U4: T10 - ASSESSING THE APPLICANTS FINANCIAL STATUS Flashcards
(42 cards)
What 5 pieces of information does the lender need to know about the required loan?
- Deposit available
- Repayment Method
- Loan to value
- Building and contents insurance required
- Other insurance requirements
True or false. Prison sentences can be imposed for providing fraudulent information on loan application forms.
True. It is not unusual for prison sentences to be imposed, even for first offences.
Most lenders will consider which figure for self-employed affordability criteria?
A) Gross Profit
B) Net profit
B) Net profit
Gross profit = Turnover minus?
Raw materials required as inputs to generate the turnover
Net profit = Gross profit minus?
Other regular business expenses
Al is a painter and decorator. What do you think would count as deductions to calculate his:
a) gross profit?
b) net profit?
A) Gross profit is turnover minus the cost of basic materials to enable him to work on a day‐to‐day basis – paint, filler, wallpaper, brushes, etc.
B) Net profit is the gross profit minus routine business expenses, such as motor expenses (petrol, repairs and insurance); postage and stationery; telephone charges, etc.
What is a dividend and in what ways the tax treatment is different from that of earned income?
A dividend is a portion of the profits of the company, paid to its shareholders. The level of dividend received depends on the amount of profit made by the company. In the case of small company where directors own the majority of shares, they can decide what dividends to pay. Dividends are paid without deduction of income tax at source and UK taxpayers have a dividend allowance on which no income tax is payable. If dividend income in excess of the allowance is received, the tax is calculated after calculating the tax due on earned income and savings interest.
The lender must keep records of their affordability assessment. True or false.
True
What section of MCOB is responsible lending?
MCOB 11: Responsible Lending
Can you remember what self‐certification is and whether it is permitted?
Self‐certification involved the applicant declaring their own income and no evidence was sought to verify their claim. The rules now prohibit this and insist that evidence of income must be obtained from a source independent of the customer.
Affordability must be based on the applicant’s free disposable income – the amount left each month after tax, National Insurance and normal expenses. True or false
True
What 3 types of expenditure must be deduced to calculate free-disposable income?
- Committed expenditure
- Basic essential expenditure
- Basic quality-of-life expenditure
Which of the 3 types of expenditure do lenders need actual figures?
- Committed expenditure
- Basic essential expenditure
- Basic quality-of-life expenditure
- Committed expenditure
For basic essential and basic quality‐of‐life expenditure they can use either the borrower’s actual figures or statistical or modelled data from organisations such as the Office for National Statistics.
Lender Stress Tests are set out in MCOB?
True.
The FCA sets out the requirements in MCOB 11.6.18 (R).
When conducting a stress test - a lender uses the rate agreed at the start of the mortgage to conduct the test. True or false
False.
The lender must use the reversion rate (after the fixed term period of the mortgage finishes) to calculate the stress test.
What is the minimum period the lender must consider interest rate increases for?
Minimum of 5 years.
Unless the mortgage is on a 5 year fixed mortgage or the mortgage term is less than 5 years.
What is the minimum interest rate increase to be used during a stress test?
1% minimum per year/
Even if the indicators above (including FPC guidance) suggest a rate below 1 per cent would be appropriate.
Define credit-impaired customer.
credit‐impaired customer is one who:
1) within the last two years has owed the equivalent of three months’ payments on a mortgage or other loan, unless late payment was the result of errors by a bank or other third party; or
2) within the last three years has had one or more county court judgments, totalling more than £500;
3) or has had an individual voluntary arrangement or bankruptcy order in force within the last three years.
Surinder and Kuldip are both applying for mortgages on houses in the UK. Surinder has just got a new job in Northampton and is moving there; Kuldip is buying a house there too for his family but he is working overseas on a long‐term contract. The lender cannot treat Kuldip’s application differently from Surinder’s just because he is not currently living in the UK. True or false?
False.
A lender cannot discriminate on grounds of race or nationality but it can impose different terms on a borrower who is living outside the UK, or decide not to lend at all, because of the increased difficulty of pursing the borrower in the event that they default on the repayments.
Last week Sam contacted her bank’s mortgage adviser about applying for a mortgage, and the adviser told her that she and her partner could probably afford to borrow £180,000, which is three times their joint income. A friend who works in a building society has now told Sam that the bank is no longer allowed to assess her application on the basis of an income multiple. Should Sam be concerned about the way the bank dealt with her enquiry?
No – lenders are allowed to give initial assessments based on income multiples. If Sam were to go ahead and make a mortgage application the lender would be required to carry out a full and detailed assessment of her income and that of her partner.
A lender may take account of sales‐related income in assessing a borrower’s ability to repay a loan. True or false?
True: variable sales‐related income is usually averaged over three or five years.
All sole traders must provide a detailed breakdown of their business expenditure on their tax return. True or false?
False. All businesses must maintain accurate accounts but a detailed breakdown of expenditure is only required on a tax return if the business turnover is above the VAT registration threshold.
Which of the following would not be an acceptable reason for a lender to waive affordability checks when varying the terms of a regulated mortgage started in 2013?
a) A further advance is required for essential maintenance to the structure of the property.
b) The borrower has requested a new 2.99 per cent fixed‐rate loan on expiry of their current 3.30 per cent fixed‐rate loan.
c) A further advance is required for home improvements.
d) Borrowing would be increased to cover the cost of the arrangement fee.
c) A further advance is required for home improvements.
Affordability checks cannot be waived for additional borrowing unless it is for essential repairs or maintenance, or to add the cost of a mortgage product fee.
A water bill is an example of:
a) committed expenditure.
b) basic essential expenditure.
c) basic quality‐of‐life expenditure.
d) cost of living expenditure.
b) A water bill is basic essential expenditure.
