducts committed and basic essential expenditure, together with basic quality-of-life expenditure (clothes, recreation, household and personal items).

The £575 figure incorrectly includes regular savings as expenditure.

Question 37

Which of the following applies when a lender carries out an interest rate stress test for a mortgage applicant?

A) The test must be carried out on mortgages of all types and lengths of term.
B) The minimum interest rate increase to apply is 1%.
C) The lender must use its own statistics to determine which interest rate to use.

Answer 37

B) The minimum interest rate increase to apply is 1%.

The test is not required for fixed-rate mortgages with a term of five years or more, or for mortgages with a term of less than five years. When deciding on the interest rate to use for the stress test, the lender must use an independent and recognised source of information, taking into account market expectations and Financial Policy Committee recommendations regarding the assumptions to use.

Question 38

A ‘credit-impaired’ customer is looking for a further advance, claiming it is to consolidate credit card debt into his mortgage. Using the lender’s standard criteria, the new mortgage would be unlikely to meet the lender’s affordability criteria. What actions are available to the lender under MCOB rules? Select all the available actions.

A) Agree to the further advance but settle the credit card debt using the further advance.

B) Agree to the further advance and take reasonable steps to ensure the credit card debt is repaid on completion of the mortgage.

C) Use discretionary measures to alter the affordability assessment.

D) Agree to the further advance but include the monthly credit card payments as committed expenditure in the affordability assessment.

E) Agree to the further advance and warn the customer that he should pay off at least some of the credit card balances.

Answer 38

A) Agree to the further advance but settle the credit card debt using the further advance.

B) Agree to the further advance and take reasonable steps to ensure the credit card debt is repaid on completion of the mortgage.

D) Agree to the further advance but include the monthly credit card payments as committed expenditure in the affordability assessment.

The lender must use consistent processes for assessing affordability. It must take ‘reasonable steps’ to ensure the credit card balances are repaid on completion of the mortgage.

Question 39

Surinder and Kuldip are both applying for mortgages on houses in the UK. Surinder has just got a new job in Northampton and is moving there; Kuldip is buying a house there too for his family but he is working overseas on a long‑term contract. The lender cannot treat Kuldip’s application differently from Surinder’s just because he is not currently living in the UK. True or false?

Answer 39

False. A lender cannot discriminate on grounds of race or nationality but it can impose different terms on a borrower who is living outside the UK, or decide not to lend at all, because of the increased difficulty of pursing the borrower in the event that they default on the repayments.

Question 40

Last week Sam contacted her bank’s mortgage adviser about applying for a mortgage, and the adviser told her that she and her partner could probably afford to borrow £180,000, which is three times their joint income. A friend who works in a building society has now told Sam that the bank is no longer allowed to assess her application on the basis of an income multiple. Should Sam be concerned about the way the bank dealt with her enquiry? Yes or No.

Answer 40

No – lenders are allowed to give initial assessments based on income multiples. If Sam were to go ahead and make a mortgage application the lender would be required to carry out a full and detailed assessment of her income and that of her partner.

Question 41

A lender may take account of sales‑related income in assessing a borrower’s ability to repay a loan. True or false?

Answer 41

True: variable sales‑related income is usually averaged over three or five years.

Question 42

All sole traders must provide a detailed breakdown of their business expenditure on their tax return. True or false?

Answer 42

False. All businesses must maintain accurate accounts but a detailed breakdown of expenditure is only required on a tax return if the business turnover is above the VAT registration threshold