Unit 4 Topic 10 Flashcards
Assessing the applicant’s financial status
Marion is regarded as a non-resident as she has worked in France for
several years. She expects to return to the UK permanently within the
next two years, but wants to purchase a property in England now in readiness for her return. How might a lender deal with this situation? (10.2.1)
A. The loan will only be considered if Marion can provide some substantial additional security.
B. If a loan is approved, it is likely to have specific conditions attached.
C. In the same way as a UK resident
D. Her application can only be accepted when she resumes UK residency
B. If a loan is approved, it is likely to have specific conditions attached.
Most lenders specify that mortgage business can only be accepted on normal terms if the applicant is a UK resident. Most lenders however, will consider loan to non-residents, but with specific conditions attached.
George is self-employed and has been asked to provide various pieces of information in support of his mortgage application. In which of these would a figure for personal drawings be found? (10.5.1)
A. Profit and loss account
B. Cashflow statement
C. Balance sheet
D. Business taxation computation
C. Balance sheet
The balance sheet is the document needed here. Within the balance sheet the capital account is found, which includes a figure for personal drawings.
Firms must keep adequate records for each customer of the steps it takes to comply with the responsible lending rules. The records must be in paper or electronic form and retained for: (10.7)
A. One year
B. Two years
C. Three years
D. The term of the mortgage
D. The term of the mortgage
This information can be found in MCOB 11, which covers responsible lending. The lender’s records must be kept for the term of the mortgage.
Richard is applying for a residential mortgage, but already owns a buy-to-let property.
Which one of the following is the lender least likely to take into account when assessing his capacity to borrow? (10.3)
A. rental income
B. season ticket
C. personal loan repayments
D. council tax
A. rental income
The income from the buy-to-let property will be offset against the costs of maintaining the property. The lender is unlikely to treat this as an acceptable form of income in relation to his borrowing capacity.
Howard and Hilda are looking to borrow the maximum amount possible to buy their first property, using a 3-year fixed rate mortgage at 3% which reverts to the lender’s SVR of 5%. Market indicators suggest rates will rise by 0.5%. When applying the interest rate stress test, the lender must assume what rate of interest at the end of the 3-year term? (10.8.2)
A. 5%
B. 6%
C. 7%
D. 8%
B. 6%
When applying the interest rate stress test, the lender must assume a rate of 6% at the end of
the three-year term (SVR of 5% + 1 per cent absolute minimum increase).
Which of the following would be included as ‘committed’ expenditure? (10.8.1)
A. Childcare costs
B. Council Tax
C. Electricity Bills
D. Personal Loan
D. Personal Loan
Committed expenditure comprises credit agreements and contractual commitments (like a personal loan) that will continue after the mortgage has started. Check your understanding of the types of expenditure with the exercise on pages 26 and 27 of the questions
Karen is applying for a mortgage but is struggling to provide exact expenditure figures.
For which of the following elements of Karen’s expenditure would the lender not use figures from the Office for National Statistics instead? (10.8.1)
A. Personal loan repayments.
B. Spending on food.
C. Spending on entertainment.
D. Electricity bill.
A. Personal loan repayments.
Lenders need the actual figures for committed expenditure, such as personal loan repayments. For basic essential and basic quality of life expenditure, lenders can use either actual figures, or statistical data
Which figure will lenders normally use when assessing the income of a self-employed prospective borrower? (10.5)
A. Turnover
B. Personal drawings from the business
C. Net profits after tax
D. Net profits before tax
D. Net profits before tax
Most lenders take the business’s net profit before tax for lending purposes; this is taken to be the equivalent of an employee’s gross salary
Ray is a self-employed plumber. His accounts show the following : (10.5)
Turnover : £80,000
Basic materials : £15,000
Routine business expenses : £10,000
Personal drawings : £25,000
Based on these figures, his net profit would be :
A. £30,000
B. £45,000
C. £55,000
D. £80,000
C. £55,000
From Ray’s turnover of £80,000 the cost of raw materials of £15,000 can be deducted, which provides the gross profit of £65,000. From the gross profit, routine business expenses of £10,000 can be deducted. leaving overall net profit of £55,000.
Joe and Jill are looking to buy their first home. They have joint income after tax of £3,000.
Their monthly expenditure is as follows :
* Committed : £350
* Basic essential : £700
* Basic quality-of-life : £500
With the 5-year fixed-rate mortgage for which the couple have applied, the lender has calculated a monthly cost of £5.70 per £1,000 borrowed. Approximately, what is the maximum mortgage the lender is likely to offer? (10.8.1)
A. £254,000
B. £305,000
C. £342,000
D. £465,000
A. £254,000
Joe and Jill have free disposable income of £1,450 (£3,000 - £1,650). The chosen mortgage product is fixed for 5 years, so the lender doesn’t need to consider the impact of future interest rate increases.
The calculation is as follows :
£1,450 ÷ 5.70 x 1000 = £254,385
This type of calculation may or may not come up in the CeMAP2 exam, but is more likely to be included in some of the CeMAP3 case studies
- The ‘loan to income flow limit’ (LTI) restricts the number of mortgages a lender can provide which are over 4.5 times income, to: (10.8.2)
A. 10% of all new residential mortgages
B. 15% of new first charge mortgages
C. 10% of new first charge mortgages and remortgages
D. 15% of new first charge mortgages and remortgages with additional borrowing.
D. 15% of new first charge mortgages and remortgages with additional borrowing.
The LTI limits the number of mortgages a lender can provide that exceed 4.5 times the income of a borrower or joint borrowers. Such lending is limited to 15 per cent of the lender’s new residential mortgages, measured on a four-quarter rolling basis. The limit applies only to new first charge mortgages, including remortgages where there is additional borrowing.
