Topic 3: Mortgage Regulation Flashcards
(25 cards)
Regulated Mortgage
A mortgage granted to individual(s) or trustee(s) and secured by a legal charge on land in the UK or in the European Economic Area depending on the date the contract was entered into.
At least 40% of the land is used, or is intended to be used, as or in connection with a dwelling.
MCD regulated Mortgage
Mortgage credit Directive
* Meets regulated mortgage criteria
* Taken on or after 21 March 2016
Home purchase plan
- Alternative to conventional mortgage for property purchase
- Provider buys the property and sells it to the buyer, who repays the purchase price during, or at the end of, a set period.
- Includes Islamic home finance plans
Equity release
Where a property owner with a small mortgage, or no mortgage, raises funds against the equity in their property
Lifetime mortgage
A regulated equity release mortgage for older borrowers, with no capital repayment required until the property is sold, the borrower enters care, or dies.
- The owner retains full ownership of the property
- Much more common than home reversion plans
Home revesion
Equity release where the homeowner sells all or part of their property for a cash lump sum and a lifetime lease, ending when they move out, enter care, or die.
Part of or all of the property is cold to the provider
* There is no repayment here - the provider gains their share of the eventual sale.
* Retain the right to live in the property rent free
Like the reverse of purchasing a property - gain capital, lose equity
What is a mortgage? What is a legal charge?
Mortgage
A loan secured against an asset (commonly property) via a legal charge, giving the lender rights over it if the borrower defaults.
Legal charge
Gives the lender rights over a property, including repossession (with court approval) if the borrower defaults. It reduces risk, allowing lower interest rates than unsecured loans.
Remember: there can be more than one charge on a property. I.e. ‘second charge’ mortgage.
When did the FCA take over regulation for the marketing and sales of mortgages and home finance from the FSA?
April 2013
What is the Mortgage Credit Directive (MCD), and how did it impact UK mortgage regulation?
Published: February 2014
Purpose:
* Set minimum regulatory standards for residential property credit agreements across the EU
* Encourage a cross-border European mortgage market
UK Implementation:
- UK’s existing MCOB rules already covered most MCD requirements
- Approach: Minimise disruption by adapting MCOB rather than overhauling it
Key changes introduced:
New MCD sections added (often as a) or b) subsections)
New rules required for:
✔ Buy to Let mortgages
✔ Second charge mortgages
Introduced a new category: Consumer Buy to Let (CBTL)
What is a regulated mortgage contract?
Meets the following conditions:
- a lender provides credit to an individual or to trustees (the
‘borrower’); and - the borrower’s obligation to repay is secured by a mortgage
on land in the UK, where at least 40 per cent of the land is
used, or is intended to be used, as or in connection with a
dwelling.
What is the difference between regulated mortgages and MCD regulated mortgages under MCOB?
Regulated Mortgage:
✔ Entered into before 21 March 2016
✔ Governed by pre-MCD MCOB rules
✔ Changes (e.g., further advances) follow original MCOB
MCD Regulated Mortgage:
✔ Entered into on or after 21 March 2016
✔ Subject to MCD-compliant MCOB amendments
✔ Includes remortgages (new contract)
Consumer BTL = regulated
Business BTL & Corporate mortgages = not regulated
Name 6 types of home finance are regulated?
- Regulated mortgages
- MCD regulated mortgages
- Consumber BTL
- Home Purchase plans
- Lifetime mortgages
- Home reversion plans
What is a lifetime mortgage and how is it typically repaid?
Definition:
A type of equity release for older homeowners (usually 55+) to borrow against their home’s value, typically with no regular repayments.
Key Features:
✔ Loan is secured by a first charge
✔ Repaid when borrower dies, moves into residential care, or sells the home
✔ Interest usually rolled up and paid with capital at the end
✔ Lender can take possession under contract if needed
Less Common Options:
- Interest-only payments (capital repaid at the end)
- Interest + partial capital payments (full capital repaid at the end)
What two additional critieria must apply for a ‘regulated lifetime mortgage?’
Must only be available for those over a cetain age
The lender cannot seek full payment until:
* Death
* Moves into residental care or sheltered accom - i.e. they’re not returning
* Borrower moves to another ‘main resi’
* Borrower sells property
* Lender exercises legal right to take possession
There is non requirement to make full capital repayment until the end of the mortgage.
Retirement Interest-Only Mortgages (RIOs)
Definition and requirements
Definition: A type of interest-only mortgage introduced by the FCA in March 2018 for older borrowers (age set by lender).
* Affordability assessed on interest-only payments – no repayment vehicle required.
Defined in MCOB as:
- Not an interest roll-up mortgage
- Restricted to older borrowers
- Repaid on a specified life event (e.g. death or long-term care), unless borrower breaches terms.
What are the key differences between a Retirement interest-only mortgage and a Lifetime mortgage?
- Interest only rolls up for a lifetime mortgage
- Affordability is not normally assessed for a LTM, but the ability to pay interest is for a RIO
- Debt increases over time with a lifetime mortgage
Uses:
* LTM - Releasing equity for income/expenses
* RIO - Replacing interest-only mortgages
Home Purchase Plan vs Regulated Mortgage
Home Purchase Plan:
* Provider buys the property; purchaser agrees to buy it over time or via a lump sum.
* Occupant must use at least 40% of the land as a dwelling.
* Common in Sharia-compliant finance – no interest charged.
Regulated Mortgage:
* Borrower buys property in their name using loan from lender.
* Loan is repaid with interest over time.
Key Difference:
✔ Ownership structure and interest payments – HPP = provider-owned, no interest;
Mortgage = buyer-owned, interest-bearing loan.
What is a home reversion plan?
1. Provider buys the property from the owner
Provider may purchase part/all of a property at a significant discount to its market value
2. Former owner continue to live in the property
Under a lifetime lease
3. On change of circumstances, the provider sells the propery
* Moves, care, death
* Provider sells the property and keeps the sale proceeds (or equal to its share)
* End of specified term of at least 20 years
Equity release vs remortgaging?
Lifetime mortgage = form of equity release, typically for older homeowners with little or no mortgage remaining.
Remortgaging = switching or changing a mortgage deal, generally used by borrowers of any age who are repaying the loan monthly.
Clients often say “I want to remortgage” when they actually mean equity release — confirm their intention and repayment ability.
Consumer Buy-to-Let (CBTL) vs Buy-to-Let (BTL)
Definition, application process for CBTL? when is a mortgage not CBTL?
BTL Mortgage (FCA definition): Like a regulated mortgage, except the property:
* Cannot be occupied by the borrower or a related person
* Must be let under a rental agreement
CBTL Mortgage: For borrowers not acting wholly or predominantly for business purposes (e.g. accidental landlords)
Application Process:
* CBTL applications follow similar standards to residential mortgages – includes affordability assessments, documentation, and due process
Not CBTL:
* If the borrower is a professional landlord or acquires property for business, it is classed as unregulated BTL
Business Buy-to-Let (BTL) - definition, critiera
Definition:
A mortgage arranged to fund a property intended solely for rental as part of a business.
➡️ These mortgages are unregulated by the FCA.
Criteria for Business BTL (any one may apply):
1. 🏠 The property was bought to rent out, and neither the borrower nor a relative has ever lived in it.
- 📊 The borrower has a portfolio (i.e. more than one rental property).
- 📉Less than 40% of the property is used as a residence.
- 🧾 The lender is satisfied the mortgage is solely for rental business purposes
Second-charge loans
Definition, key features, regulation?
A second mortgage secured against a borrower’s property, where the main mortgage (first charge) takes priority in case of repossession
⚖️ Key Features:
* Uses the home as additional security
* First-charge lender has repayment priority if borrower defaults
🏛 Regulation
* From 21 March 2016, regulated under MCOB (formerly under CONC)
* Loans taken out before this date are regulated under MCOB if they meet the criteria — known as ‘back book loans’
Legislation Protecting Property Buyers: 1. Consumer Protection (Amendment) Regulations 2014
Replaced previous marketing/selling regulations covering professionals (including estate agents).
Protects consumers from unfair, misleading, or aggressive commercial practices.
Includes:
* Ban on unfair commercial practices
- Assessment of misleading/aggressive practices based on their influence on average consumers
- A “blacklist” of banned unfair practices
- Estate agents must not omit important property info or provide misleading details.
- Breach occurs if businesses ignore subscribed codes of practice.
Legislation Protecting Property Buyers: Consumer Credit Legislation
- Protects individuals and small businesses (up to 3 partners or unincorporated associations).
- Main laws: Consumer Credit Acts 1974 & 2006.
- Regulated by FCA since 2014 under the Consumer Credit sourcebook (CONC).
- Applies to unsecured loans, credit cards, etc.
- Excludes regulated mortgages (covered by MCOB rules).
- Since March 2016, second charge lending regulated under MCOB (mortgage rules).
