Topic 23 - Raising Additional Funds from Property

Question 1

A Further Advance is?

Answer 1

A top-up to an existing mortgage.

It is usually over the remaining term of the existing loan.

It is generally the most cost-effective way to raise additional funds.

It usually involves much less legal and admin work than remortgages and second-charges.

Question 2

MCOB rules require lenders to inform customers seeking to raise additional funds from their property that…

Answer 2

…a second-charge loan or a remortgage could be a suitable alternative to a further advance, though further advice on the alternatives are not required.

Question 3

The LTV with a further advance…

Answer 3

…usually takes the total mortgage to between 80-90% LTV. A lower limit may be set if the advance is not for home improvements or repairs

Question 4

Many lenders will only consider further advances on what basis?

Answer 4

A repayment basis

Question 5

An application for a further advance follows the same principles as a new mortgage application. True or False?

Answer 5

True

Question 6

What information does the lender need for a further advance?

Answer 6

Assessment of the ability to repay

Adequacy of the property as security

Question 7

Before a further advance is considered, many lenders will insist that…

Answer 7

…arrears are cleared in the borrower’s existing account.

Question 8

When issuing a further advance, many lenders will not require a new valuation of the property if the property has…

Answer 8

…been valued in the previous 12 months, unless significant work has been done.

In any case, the valuation need not be a formal one, unless the lender is a building society.

Question 9

If the original LTV was high…

Answer 9

…a new valuation may be needed to determine whether the property offers sufficient security for the higher borrowing commitment.

Question 10

If the purpose of the advance is for home improvements…

Answer 10

the lender may be prepared to consider the enhanced value of the property once the work is completed.

Question 11

Other things considered by a lender giving a further advance include:

Answer 11

Local authority/legislation conditions

Location and neighbourhood

Question 12

What is a deed of postponement?

Answer 12

When a new loan from the original mortgage jumps the queue and becomes part of the first charge.

Question 13

What are the three situations where a deed of postponement is not required?

Answer 13

1) The first charge holder had no notice of the other charge at the time it was made.
2) If the mortgage deed obliged the first-charge holder to make further advance and the obligation was registered at the Land Registry.
3) If the lender agreed a drawdown mortgage with the borrower.

If none of these apply, the lender will need to seek a deed of postponement in its favour.

Question 14

A higher lending charge is required when the LTV exceeds a threshold of what percentage?

Answer 14

75-80%

This applies where the further advance takes the lending above the threshold also.

Question 15

When is an architect’s certificate needed?

Answer 15

When an advance is being used to fund building work not carried out by a NHBC member.

Question 16

What is a drawdown facility?

Answer 16

The ability for a borrower to draw down further advances up to a maximum LTV. These usually require a short application form and admin fee.

The lender must check the advance is affordable.

Question 17

What is second-charge lending?

Answer 17

A loan which allows the lender to go above the LTV, thus carrying more risk. The second charge is ranked behind the original mortgage in order of repayment.

Question 18

Does a second-charge need to seek permission from the first-charge lender before offering a loan?

Answer 18

There is no requirement for them to, unless the first-charge lender has included a clause in the mortgage deed that the Land Registry cannot register any further charges without their agreement.

Question 19

When arranging a second-charge, the lender must:

Answer 19

1) Meet the Initial Disclosure requirements including an outline of the firm’s scope of service and remuneration
2) Provide an ESIS for product disclosure
3) Provide an adequate explanation of the product
4) Confirm key details when the contract starts
5) Follow the same post-sale procedures as for first-charge mortgages

Question 20

MCOB rules only apply to second charges taken out for business purposes if the loan is _____ or less.

Answer 20

£25,000

Question 21

Second-charges are often used for what purpose?

Answer 21

Debt consolidation.

Therefore, lenders should ensure debts are repaid when the new loan starts and include existing debts in the affordability assessment.

Question 22

What are the two types of bridging finance?

Answer 22

Open bridging and closed bridging.

Open is when the borrower does not have a firm buyer for their existing property, so it is riskier and interest rates are thus higher.

Lenders are much more willing to lend for closed building, where the borrower has a confirmed exit strategy.

Question 23

Open bridging is typically limited to how many months?

Answer 23

12 months.

Question 24

What are the charges involved in bridging finance which make it more expensive than a conventional mortgage?

Answer 24

Valuation fee
Legal fees
Arrangement fee
Loan interest (between 0.75% and 1% per month)
Exit fee

Question 25

If a loan meets the definition of a bridging loan, it will be subject to the full requirements of MCOB. True or False?

Answer 25

False

Question 26

A MCD-exempt bridging loan is one with:

Answer 26

A term of 12 months or less, used by the consumer as temporary financing while transitioning to another financial arrangement for an immovable property.

Question 27

If a bridging loan has an original term of more than 12 months, or is extended beyond 12 months, it will become a:

Answer 27

MCD regulated mortgage and is subject to MCOB. At that point, the client must be issued with ESIS.

Question 28

MCOB 4.7:

Answer 28

Requires the firm to assess whether a bridging loan would be appropriate to a customer's need and circumstances in broadly the same way as a normal mortgage. It also requires that the firm must make the customer aware they will need to demonstrate that they have a credible repayment strategy in place.

Question 29

MCOB 11:

Answer 29

Requires the lender to assess the affordability of the bridging loan. This does not apply when the bridging loan is on an interest roll-up basis, although the borrower must be made aware of the impact of rolling up the interest on the remaining equity in the property.

Question 30

An extension to a bridging loan...

Answer 30

...requires positive consent from the borrower. It must be treated as a new loan and subject to an affordability assessment, unless it is for a high-net-worth customer.

Question 31

What are the two main methods of equity release?

Answer 31

1) Lifetime mortgage | 2) Home reversion plan

Question 32

A lifetime mortgage is one where...

Answer 32

...the mortgage is on an interest-only basis, with no defined term. The interest is rolled up rather than paid where due.

Question 33

A home reversion plan is where...

Answer 33

...the property is sold in return for a lump sum or an income, together with guaranteed tenancy for life.

Question 34

A potential disadvantage of both types of equity release is?

Answer 34

Increased income or capital may affect eligibility for means-tested benefits.

Question 35

What is a no-negative-equity guarantee in a lifetime mortgage?

Answer 35

It is a guarantee offered by the lender that the debt will never exceed the value of the value of the property. It is a requirement of the Equity Release Council's statement of principles, rules and guidance and product standards.

Question 36

What are some advantages of a home reversion plan over a lifetime mortgage?

Answer 36

The plan-holder does not have to worry about repayment. The scheme will probably provide more cash.