Mortgages (Easily Understood) - Revision Guide for CeMap 2

Mortgages Easily Understood Written by

Tomi Omidiora BA Hons, MBA, CeMAP, CeFA

Published by Ruksons Ltd, UK Mortgages Easily Understood Adetomi Omidiora Published In Great Britain 2009 Copyright © Adetomi Omidiora 2009 The Mortgages Easily Understood guide is to be used in addition to the main accredited Textbook and will never replace the detail contained there. It was written with an intention to support the reader’s understanding of the main aspects of the text, and will serve as an appropriate revision guide to understanding Mortgages. A thorough analysis, the detailed document could also provide clarity and understanding to an individual who needs a basic understanding of Mortgages. The Mortgages Easily Understood Book published in August 2009 provides information for the 2009/10 financial year. While the author has used all her efforts in preparing this book, there are no promises or warranties in respect of the accuracy or completeness of the content of this book with updated changes from the appropriate financial bodies. All rights reserved. Contents and or cover may not be reproduced in whole or in part. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means ---- electronic, mechanical, including photocopying, scanning and recording worldwide, without prior permission in writing from the author and/or publisher. Printed in the UK. Created and Designed By

Ruksons Ltd www.ruksons.com

Edition 2.0

UNIT 3: Mortgage Law, Policy, Practise and Markets Contracts Law of Agency Borrowing Types of Borrowers Personal Borrowers (Individuals) Partnership Limited Liability Partnerships Corporate Borrowers (Companies) Commercial Borrowing Personal Representatives Attorneys Trustees Voluntary Housing Sector (non profit) Clubs and Associations The Mortgage Regulated Mortgage Contract MCOB Rulebook Conveyance Second and Subsequent Mortgages Deed of Postponement Two types of ownership Home Purchase Plan Home Reversion Plan Land Tenure Freehold Possession Leasehold Possession Forfeiture Common hold /Leasehold Reform 2002 Buying the Freehold of a Flat Common hold Association Factors That Trigger Land Registration in the UK/Wales HM Land Registry - Three Registers Unregistered Land Easements Covenants Title 4 Categories of Title Title Guarantees Report on Title Agreement in Principle Application form Offer of Advance Legal charge (Mortgage deed) Rights and Covenants Table Stage Payments Quality of Construction The Consumer Credit Act House Buying Process (Methods of purchase)

1 1 2 2 2 3 4 4 4 5 5 5 5 6 6 6 7 7 8 8 8 8 8 9 9 9 10 10 10 11 11 11 12 13 13 13 13 14 14 14 15 15 16 16 17 17 17 18

Private Treaty Auction Property Defects Structural Movements Subsidence Heave Undertaking Retention The Role of Estate Agents Property Mis descriptions Act 1991 Home information Pack (Housing Act 2004) The Role of Solicitors Stamp Duty Consolidation Information to be provided by Lender before 1st payment Mortgage Market Background Inflation State of the Economy Supply and Demand Disintermediation Marketing of Mortgages (Financial Promotions) Real time Financial Promotion Non real time financial promotions

18 19 19 19 20 20 20 20 20 21 21 22 24 24 25 25 25 28 28 28 30 31 31 31

Question Time Review for Unit 3

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UNIT 4: Mortgage Applications Ethical Advice Ethical advice involves: The Scope of the Service Advised Sales Non Advised Sale Three Levels of Service Order of Documentation Initial Disclosure Document (IDD) Customer Specific Illustration Responsible Lending The Advice Process Assessing a Mortgage Applicant’s Status Corroborating Income and Outgoings Individual Voluntary Arrangement (IVA) County Court Judgements (CCJS) Insolvency/Bankruptcy Data protection Act 1998 Anti – money Laundering Regulations (Proceeds of Crime Act 2002) Valuation and Surveys Three Types Reinstatement Value

34 34 35 35 35 36 36 36 36 37 37 38 38 44 44 44 44 45 45 46 47

Gazumping Gazundering Factors affecting the Value of Property Tenure Location Type and design of the Property Condition of the Property Multiple use Property Vacant Possession Age of the building Insurance Issues Quality of Construction Method of Construction Planning Consent Building Regulations Environmental Factors Agricultural Holding Disputes Additional Security for the Mortgage Loan The Guarantor (Statue of Frauds Act 1677) Collateral Deposits Surety Life Assurance policies Mortgage Indemnity Guarantee (MIG) Fees Table

47 47 48 48 48 48 48 48 48 48 49 49 49 49 51 51 52 52 52 52 53 53 53 53 55

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UNIT 5: Mortgage Payment Methods and Products Mortgage Repayment Methods There are two methods to repay the mortgage Mortgage Repayment vehicles Endowment Policies Interest Table

58 58 59 59 60

Endowment Table Pooled Investments Unit Trusts Open-ended Investment company (OEIC) Investment Trusts Collective Investment Table Individual Saving Account (ISAs) Cash ISA Equity ISAs Personal/ Stakeholder Pension Plan Calculation of mortgage Interest Annual Basis Monthly Basis Daily Basis Annual Review Schemes Annual Percentage Rate (APR) Product Incentives Two Types of Mortgage Products Fixed Rate Variable Rate Hybrid Products CAT Standard Mortgage (Charges Access and Terms) Charges Access Terms Shared Ownership Plans Equity Share Scheme The HomeBuy Scheme Social Home Buy New Home Buy Open Market Home Buy Home buy Direct Rent to Home buy Right to buy legislation/ Right to Acquire Buy to Let Mortgages Mortgages with LTV of 100% or more Equity Release Schemes Shared Appreciation Mortgages (SAMs) Life time Mortgages Home Income plans Home Reversion Schemes Equity Release Table Commercial Mortgages Business Clients Partnership Corporate Borrowers (Companies) Commercial Borrowing Building and Contents Insurance The Principle of Averaging Block Insurance Policy Mortgage Protection Products Level term Assurance Decreasing Term assurance (Mortgage protection policy) Convertible Term Assurance

62 65 65 66 66 68 69 70 70 70 72 72 72 72 72 73 73 73 74 74 78 79 79 79 79 79 80 80 80 81 81 81 81 82 82 83 83 83 83 84 85 85 86 87 87 87 87 88 88 89 89 89 90 90

Health Insurance Critical Illness Permanent Health Insurance Mortgage payment protection insurance (ASU) MPPI Waiver of Premium

91 91 91 92 92

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UNIT 6: Mortgage arrears and post-completion Further Advances Alternatives to a Further Advance Bridging Finance Redemption Early redemption Clog on the Equity of Redemption Part Redemption (lump sum redemption) Redemption – Vacating the Mortgage Mortgages and debt Consolidation Areas to consider before going into the arrangement Variation of Mortgage Conditions Factors that require a Deed of Variation: Changing The Mortgage Term Property Moves Reasons for Moving Costs Re-mortgaging Lender will assess as follows: Second Mortgage (Second charge) Letting the Property Arrears State Assistance to Borrowers in Arrears Homeowners Mortgage Support Scheme Support from Mortgage Interest Mortgage Rescue Teams Sources of Advice Mortgage Rescue Schemes Legal Remedies on Default Possession Council of Mortgage Lenders Possession Register The Right of Subrogation Equity Release Lifetime Mortgages Home Reversion Plan

95 97 97 98 98 98 98 98 99 99 100 100 102 102 102 102 103 103 103 104 104 107 107 107 108 109 109 109 110 110 110 111 111 111

Question Time Review for Unit 6

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Answers & Additional Content:

Review: Answers for Unit 3

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Review: Answers for Unit 4

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Review: Answers for Unit 5

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Review: Answers for Unit 6

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Acts Table

122

Record Keeping Table

123

PLEASE NOTE: THIS IS A SAMPLE FROM THE ORIGINAL COPY. PAGES WILL BE MISSING

UNIT 3: MORTGAGE LAW, POLICY, PRACTICE AND MARKETS

Contracts A contract is a binding agreement between two or more parties. All contracts must: • Be a legal agreement • Have an offer and acceptance • Have a consideration given (e.g buyer gives money and seller gives property). • Be entered into by persons who have the legal capacity to act within the defined roles. • Be entered into with utmost good faith – the truth must be told, with material facts disclosed. Who cannot enter into a contract •

The mentally incapacitated – Those with unsound mind.

•

Minors – Those under 18 years old.

Law of Agency An agent acts on behalf of another person (principal). For example, the Estate Agent will act as an agent on behalf of the seller (principal). It is important that an agent is able to conclude contracts on behalf of the principal. • There must be a written contract. • The principal is liable for the agent’s actions but the agent should only act within the remit as given by the principal, which is the “actual authority” Apparent Authority: This is where an agent acts outside his remit that is, acts outside actual Authority. Ratification: The Principal could agree that the agent’s action is acceptable even when he acted outside his scope. The principal “ratifies” the event.

UNIT 4: MORTGAGE APPLICATIONS Ethical Advice Ethical advice involves: • • • • •

Asking questions to ascertain client’s attitudes and needs, so that the advisor can identify the client’s full financial position. Establishing the client’s attitude to risk. Verifying information where possible and offering advice and recommendations that best suits the client. Using plain simple language when advising clients by avoiding the use of technical jargon. Recommending products that meet the client’s needs and objectives and disregarding the commission to be received by the advisor so that it is not considered in the process of making the recommendation.

Note - It is important that a client knows why a particular product is being recommended. • Ethical advice is enacted in the FSA Principles of “Treating customers fairly” (TCF) which is under the “Principles for Business”. • There are 4 principles involved: Principle 2 – Skill, Care and Diligence in a firm’s conducting of its business activities. Principle 3 – Organisation and control of a firm’s affairs with adequate risk management. Principle 6 – Customer interest and “TCF”. Principle 7 – Communication of information to clients must be clear, fair and not misleading. • •

All mortgage advisors are expected to give ethical advice. The FSA is yet to provide a definition for “fair treatment” as this is likely to be circumstance specific. Moreover, their focus is on quality rather than meeting set rules, which would lead to an increase in costs and possibly less product variety. They have however provided specific guidelines as listed below, to help firms assess TCF 1. Better risk management. 2. Effective and clear communication. 3. Get rid of things that could lead to customer complaints. 4. Transparency

•

Post 2009, all firms must be able to show that they demonstrate the TCF approach through a review and report. This review and report can be assessed against the 6 client outcomes as follows

•

• •

•

1. No barriers to product or provider switches and claim or complaint handling. 2. Suitability of advice 3. Information provided must be clear and adequate at all levels before and after a sale 4. Product performance is in line with client expectation (as advised). 5. Products are targeted in design to specific customer segments. 6. Client must be sure that firm is committed to TCF. The details of TCF is in the “conduct of business rules” . A part of the FSA handbook “The Responsibilities of Providers and Distributors”(RPDD) will guide firms on how the principles for business combined with the conduct of business sourcebook will produce better TCF outcomes. Where a firm follows the FSA guideline then it is assumed that the firm has followed the rules.

Corroborating Income and Outgoings

1) For Employees (PAYE) • • •

Based on income multiples (see chapter1), as well as outgoings. Income is based on the salary of the employee or could be based on overtime, commission or other income relating to sales, maintenance and trusts. A conservative estimate to calculating regular bonuses and overtime will be to take an average over a 3 year period.

Example - Income multiples Diana and her husband Steven are looking to take out a mortgage on a joint Tenancy basis. Diana earns £50,000 a year, and also receives £5,000 a year from a life trust. Steven’s basic salary is £30,000 per year. He has also receives regular bonuses from his job . His bonuses over the last 3 years were £8,000, £6,000 and £7,000 respectively. The lender’s income multiples are: 3 times joint income OR 4 times main income plus 1 times secondary income. What is the maximum amount Diana and Steven can borrow? Scenario 1 (3 times joint income) 1) £50,000 (Diana’s income) plus £5,000 (trust) = £55,000 2) £30,000 (Steven’s income) plus £7,000 (£8,000 +£6,000+£7,000 =

£21,000 £21,000 divided by 3 = £7,000) = £37,000 3) £55,000 + £37,000 = £92,000 4) £92,000 multiplied by 3 = £276,000 Scenario 2 (4 times main income plus 1times secondary income) 1) £55,000 (Diana is the main income) multiplied by 4 = £220,000 2) £220,000 + £37,000 (Steven's total income) = £257,000 • Scenario 1 is better, the total amount Diana and Steven can borrow based on the income multiples is £276,000

• Outgoings can usually be corroborated from bank income. They are expenses and all other borrowing such as pension payments, school fees, credit card payments, rent or other mortgage payments etc • It must be established that the borrower can afford the monthly payments and a lender should ensure that this repayment is not more than a certain percentage of the borrower’s net income. • There are occasions where the lender may be willing to take a more flexible approach to income corroboration e.g If the borrower is on an upward career path (i.e studying to be a barrister) the lender might be willing to advance more than his current income multiples. • In relation to outgoings, there are instances where the advisor may be able to improve the financial circumstances of the client by consolidating lending arrangements, at lower interest rates. Additional information required may include the following: • Employer’s reference (Should be verified, beware of fraudulent references). • Banker’s reference (Will usually cost about £50) • Mortgage statements • Landlord’s reference • P60 (historic document so it is not very useful) • Generally, outgoings can be corroborated from bank statements. •

houses built after second world war were only to last 20-30 years, but are still standing today). Lenders are still unlikely to give loans on these properties.

11.Planning Consent and Building Regulations – Planning permission may be needed and building regulations may have to be followed for a house owner who intends to build or extend his property, or seeks to make any changes to the external appearance of the property. (e.g building a new

property, additions and extensions, converting an existing building to a barn). It is important to note that Planning permission is hardly given after the work has been done (retrospectively) and If a property is passed on to a new owner he will still suffer the consequences (could result in a compulsory order to put the property back to its previous state), if planning permission was not obtained. Moreover failure to obtain permission will lead to a devaluation of the property and would discourage lending. Listed Buildings • These are buildings of Architectural or historical interest. • Subject to restrictions on changes to Fabric –Cannot change exterior or sometimes the interior. • Consent is required when owner wants to demolish or change or extend it in a way that will affect its character. Listed Buildings ------- 100% Grade 1 Building – Exceptional Interest - 2% of listed buildings Grade 2 Building – Particular Importance – 4% of listed buildings Grade 3 Building – Special Interest - 94% of listed buildings •

The Secretary of State will be informed once local authority has reached a decision for proposed demolition of a listed building and any alteration to a Grade 1 and 2 Building.

12.Environmental Factors – There are two main issues – Radon gas, which is

highly carcinogenic, and requires that the owner installs fans and pipes in the property to remove the effect. The other is overhead electric power lines, which are, still a subject of controversy. In both cases the lender is reluctant to lend. • Other environmental factors to be considered but are unlikely to affect the lending decision include busy roads, closeness to flood plains and mobile phone masts, property prone to slippage or subsidence built on London clay may not be considered suitable security for the mortgage loan if the subsidence has not been professionally rectified, as it may be difficult to get the house insured. Agricultural Holding • • • •

Expert advice is needed, as it is a very delicate area to go into. Agricultural Holding 1948 gives tenants a high degree of security making it very difficult for them to be evicted. Moreover with evidence of poor management land could be taken out of the owner’s control. The consequence of this is that lenders are reluctant to lend on agricultural land, because of the difficulty the legislation presents in terms of their ability to exercise their rights quickly.

Reinstatement Value • • • •

A vital part of insurance cover. Cost of rebuilding from scratch in event of failure, destruction or catastrophe. Value – Based on property size and building costs for area. Amount is increased in line with inflation to ensure cover remains adequate.

Standard Construction Property – Reinstatement value is less than the Market

value (market value includes price of the land, which is not an issue when rebuilding). Unusual Design Property – Reinstatement value is greater or equal to

Mortgage valuation. (this signifies the higher cost of non-standard materials when rebuilding).

Local Authority and Town Planning Consent Property Developments require local authority consent. In certain cases if changes have been made to a property the lender should ascertain, at application stage, that there is documentary evidence of planning consent. •

This information is usually requested before a further advance is made for home improvements.

Such instances are: • • • • • • • • •

Where a new building is being erected Building an extension Building a Garage Changing the use of a building Kitchen moved from one room to another Changes to a listed building Changing the external appearance of the building to the extent that it alters the physical appearance of neighbourhood. Changing the paint colour of a property. Felling of certain trees.

Note - Local authorities are able to overrule building regulations requirements in cases where they are plainly inappropriate. •

Local authorities will not usually grant planning permission after the work has been done (retrospectively). This implies that the borrower may have to restore the house to the original state, which will cost time and money.