Unit 3 T2

Question 1

Purpose and Description of a Mortgage

Answer 1

Property and land is not the only asset that can be mortgaged, other assets such as share portfolios can be mortgaged too.

Question 2

The two parties to the contract are:

Answer 2

The lender who is often described as the mortgagee
The borrower who is often described as the mortgagor

Question 3

A legal charge?

Answer 3

First charge – the charge that is registered first at the Land Registry has
priority over other charges.
o Second charge – a legal charge that is registered after a first charge will rank second in line for repayment on sale or re-possession.
If there isn’t enough money left to cover the second charge debt, then they will lose out – usually a higher rate of interest on a second charge.

Question 4

Mortgage Regulation and MCOB

Answer 4

The mortgage is to individual(s) or trustees.
It is a secured by a legal charge on land in the UK.
At least 40% of that land is to be used as a dwelling and the land must be used by:
Borrower or a related person
Beneficiary or a related person when the borrower is a trustee.
* The majority of residential mortgages and commercial mortgages which meet the 40% residential rule are classed as regulated.

Question 5

commercial mortgage

Answer 5

A commercial mortgage is a mortgage where the loan is used to buy a non- residential property e.g. shops, offices, factories, warehouses etc.

Question 6

company or LLP

Answer 6

If the borrower is a company or a limited liability partnership (LLP), the mortgage is not MCOB regulated and most buy to let mortgages will also not be MCOB regulated.

Question 7

MCD

Answer 7

• Mortgages which meet the rules above taken out before March 2016 are regulated by MCOB.
• If the mortgage is taken out since March 2016, then the Mortgage Credit Directive (MCD) applies which effectively incorporates the MCOB rules.

Question 8

CBT

Answer 8

Consumer buy to let mortgages are regulated as of March 2016
If it is a Consumer BTL mortgage the same rules on affordability will apply as for normal residential mortgages.
* A consumer buy to let could apply when an ‘accidental landlord’ is created
o Someone who inherits a property which is then rented out to cover costs
o Someone who has moved to another property and can’t sell the previous one, so its rented out to cover costs.
o Someone who moves into a partner’s property so rents out their property to cover costs.

Question 9

Second Mortgages/Charges

Answer 9

Second charges have been regulated since March 2016 by MCD and therefore MCOB rules apply and firms operating in this field have to gain the necessary level 3 mortgage qualification eg (CeMAP)

Most second charge mortgages taken out before March 2016 are subject to regulation retrospectively sometimes referred to as a ‘back book loan’

Question 10

Lifetime mortgages

Answer 10

available for people over a certain age typically 55 are also MCOB regulated. There are additional regulatory requirements in this area and an additional examination that advisers would have to take.
A lifetime mortgage is defined is typically where a loan is advanced up to a certain percentage of the property value, with the interest rolled up and paid along with the capital at death or if the borrower has to go into care

Question 11

Home reversion plan

Answer 11

A home reversion plan is another scheme aimed at elderly people usually over 60 whereby the property is sold to a provider who will then allow you to stay in that property with a guaranteed lifetime tenancy, usually around £12 per year. The provider will only be able to access the property when the occupier either dies, moves, goes into long term care or at the end of a defined period which must be at least 20 years.
Are regulated by MCOB

Question 12

RIO

Answer 12

due to demand from borrowers above a certain age who are unable to repay an interest only mortgage. Affordability can be assessed for these as an interest only mortgage with no requirement to provide a repayment vehicle.

Question 13

3 PS

Answer 13

Property
Person
Purpose

Question 14

Private (Personal) Borrowers

Answer 14

Personal borrowers are either first time buyers or subsequent buyers.
If two or more individuals take out a mortgage, the mortgage deed will always make those individuals ‘jointly and severally’ liable for that loan, this means that all parties are liable for the whole amount, not just their share of it.

Question 15

Business (professional) Buy to let (BTL)

Answer 15

These are people buying a property with a view to letting out the property to tenants.
a minimum level of income and the amount of the loan is determined by the rental income.
Typically, the rental income needs to be a minimum of 125% to maybe as much as 145% of the loan repayments – called interest coverage ratio (ICR).
Where the borrower is using some personal income to support the mortgage, the lender must carry out an affordability assessment.
There will also need to be an interest rate affordability stress test to consider the possible effect of mortgage interest rate increases over the next 5 years.
not regulated under FCA .

Question 16

Business Borrowers

Answer 16

Mortgages taken out by individuals for business purposes are regulated by MCOB if:
The borrowing is secured by a legal charge where at least 40% of the land is used as a residence AND
* The sole purpose of the mortgage is to raise funds for use by a small business (one with turnover of less than £1m) and the business is not a Limited Liability Partnership (LLP) or a limited company.

Therefore, if the business is a limited company or an LLP the mortgage is not regulated by MCOB.

Question 17

Business Partnerships

Answer 17

Defined as the “relationship that exists between persons…with a view of profit”.
* Unlike a limited company, a partnership is not a separate entity.
* The partners jointly own the assets and liabilities which means that they are all jointly and severally liable for the loan
The Partnership Deed or Agreement will specify when the partnership ends, for example on death/bankruptcy.
The lender will want to see the Partnership Agreement to find out whether there is anything unsuitable in the agreement that would make the lender nervous, such as, a partner’s responsibilities being terminated on death or bankruptcy. The Partnership Agreement will also state who is authorised to sign on behalf of the partnership.

Question 18

LLP

Answer 18

is a different concept in that the individual partners do not have a direct liability for any debts of the partnership, very similar proposition to lending to a company.
* The mortgage is provided to the LLP rather than to the partners. Mortgage lending to an LLP is not regulated.
The lender may decide to insist on ‘personal guarantees’ from the partners in much the same way as they would from the directors of a company. (see below)

Question 19

Corporate Borrowers

Answer 19

Corporate lending is any lending to a company.
A limited company is a separate legal entity, which means it is separate from the company’s owners (the shareholders).
When a limited company cannot pay its debts, a lender cannot automatically enforce the debt against the shareholders. Lenders may as a condition require personal guarantees from the directors to give them additional security.
These issues are covered in the company’s memorandum of association (powers of the company) and the articles of association (powers of the directors).

Question 20

SPV

Answer 20

a company set up usually specialising in buying buy to let or commercial property.
Changes in the taxation rules, make it more attractive to buy property within the SPV.
The shares in the SPV are owned by the individual but the property itself is owned by the SPV.

Question 21

Lending to LC

Answer 21

the Building Societies Act 1986 states that a maximum of 25% of a building society’s commercial assets can be held in loans to limited companies secured on land

Question 22

Commercial Borrowers

Answer 22

Commercial lending is lending to anyone (individuals or companies) for the purpose of buying commercial property – shops or factories.

Question 23

Personal Representatives

Answer 23

Act in managing the estates of deceased persons.
* If there is a valid will the representative is known as Executor and is nominated through Grant of Probate.
* If there is no will the representative is known as the Administrator and nominated through Grant of Letters of Administration.
Lenders can lend if the loan is for the purpose of administering the estate or to buy property for a dependent of the deceased.

Question 24

Attorneys

Answer 24

Attorneys are people who are contractually able to act on behalf of others through a Power of Attorney.
The person who grants the power to someone else is the donor, the person who receives the power is the donee.

Question 25

Trustees

Answer 25

Trustees are responsible for dealing with assets written in trust on behalf of the beneficiaries.
must act in accordance with the Trust Deed.
The lender will need to examine the Trust Deed to check that the trustee has been given the power to create a mortgage.

Question 26

Clubs and Associations

Answer 26

Usually run by committees on behalf of the members
Any borrowing powers are contained in a set of rules.
* The rules will state whether they can borrow and who is authorised to sign on behalf of the club.

Question 27

Vulnerable Customers

Answer 27

FCA describes a vulnerable customer as someone who might be ‘susceptible to detriment’ as a result of their personal circumstances.
e physical/mental disability, poor health, weak numeracy or literacy skills. The vulnerability could also be short term eg job loss, recent bereavement, or release from prison.

Question 28

deal appropriate with vulnerable customers

Answer 28

those looking to to buy using statutory ‘right to buy’
those entering a sale and rent back agreement.
Equity release customers.
Customers looking to consolidate debt

Question 29

Mortgage Prisoners

Answer 29

Borrowers who have a regulated mortgage may sometimes struggle to get a new mortgage deal with their existing lender or moving to another lender due to the new stricter rules on affordability that now exist.
these borrowers are not looking to incur any material change to their mortgage, they are just looking for a new deal with their existing lender.

Question 30

Those Unable to Borrow

Answer 30

minors
the mentally incapacitated
undischarged bankrupts

Question 31

power of attorney

Answer 31

An ordinary power of attorney involves an individual carrying out activities in relation to the donor’s financial and property affairs. It typically applies when someone is mentally but not physically capable or someone who is living abroad.
* An ordinary power of attorney ceases when the donor becomes mentally incapable.
If such persons need a mortgage, an application can be made to the Court of Protection who can appoint a deputy.

Question 32

EPA and LPA

Answer 32

you could create an Enduring Power of Attorney (EPA) which comes into force when that person becomes of unsound mind. Since October 2007, this is now called a Lasting Power of Attorney –LPA.
LPAs can be set up in two forms:
o Property and affairs – covers finance and property
o Health and welfare – covers medical treatment and care
These must be set out in a specific format and be registered with the Office of the Public Guardian.
An EPA or LPA can only be revoked by the Court of Protection.

Question 33

Undischarged Bankrupts

Answer 33

undischarged bankruptcy within the 12 months
An individual may petition for his own bankruptcy regardless of how much
they owe and it will be granted if the court deems it appropriate.
Once discharged the individual is legally entitled to borrow but it is a legal requirement to disclose the existence of a previous bankruptcy when asked and failure to do so constitutes fraud.
While the bankruptcy is in force they are classified as undischarged bankrupts and cannot legally borrow more than £500 without disclosing the bankruptcy and they are legally prevented from taking out a mortgage or to buy a property
Bankruptcy will show on the credit file for 6 years from the declaration of bankruptcy.

Question 34

IVA

Answer 34

is an alternative to bankruptcy whereby a formal agreement is set up to repay a certain percentage of the debt normally over a 5-year period after which the debt is deemed to be settled.
An IVA does not legally prevent an individual from taking out a mortgage.

Question 35

Consumer credit act

Answer 35

Other loans such as credit cards, unsecured loans, hire purchase agreements, retail finance
are regulated by the Consumer Credit Act
Loans to sole traders and partnerships with three or fewer partners will be within the 2006 Act.

Question 36

Consumer Protection (Amendment) Regulations 2014

Answer 36

Under the new rules it is a breach to fail to disclose information about the
condition of the property that the estate agent may be aware of.