U6: T26 - RAISING ADDITIONAL FUNDS FROM PROPERTY

Question 1

If a mortgage is in default, the lender will eventually proceed to possession and exercise its power of sale to recover the debt. The holder of the first charge takes what is legally due to it from the proceeds, then passes the balance of the sale money (if any) to the second lender, who takes what is due to it.

When all secured lenders have been satisfied, what happens to the balance, if any?

Answer 1

The balance is passed to the borrower.

Question 2

Can you recall when bridging finance might be required?

Answer 2

Bridging finance might be required when a borrower wishes to move house but has not managed to sell their existing house, or the funds from the sale will not be available before completion of the new purchase is due. The finance is designed to ‘bridge’ the funding gap on a temporary basis.

Question 3

Which of the following is true of a further advance?

a) It must finish at the same time as the original mortgage.
b) The same loan‐to‐value limit will apply, regardless of the purpose of the further advance.
c) The existing mortgage must usually have been in place for at least six months.
d) The lender will not need to reassess the property as security, as it would have been valued for the original mortgage.

Answer 3

c) The existing mortgage must usually have been in place for at least six months.

Question 4

Karen has requested a further advance but her personal circumstances have changed since she obtained the original mortgage. Her partner has now moved into the property and her son has returned to live at home since graduating from university. Assuming Karen meets all the other criteria for a further advance, what action would the lender need to take in relation to the change in occupants?

Answer 4

The lender would require the completion of a consent to mortgage form by Karen’s partner and her son. Alternatively, they might become parties to the mortgage, assuming joint and several liability for payment; this would require a variation of the mortgage deed.

Question 5

The value of the security should be reassessed if a further advance is requested. True or false?

Answer 5

True

Question 6

In relation to a further advance on an existing MCD regulated mortgage, in order to comply with MCOB, the lender must provide the borrower with:

a) an illustration based on the further advance only.
b) an ESIS based on the further advance only.
c) an ESIS based on the total borrowing.
d) an illustration based on the total borrowing.

Answer 6

b) The lender must provide the borrower with an ESIS based on the further advance only.

Question 7

The order of priority for legal charges on registered property is established by:

a) the date of the charge’s registration at the Land Registry.
b) the date the loan came into force.
c) the date the solicitor received confirmation of the charge from the lender.
d) the size of the loan.

Answer 7

A) The order of priority for legal charges on registered property is established by the date of the charge’s registration at the Land Registry.

Question 8

A deed of postponement is required for all second charges. True or false?

Answer 8

False. A second charge does not require a deed of postponement.

Question 9

Which of the following is untrue in relation to MCOB rules and second charges?

a) MCOB rules apply to new and existing second‐charge loans, regardless of when they started.
b) When arranging a new second‐charge loan, the lender must provide the borrower with an ESIS.
c) The lender must provide a suitability report to give an adequate explanation of the product.
d) A second‐charge loan of £30,000 secured on the borrower’s home for business purposes would not be subject to MCOB.

Answer 9

c) The lender must provide a suitability report to give an adequate explanation of the product.

The lender does not have to provide a suitability report for a second‐charge loan.

Question 10

When a second mortgage is taken, the new lender informs the original lender of the situation. True or false?

Answer 10

True. The new lender will wish to receive any surplus after the first mortgage has been paid off on possession and sale.

Question 11

Dmitri has accepted a new job in Manchester and bought a house there, but the sale of his previous home in Derby fell through and he has not yet found a new buyer. He needs bridging finance – which type is most likely to be appropriate?

Answer 11

Dmitri would need open bridging finance as he does not have a prospective buyer for his previous home and therefore does not know how long the finance might be required.

Question 12

An advantage of a lifetime mortgage is that the planholder is guaranteed a tenancy for life. True or false?

Answer 12

False. With a lifetime mortgage the planholder retains ownership of the property.

Question 13

In the context of further advances, what is the ‘deed of postponement’?

Answer 13

Effectively allows a new loan from the original mortgage lender to ‘jump the queue’ and become part of the first charge.

Question 14

If a mortgage is in default, the lender will eventually proceed to possession and exercise its power of sale to recover the debt. The holder of the first charge takes what is legally due to it from the proceeds, then passes the balance of the sale money (if any) to the second lender, who takes what is due to it. When all secured lenders have been satisfied, what happens to the balance, if any?

Answer 14

The balance is passed to the borrower.

Question 15

MCOB rules only apply to second charges taken out for business purposes if the loan is for £25,000 or less. True or false

Answer 15

True.

This is called the business exemption

Question 16

Which of the following two have higher interest rates?

A) Open bridging
B) Closed bridging

Answer 16

A) Open bridging.

Open bridging – the borrower needs finance to buy the new property but does not have a firm buyer for their existing property. This can represent a high risk for lender and borrower because there is no guarantee that the property will be sold within a reasonable period of time. Borrowers should be advised to think very seriously before committing to this arrangement. Open bridging interest rates are higher than those for closed bridging, due to the increased risk.

Question 17

A bridging loan is a short‐term mortgage. True or false

Answer 17

True

Question 18

What is an MCD-Exempt Bridging Loan?

Answer 18

A regulated mortgage contract or an article 3(1)(b) credit agreement either of no fixed duration or which is due to be repaid within 12 months, used by the consumer as a temporary financing solution while transitioning to another financial arrangement for an immovable property (FCA, no date).

Question 19

To be an MCD‐exempt bridging loan, it must have a term of less than 24 months. True or false

Answer 19

False.

To be an MCD‐exempt bridging loan, it must have a term of less than 12 months.

Question 20

What 2 criteria are required for a second charge bridging loan to be exempt from MCOB regulation?

Answer 20

A second charge bridging loan will be exempt if it:
1) is for more than £25,000 and is for business purposes;
2) requires four or fewer repayments.

Question 21

There is a requirement for the lender to carry out a review of the repayment strategy during the term of an interest‐only bridging arrangement. True or false

Answer 21

False

There is no requirement for the lender to carry out a review of the repayment strategy during the term of an interest‐only bridging arrangement.

Question 22

What is in MCOB 11?

Answer 22

MCOB 11 (responsible lending)

Question 23

What is in MCOB 4.7?

Answer 23

MCOB 4.7 (advice)

Question 24

A bridging loan extension for a HNW individual must be treated as a new loan. True or false?

Answer 24

False.

Unless the finance is a secured overdraft for a high‐net‐worth customer, an extension to a bridging loan must be treated as a new loan and subject to an affordability assessment.

Question 25

A bridging loan extension for business purposes must be treated as a new loan. True or false?

Answer 25

False.

Unless the finance is a secured overdraft for business purposes or for a high‐net‐worth customer, an extension to a bridging loan must be treated as a new loan and subject to an affordability assessment.

Question 26

Graham is hoping to raise additional funds to build an extension to his house. He has approached his existing mortgage lender for a further advance. What do MCOB rules require the lender to do?

A) Advise Graham to shop around for the best arrangement.
B) Inform Graham that a second charge or remortgage might be suitable alternatives.
C) Base the further advance amount on the house’s projected post-extension value.

Answer 26

B) Inform Graham that a second charge or remortgage might be suitable alternatives.

MCOB rules require the lender to inform a borrower considering a further advance, second-charge loan or remortgage that the other options could be suitable alternatives. The lender is not required to provide further advice on the suitability of those alternatives.

Question 27

A bank has received an application for a further advance from an existing mortgage customer. Which of the following is true of the bank’s assessment of the property as security for the mortgage?

A) The bank must carry out a formal assessment of the property as security, but it can choose an appropriate method.
B) The bank can assess the property in any way it considers appropriate to its lending practices.
C) The bank must carry out a mortgage valuation.

Answer 27

B) The bank can assess the property in any way it considers appropriate to its lending practices.

Building societies must conduct a formal assessment of the property, but banks and other lenders have no similar statutory duties: they can assess the security in any way that meets their lending practices.

Question 28

What establishes the order of priority for charges secured on registered land?

A) The size of the loan.
B) The date the loan was advanced.
C) The date of registration of the loan at the Land Registry.

Answer 28

C) The date of registration of the loan at the Land Registry.

Question 29

James has a mortgage with his bank and a second-charge loan with a specialist loan company. He has applied for a further advance from his bank, which will not need to ask for a deed of postponement from the second-charge lender. This is because:

A) the bank had notice of the second charge when James’s request was received.
B) James has a drawdown mortgage arrangement with the bank.
C) the further advance is below the minimum for a deed of postponement to be needed.

Answer 29

B) James has a drawdown mortgage arrangement with the bank.

A deed of postponement is needed when a first-charge lender wants to ‘tack’ a further advance on to a first-charge mortgage, so that it forms part of the first charge. If the first-charge deed contains an obligation to make further advances, subject to certain conditions, then any further advance will automatically become part of the first charge. James’s drawdown mortgage does that, so a deed of postponement is not necessary.

Question 30

MCOB 7 rules require lenders to provide a European Standardised Information Sheet (ESIS) to customers applying for a further advance on an MCD regulated mortgage. The ESIS must be based on the:

A) total borrowing but with the annual percentage rate of charge (APRC) calculated on just the further advance.
B) further advance only but with the APRC calculated on the total borrowing.
C) further advance only, with the APRC calculated on just the further advance.

Answer 30

C) further advance only, with the APRC calculated on just the further advance.

For an MCD regulated mortgage that requires the lender to approve further advances, MCOB 7B.1 requires the lender to provide an ESIS based on the further advance only, with the APRC calculated on the further advance only.

Question 31

Basu and Mina intend to build an extension to their house and need to borrow additional funds to do so. They have chosen a second-charge loan rather than a further advance from their existing mortgage lender. What is the most likely reason for their decision?

A) The interest rate on the second charge will be lower.
B) They will be able to avoid a higher lending charge.
C) The second-charge lender can take a less stringent approach to affordability.

Answer 31

B) They will be able to avoid a higher lending charge.

They may have to pay a higher lending charge if the further advance takes their mortgage above the lender’s threshold. As a second charge will not affect the mortgage lender’s security, the higher lending charge can be avoided.

Second-charge interest rates are usually higher than for first-charge mortgages because of the additional risk to the lender. Second charges are now subject to MCOB rules on affordability, so the lender must use the same affordability criteria

Question 32

In respect of a new second-charge loan taken out on a borrower’s family home for business purposes, it is true to say that it will be:

A) exempt from MCOB rules.
B) subject to MCOB rules if it exceeds £25,000.
C) subject to MCOB rules if it is for £25,000 or less.

Answer 32

C) subject to MCOB rules if it is for £25,000 or less.

Question 33

Maureen and Peter have exchanged contracts on the sale of their existing home, but their buyer cannot complete the purchase for two months. Peter and Maureen have been told they must exchange contracts and complete the purchase of their new home within three weeks or lose the house. Which type of bridging finance would suit them?

A) Open bridging.
B) MCD-exempt bridging.
C) Closed bridging.

Answer 33

C) Closed bridging.

As they have exchanged contracts on their sale, Maureen and Peter can be confident that the sale will complete. This means closed bridging would be suitable. Open bridging is for those who have either not yet found a buyer or who have not exchanged contracts. An MCD-exempt bridging loan refers to the regulatory status of the arrangement, and can be open or closed.

Question 34

Steve took out an MCD-exempt bridging loan with a specialist company for a maximum term of 12 months, to provide finance for his new house while he sold his former home. After 12 months he has still not sold his home and so has asked to extend the bridging arrangement. What is the position now?

A) The bridging loan can be extended with the lender’s agreement but will become an MCD regulated mortgage.
B) The bridging loan must be converted to a second charge.
C) The arrangement can continue as an MCD-exempt bridging loan, with the lender’s agreement.

Answer 34

A) The bridging loan can be extended with the lender’s agreement but will become an MCD regulated mortgage.

An MCD-exempt bridging loan must have a term of 12 months or less. If a bridging loan has an original term exceeding 12 months, or is extended beyond 12 months, it will be (or become) an MCD regulated mortgage.

Question 35

Ken and Dorothy are retired and able to live comfortably but not extravagantly. They are considering equity release to raise funds to help their son now, but would like to leave their daughter as much as possible when they die. They have been offered the options of 45% of the value of their house by a home reversion provider and 35% by a lifetime mortgage company. Which arrangement is most likely to enable them to achieve their goals?

A) The home reversion plan.
B) The lifetime mortgage.
C) An interest-only mortgage.

Answer 35

B) The lifetime mortgage.

A home reversion plan would provide more money now, but Dorothy and Ken would not own the property. This would mean none of its value could be left to their daughter. The lifetime mortgage would provide a little less cash now, but they would still own the house. The surplus between the property value on the second death and the mortgage plus accrued interest would pass into their estate to benefit their daughter. A conventional interest-only mortgage would not be suitable, because affordability is likely to be an issue for both the couple and the lender, and most lenders would not be keen to lend to retirees over an extended term