Mortgage Applications - MCOB 11 - Responsible Lending

Question 1

Three types of expenditure:

Answer 1

Committed = continue after mortgage starts (e.g. unsecured loan)

Basic essential = costs of household, to maintain basic living needs

Additional = to provide basic QoL beyond bare necessities such as clothing, personal goods, basic recreation and child care

Question 2

Affordability Calculation - EXAMPLE:

Figures will differ

Answer 2

Bank/B.S. model assumes expenditure of £600 per month for a couple, plus £130 per month per dependent plus actual financial monthly commitments (Loans etc)

Interest rate of 5.6% is assumed = repayments required at £6.27 per £1000 of a loan for 25 year term.

H has salary of £25,000 p/a = net monthly income = £1650

F earns £6000 p/a = £500 net monthly

Total net monthly income combined is £2150

So:

Monthly expenditure for couple = £600
Monthly expenditure for 2 kids = 2x £130 = £260
Total = £860

Financial commitments = £50/month

Total expenditure = £910 monthly

Free disposable income = £2150 - £910 = £1,240

Based on lender’s repayment factor they could borrow=

£1240 / 0.00627 (£6.27) = £197,000

Question 3

Affordability Calculation

Answer 3

Add ALL expenditure together and subtract from monthly salary/earnings

Then divide by the cost of interest per £1000 borrowed

E.G.

Joint net income = £3000
Commited Expenditure = £500
Essential Expenditure = £1000
Lifestyle Expenditure = £500

£2000 total expenditure - £3000 salary = £1000 surplus

£1000 / 0.006 = £166,660