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CeMAP 2 - MORT > Topic 2 > Flashcards

Topic 2 Flashcards

Types of borrower

1
Q

What are the three key factors (Three Ps) lenders assess in a mortgage application?

A

Person (the applicant), Property (the security), and Purpose (the use of funds).

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2
Q

What does the ‘Person’ factor in mortgage assessment refer to?

A

Whether the lender is legally able and willing to lend to the applicant.

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3
Q

What does the ‘Property’ factor in mortgage assessment refer to?

A

Whether the property is suitable as security for the mortgage.

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4
Q

What does the ‘Purpose’ factor in mortgage assessment refer to?

A

Whether the reason for the mortgage is acceptable (e.g. house purchase, home improvement, capital raising).

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5
Q

Name four ongoing considerations for a lender’s mortgage policy.

A

Lender’s strategy, risk profile of applicant, desired profit margin, arrears and recovery stats.

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6
Q

What is joint and several liability in mortgage law?

A

All parties on the mortgage are individually and collectively liable for the full loan amount.

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7
Q

If two borrowers take a joint mortgage and one refuses to pay, who is liable?

A

The other borrower is still fully liable for the entire loan.

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8
Q

What are the three main reasons private (personal) borrowers seek mortgage finance?

A

Buying a family home, arranging second-charge loans, or bridging finance for a new purchase.

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9
Q

What is a second-charge loan in the context of private borrowers?

A

Top-up finance from another lender secured on the property, subordinate to the first mortgage.

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10
Q

What is bridging finance used for by private borrowers?

A

To fund a new purchase before selling their current property.

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11
Q

What is a buy-to-let (BTL) mortgage?

A

A mortgage for purchasing a residential property to let out as an investment, aiming for profit from rent and property value growth.

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12
Q

Are BTL mortgages usually available to first-time buyers?

A

No, most lenders require the borrower to already own a property.

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13
Q

What is the Interest Coverage Ratio (ICR) in BTL lending?

A

The ratio of rental income to mortgage payments; the PRA minimum standard is 125%, but some lenders require 145%.

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14
Q

What is the stress ICR or interest rate affordability stress test?

A

It checks the borrower’s ability to repay if interest rates rise, using a notional rate at least 2% higher than the actual rate.

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15
Q

What is the income affordability test in BTL lending?

A

A check if personal income is used to support the mortgage, requiring a full affordability assessment.

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16
Q

What is a Consumer Buy-to-Let (CBTL) mortgage?

A

A buy-to-let mortgage not arranged ‘wholly or predominantly’ for business, often by ‘accidental landlords’ due to personal circumstances.

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17
Q

Are BTL mortgages regulated by the FCA?

A

No, unless they are CBTL mortgages, which fall under the Mortgage Credit Directive Order 2015.

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18
Q

Who regulates CBTL mortgages and what must firms do?

A

Regulated under the Mortgage Credit Directive; firms must be registered with the FCA and assess suitability and affordability like MCOB rules.

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19
Q

What defines a high-net-worth mortgage customer?

A

Someone with at least £300,000 annual net income or £3m in net assets; one applicant must qualify individually in joint applications.

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20
Q

How are mortgage rules different for high-net-worth customers?

A

Lenders can apply more flexible processes than for mainstream mortgages.

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21
Q

Who is a professional customer in mortgage lending?

A

Someone with at least one year’s experience in the home finance sector and capable of understanding the risks involved.

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22
Q

What is the role of personal representatives in mortgage applications?

A

Executors or administrators can borrow to manage or buy property for the estate of a deceased person.

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23
Q

Who is an attorney in a mortgage context?

A

Someone authorised under a power of attorney to manage another person’s financial affairs, often for the elderly or overseas individuals.

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24
Q

Who are trustees in mortgage borrowing?

A

Individuals appointed to hold and manage trust property for beneficiaries; can borrow if allowed by the trust deed.

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25
Can trustees arrange mortgages for disabled beneficiaries?
Yes, if the trust permits borrowing for that purpose.
26
What must lenders check before lending to clubs and associations?
That the club’s constitution allows borrowing and repayment capability is clear.
27
When is a mortgage for business purposes regulated under MCOB?
If it's secured on property where at least 40% is residential and the funds are for a small business with turnover under £1 million.
28
Is a mortgage taken out by a business on business premises regulated?
No, mortgages secured on business premises by a business or its individuals are not regulated.
29
What must a lender assess if a regulated business mortgage is being taken?
The lender must assess affordability using income and expenditure, and consider the business’s ability to support both the loan and the borrower’s personal living costs.
30
What is a business partnership in mortgage terms?
A partnership between self-employed individuals, not a separate legal entity, with joint ownership of assets and shared liability for debts.
31
When are business partnership mortgages regulated?
If they meet the criteria for a regulated business mortgage (e.g. secured on part-residential property and for a small business).
32
What must lenders check in a partnership agreement?
Profit shares, arrangements for retirement/death/bankruptcy, and borrowing powers, including who must sign contracts.
33
What is a Limited Liability Partnership (LLP)?
A legal entity separate from its partners, who are not directly liable for debts beyond their initial capital contribution.
34
Is mortgage lending to an LLP regulated?
No, mortgages to LLPs are not regulated.
35
Can a lender require personal guarantees for an LLP mortgage?
Yes, lenders may require partners to give personal guarantees, similar to directors of a company.
36
What is a Special Purpose Vehicle (SPV) in mortgage lending?
A limited company set up to own property instead of individuals owning it directly.
37
Who owns the property in an SPV arrangement?
The SPV (company) is the legal owner; individuals own shares in the SPV, not the property itself.
38
Why are SPVs used for buy-to-let property?
For potential tax benefits and to separate ownership from personal names.
39
Are BTL mortgages through SPVs regulated as CBTL?
No, they are not CBTL because they are held through a business.
40
What do lenders usually require from SPV directors?
Personal guarantees backed by a legal charge on the directors’ main property.
41
What is corporate borrowing in mortgage lending?
Lending to a limited company for residential or commercial purposes.
42
What must a lender check before lending to a limited company?
That the company is permitted to borrow by its memorandum and articles of association, and that the individuals have authority to commit the company.
43
What do lenders often require from directors/shareholders of small companies?
A personal guarantee to repay the debt if the company cannot.
44
Are corporate mortgages regulated by the FCA?
No, they are not regulated, regardless of property type, because the borrower is a company.
45
When might a corporate mortgage still be subject to MCOB rules?
If the company has a turnover of less than £1 million.
46
What restriction do building societies have on corporate lending?
Under the Building Societies Act 1986 (amended 1997), only up to 25% of their commercial assets can be in loans to limited companies secured on land.
47
What is a commercial mortgage?
A commercial mortgage is secured on commercial property (e.g. shop, factory) and can be offered to an individual or a company, but is not a regulated mortgage.
48
Who are ‘mortgage prisoners’?
Mortgage prisoners are customers with regulated mortgages who are unable to switch to a better deal due to affordability rules, even if switching wouldn’t increase their borrowing or payments.
49
Under what condition can mortgage prisoners switch mortgages under MCOB 11.9 rules?
Only if they are not moving property and are not increasing borrowing or monthly payments.
50
How does the FCA define a vulnerable customer (2021 guidance FG21/1)?
Someone especially susceptible to harm due to personal circumstances, particularly if firms do not provide appropriate levels of care.
51
What are the four main drivers of vulnerability identified by the FCA?
Health, Life events, Resilience, and Capability.
52
What are examples of vulnerable mortgage customers according to the FCA?
Right-to-buy applicants, sale-and-rent-back clients, equity release applicants, and those consolidating debt.
53
What responsibilities do firms have toward vulnerable customers?
Understand customer needs, train staff to identify/respond to vulnerability, offer flexible services, and monitor performance in treating such customers fairly.
54
Which three groups of people are legally unable or restricted from borrowing?
Minors, mentally incapacitated individuals, and undischarged bankrupts.
55
Why can minors not take out a mortgage?
They cannot hold a legal estate in land or enter into a mortgage contract except for necessities; lenders only lend to those aged 18 or over.
56
Who can act on behalf of a mentally incapacitated person needing a mortgage?
A Court of Protection deputy or someone with power of attorney.
57
What are the two conditions of insolvency?
When liabilities exceed assets and the person cannot meet obligations when due.
58
What is an undischarged bankrupt?
A person currently within the legal period of bankruptcy, usually 12 months, during which borrowing is severely restricted.
59
Can an undischarged bankrupt apply for a mortgage on a new property?
No – they cannot borrow to acquire an interest in property.
60
Can an undischarged bankrupt remortgage a property they already own?
Technically yes, but in practice it’s extremely difficult to obtain financing.
61
Can an undischarged bankrupt borrow less than £500?
Yes, legally they can and do not need to disclose bankruptcy unless asked.
62
Must a discharged bankrupt declare past bankruptcy?
Yes, if asked by the lender – failure to do so may constitute fraud.
63
How long is bankruptcy recorded on public and credit records?
On the Insolvency Register for 3 months post-discharge and on credit files for 6 years from the date of bankruptcy.
64
Will lenders always refuse applicants with a past bankruptcy?
Not always – some may consider them after a minimum discharge period, depending on the case.
65
What is an Individual Voluntary Arrangement (IVA)?
A formal agreement to repay part of a debtor's total debt over typically five years, after which the debt is considered settled.
66
What is a Debt Relief Order (DRO)?
An order for non-property owners with debts under £30,000 and limited assets that freezes creditor action for 12 months, after which debts are usually written off.
67
Can someone with an IVA or DRO apply for a mortgage?
Legally yes, but most lenders are unlikely to accept the application.
68
What is a power of attorney?
A legal arrangement where a person (the donor) gives another (the attorney) the authority to manage their affairs.
69
Who cannot appoint an attorney?
Minors and anyone who lacks legal mental capacity.
70
What is an ordinary power of attorney?
A power that allows the attorney to manage the donor’s financial/property matters while the donor has mental capacity. It ends if the donor becomes mentally incapacitated.
71
What is a lasting power of attorney (LPA)?
A power that continues even after the donor loses mental capacity. It must be registered with the Office of the Public Guardian.
72
What are the two types of lasting power of attorney (LPA)?
Property and financial affairs, and health and welfare.
73
When can the health and welfare LPA be used?
Only once the donor has lost mental capacity.
74
What is an enduring power of attorney (EPA)?
A pre-October 2007 power that continues after the donor loses capacity, but must be registered with the OPG at that point.
75
Can new enduring powers of attorney (EPAs) be created after 1 October 2007?
No, but existing ones remain valid and can still be registered.
76
What must happen before an EPA can be registered?
The donor and at least three mentally capable relatives over 18 must be notified.

CeMAP 2 - MORT (2 decks)

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