Topic 2: Types of borrower Flashcards
What is a Buy to let?
Where a borrower buys a residential property with a view to letting (renting) it to someone else as a form of investment.
What is Joint and Several Liability?
Joint borrowers are responsible for the whole mortgage jointly but also individually if one cannot meet their obligations.
What is Consumer Buy to Let?
A buy-to-let mortgage where the purpose of letting out the property is not for business or investment, eg where someone inherits a property and rents it out while they decide what to do with it, but needs to raise funds for improvements.
What is a High-Net-Worth Customer?
A mortgage customer who has a minimum income of £300,000 a year or net assets of at least £3m.
What is a Professional Customer?
A mortgage customer who has worked in the home finance sector for at least a year in a role that requires knowledge of the mortgage product or service being discussed, and is capable of understanding the risks of the product.
What is a Business Borrower?
Someone wishing to arrange a mortgage that would normally be a regulated mortgage or MCD regulated mortgage contract, but the sole reason for the mortgage is to raise funds for a business. The term does not apply to mortgages taken out on business premises.
What is a Business Partnership?
Two or more people working together in a business on a self-employed basis. The partners are, in effect, the business, and each partner is responsible jointly and severally for the debts of the business.
What is a Limited Liability Partnership (LLP)?
A business partnership where the business is a separate legal entity from the partners, and can borrow in its own right. The LLP is registered at Companies House and the partners’ liability for the partnership debts is limited to the amount they have invested in the business.
What is a Limited Company?
A business owned by its shareholders. The company is a separate legal entity from the shareholders and can borrow in its own right. Shareholders have no liability for the company’s debts beyond the amount they invested in the company’s shares.
What is a Special Purpose Vehicle (SPV)?
A limited company formed specifically to allow the shareholders to invest in buy-to-let property, using the company structure to benefit from certain tax advantages.
What are Mortgage Prisoners?
Borrowers who have a regulated mortgage and may be prevented from changing their arrangement with their existing lender if tighter affordability requirements under MCOB are applied to them.
Who are Vulnerable customers?
Borrowers who could be at risk of being disadvantaged by a lender’s action due to their personal circumstances. Examples of vulnerability would include debt problems, bereavement or a recent prison term.
What is Insolvency?
Where someone’s liabilities exceed their assets and they cannot meet their commitments within a reasonable timescale.
What is Bankruptcy?
A court order in response to a petition from an insolvent debtor or their creditors. A bankruptcy order usually lasts for 12 months and, once it has been granted, the bankrupt’s assets and some of their income can be taken to settle their debts.
What is Individual Voluntary Arrangement (IVA)?
A formal agreement between an individual and their creditors to pay off a proportion of their debts by regular payments over an agreed period, after which the debt is deemed to be settled (as long as the agreed repayments have been made).
What are the three Ps of Assessing a Mortgage Application?
PERSON: is the lender legally able and willing to
lend to the applicant?PROPERTY: is the property suitable security
for the required mortgage?
PURPOSE: is the purpose of the mortgage acceptable (eg house purchase, home improvement,
capital raising)?
What are three key reasons why private borrowers seek mortgage finance?
- Family Home-Those who are borrowing to buy a home for themselves and their family. These borrowers form the bulk of the residential mortgage market.
- Second Charge -Those who already have a mortgage and are seeking to arrange top-up finance from another
lender on a second-charge basis. - Bridging Finance -Those arranging a loan to finance a new purchase before they have sold their existing property, ie to ‘bridge’ the finance gap (covered in Unit 6).
What is the Interest Coverage Ratio (ICR)?
the ratio of rental income to mortgage payments (including associated costs and tax). Each lender can set an ICR
based on rental demand and typical rent levels in the area, with the PRA
setting 125 per cent as a minimum industry standard, meaning that rent must be at least 125 per cent of the landlord’s costs, although some lenders set a minimum as high as 145 per cent.
What is the Interest Rate Affordability Stress Test?
(sometimes referred to as the stress
ICR) – the lender is required to consider the effect of interest rate increases on the borrower’s ability to service the mortgage over a minimum period
of five years from the start of the mortgage, unless the mortgage is on a fixed or capped rate for at least five years or the mortgage term is less than five years. This is achieved by increasing the actual rate of the selected mortgage to give a notional rate, which is then used for the ICR. The lender can determine the rate to use, but it must be at least 2 per cent above the actual rate.
What is the Income Affordability Test?
where the borrower will be using some personal
income to support the mortgage, the lender must carry out a detailed
affordability assessment.
What are Personal Representatives?
Personal representatives (or executors in Scotland) act in managing the
estates of deceased people. If the deceased person has left a will, the personal representative is called an executor and is named by grant of probate. If the
deceased has not left a will, the representative is an administrator, appointed by letters of administration.
What is an Attorney?
An attorney is a person who is given the responsibility to deal with someone else’s financial or other personal affairs through a document called a ‘power of attorney’. There are many users of attorneys, including elderly people who can no longer manage their own finances or people who live outside the UK for
long periods.
What are Trustees?
Trustees are people appointed in a document called a trust deed to hold a specific asset, or assets, on behalf of others called the beneficiaries, and to act
for the beneficiaries according to the terms set out in the deed.
Mortgages taken out by individuals for business purposes are regulated and subject to MCOB if:
- the borrowing is secured by a legal charge on a property where at least 40 per cent of the land is used as a residence (the standard definition of a regulated mortgage); and
- the sole purpose of the mortgage, remortgage or further advance is to raise funds for use by a small business (ie one with turnover of less than £1mper year).
