Unit 3 T2 Flashcards
Purpose and Description of a Mortgage
Property and land is not the only asset that can be mortgaged, other assets such as share portfolios can be mortgaged too.
The two parties to the contract are:
The lender who is often described as the mortgagee
The borrower who is often described as the mortgagor
A legal charge?
First charge – the charge that is registered first at the Land Registry has
priority over other charges.
o Second charge – a legal charge that is registered after a first charge will rank second in line for repayment on sale or re-possession.
If there isn’t enough money left to cover the second charge debt, then they will lose out – usually a higher rate of interest on a second charge.
Mortgage Regulation and MCOB
The mortgage is to individual(s) or trustees.
It is a secured by a legal charge on land in the UK.
At least 40% of that land is to be used as a dwelling and the land must be used by:
Borrower or a related person
Beneficiary or a related person when the borrower is a trustee.
* The majority of residential mortgages and commercial mortgages which meet the 40% residential rule are classed as regulated.
commercial mortgage
A commercial mortgage is a mortgage where the loan is used to buy a non- residential property e.g. shops, offices, factories, warehouses etc.
company or LLP
If the borrower is a company or a limited liability partnership (LLP), the mortgage is not MCOB regulated and most buy to let mortgages will also not be MCOB regulated.
MCD
- Mortgages which meet the rules above taken out before March 2016 are regulated by MCOB.
- If the mortgage is taken out since March 2016, then the Mortgage Credit Directive (MCD) applies which effectively incorporates the MCOB rules.
CBT
Consumer buy to let mortgages are regulated as of March 2016
If it is a Consumer BTL mortgage the same rules on affordability will apply as for normal residential mortgages.
* A consumer buy to let could apply when an ‘accidental landlord’ is created
o Someone who inherits a property which is then rented out to cover costs
o Someone who has moved to another property and can’t sell the previous one, so its rented out to cover costs.
o Someone who moves into a partner’s property so rents out their property to cover costs.
Second Mortgages/Charges
Second charges have been regulated since March 2016 by MCD and therefore MCOB rules apply and firms operating in this field have to gain the necessary level 3 mortgage qualification eg (CeMAP)
Most second charge mortgages taken out before March 2016 are subject to regulation retrospectively sometimes referred to as a ‘back book loan’
Lifetime mortgages
available for people over a certain age typically 55 are also MCOB regulated. There are additional regulatory requirements in this area and an additional examination that advisers would have to take.
A lifetime mortgage is defined is typically where a loan is advanced up to a certain percentage of the property value, with the interest rolled up and paid along with the capital at death or if the borrower has to go into care
Home reversion plan
A home reversion plan is another scheme aimed at elderly people usually over 60 whereby the property is sold to a provider who will then allow you to stay in that property with a guaranteed lifetime tenancy, usually around £12 per year. The provider will only be able to access the property when the occupier either dies, moves, goes into long term care or at the end of a defined period which must be at least 20 years.
Are regulated by MCOB
RIO
due to demand from borrowers above a certain age who are unable to repay an interest only mortgage. Affordability can be assessed for these as an interest only mortgage with no requirement to provide a repayment vehicle.
3 PS
Property
Person
Purpose
Private (Personal) Borrowers
Personal borrowers are either first time buyers or subsequent buyers.
If two or more individuals take out a mortgage, the mortgage deed will always make those individuals ‘jointly and severally’ liable for that loan, this means that all parties are liable for the whole amount, not just their share of it.
Business (professional) Buy to let (BTL)
These are people buying a property with a view to letting out the property to tenants.
a minimum level of income and the amount of the loan is determined by the rental income.
Typically, the rental income needs to be a minimum of 125% to maybe as much as 145% of the loan repayments – called interest coverage ratio (ICR).
Where the borrower is using some personal income to support the mortgage, the lender must carry out an affordability assessment.
There will also need to be an interest rate affordability stress test to consider the possible effect of mortgage interest rate increases over the next 5 years.
not regulated under FCA .
Business Borrowers
Mortgages taken out by individuals for business purposes are regulated by MCOB if:
The borrowing is secured by a legal charge where at least 40% of the land is used as a residence AND
* The sole purpose of the mortgage is to raise funds for use by a small business (one with turnover of less than £1m) and the business is not a Limited Liability Partnership (LLP) or a limited company.
Therefore, if the business is a limited company or an LLP the mortgage is not regulated by MCOB.
Business Partnerships
Defined as the “relationship that exists between persons…with a view of profit”.
* Unlike a limited company, a partnership is not a separate entity.
* The partners jointly own the assets and liabilities which means that they are all jointly and severally liable for the loan
The Partnership Deed or Agreement will specify when the partnership ends, for example on death/bankruptcy.
The lender will want to see the Partnership Agreement to find out whether there is anything unsuitable in the agreement that would make the lender nervous, such as, a partner’s responsibilities being terminated on death or bankruptcy. The Partnership Agreement will also state who is authorised to sign on behalf of the partnership.
LLP
is a different concept in that the individual partners do not have a direct liability for any debts of the partnership, very similar proposition to lending to a company.
* The mortgage is provided to the LLP rather than to the partners. Mortgage lending to an LLP is not regulated.
The lender may decide to insist on ‘personal guarantees’ from the partners in much the same way as they would from the directors of a company. (see below)
Corporate Borrowers
Corporate lending is any lending to a company.
A limited company is a separate legal entity, which means it is separate from the company’s owners (the shareholders).
When a limited company cannot pay its debts, a lender cannot automatically enforce the debt against the shareholders. Lenders may as a condition require personal guarantees from the directors to give them additional security.
These issues are covered in the company’s memorandum of association (powers of the company) and the articles of association (powers of the directors).
SPV
a company set up usually specialising in buying buy to let or commercial property.
Changes in the taxation rules, make it more attractive to buy property within the SPV.
The shares in the SPV are owned by the individual but the property itself is owned by the SPV.
Lending to LC
the Building Societies Act 1986 states that a maximum of 25% of a building society’s commercial assets can be held in loans to limited companies secured on land
Commercial Borrowers
Commercial lending is lending to anyone (individuals or companies) for the purpose of buying commercial property – shops or factories.
Personal Representatives
Act in managing the estates of deceased persons.
* If there is a valid will the representative is known as Executor and is nominated through Grant of Probate.
* If there is no will the representative is known as the Administrator and nominated through Grant of Letters of Administration.
Lenders can lend if the loan is for the purpose of administering the estate or to buy property for a dependent of the deceased.
Attorneys
Attorneys are people who are contractually able to act on behalf of others through a Power of Attorney.
The person who grants the power to someone else is the donor, the person who receives the power is the donee.
