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 1
Law of Agency 1
Borrowing 2
Types of Borrowers 2
Personal Borrowers (Individuals) 2
Partnership 3
Limited Liability Partnerships 4
Corporate Borrowers (Companies) 4
Commercial Borrowing 4
Personal Representatives 5
Attorneys 5
Trustees 5
Voluntary Housing Sector (non profit) 5
Clubs and Associations 6
The Mortgage 6
Regulated Mortgage Contract 6
MCOB Rulebook 7
Conveyance 7
Second and Subsequent Mortgages 8
Deed of Postponement 8
Two types of ownership 8
Home Purchase Plan 8
Home Reversion Plan 8
Land Tenure 9
Freehold Possession 9
Leasehold Possession 9
Forfeiture 10
Common hold /Leasehold Reform 2002 10
Buying the Freehold of a Flat 10
Common hold Association 11
Factors That Trigger Land Registration in the UK/Wales 11
HM Land Registry - Three Registers 11
Unregistered Land 12
Easements 13
Covenants 13
Title 13
4 Categories of Title 13
Title Guarantees 14
Report on Title 14
Agreement in Principle 14
Application form 15
Offer of Advance 15
Legal charge (Mortgage deed) 16
Rights and Covenants Table 16
Stage Payments 17
Quality of Construction 17
The Consumer Credit Act 17
House Buying Process (Methods of purchase) 18
Private Treaty 18
Auction 19
Property Defects 19
Structural Movements 19
Subsidence 20
Heave 20
Undertaking 20
Retention 20
The Role of Estate Agents 20
Property Mis descriptions Act 1991 21
Home information Pack (Housing Act 2004) 21
The Role of Solicitors 22
Stamp Duty 24
Consolidation 24
Information to be provided by Lender before 1st payment 25
Mortgage Market 25
Background 25
Inflation 28
State of the Economy 28
Supply and Demand 28
Disintermediation 30
Marketing of Mortgages (Financial Promotions) 31
Real time Financial Promotion 31
Non real time financial promotions 31

Question Time Review for Unit 3 33

UNIT 4: Mortgage Applications

Ethical Advice 34
Ethical advice involves: 34
The Scope of the Service 35
Advised Sales 35
Non Advised Sale 35
Three Levels of Service 36
Order of Documentation 36
Initial Disclosure Document (IDD) 36
Customer Specific Illustration 36
Responsible Lending 37
The Advice Process 37
Assessing a Mortgage Applicant’s Status 38
Corroborating Income and Outgoings 38
Individual Voluntary Arrangement (IVA) 44
County Court Judgements (CCJS) 44
Insolvency/Bankruptcy 44
Data protection Act 1998 44
Anti – money Laundering Regulations (Proceeds of Crime Act 2002) 45
Valuation and Surveys 45
Three Types 46
Reinstatement Value 47
Gazumping 47
Gazundering 47
Factors affecting the Value of Property 48
Tenure 48
Location 48
Type and design of the Property 48
Condition of the Property 48
Multiple use Property 48
Vacant Possession 48
Age of the building 48
Insurance Issues 49
Quality of Construction 49
Method of Construction 49
Planning Consent 49
Building Regulations 51
Environmental Factors 51
Agricultural Holding 52
Disputes 52
Additional Security for the Mortgage Loan 52
The Guarantor (Statue of Frauds Act 1677) 52
Collateral Deposits 53
Surety 53
Life Assurance policies 53
Mortgage Indemnity Guarantee (MIG) 53
Fees Table 55

Question Time Review for Unit 4 57

UNIT 5: Mortgage Payment Methods and Products

Mortgage Repayment Methods 58

There are two methods to repay the mortgage 58
Mortgage Repayment vehicles 59
Endowment Policies 59
Interest Table 60
Endowment Table 62
Pooled Investments 65
Unit Trusts 65
Open-ended Investment company (OEIC) 66
Investment Trusts 66
Collective Investment Table 68
Individual Saving Account (ISAs) 69
Cash ISA 70
Equity ISAs 70
Personal/ Stakeholder Pension Plan 70
Calculation of mortgage Interest 72
Annual Basis 72
Monthly Basis 72
Daily Basis 72
Annual Review Schemes 72
Annual Percentage Rate (APR) 73
Product Incentives 73
Two Types of Mortgage Products 73
Fixed Rate 74
Variable Rate 74
Hybrid Products 78
CAT Standard Mortgage (Charges Access and Terms) 79
Charges 79
Access 79
Terms 79
Shared Ownership Plans 79
Equity Share Scheme 80
The HomeBuy Scheme 80
Social Home Buy 80
New Home Buy 81
Open Market Home Buy 81
Home buy Direct 81
Rent to Home buy 81
Right to buy legislation/ Right to Acquire 82
Buy to Let Mortgages 82
Mortgages with LTV of 100% or more 83
Equity Release Schemes 83
Shared Appreciation Mortgages (SAMs) 83
Life time Mortgages 83
Home Income plans 84
Home Reversion Schemes 85
Equity Release Table 85
Commercial Mortgages 86
Business Clients 87
Partnership 87
Corporate Borrowers (Companies) 87
Commercial Borrowing 87
Building and Contents Insurance 88
The Principle of Averaging 88
Block Insurance Policy 89
Mortgage Protection Products 89
Level term Assurance 89
Decreasing Term assurance (Mortgage protection policy) 90
Convertible Term Assurance 90
Health Insurance 91
Critical Illness 91
Permanent Health Insurance 91
Mortgage payment protection insurance (ASU) MPPI 92
Waiver of Premium 92

Question Time Review for Unit 5 93

UNIT 6: Mortgage arrears and post-completion

Further Advances 95
Alternatives to a Further Advance 97
Bridging Finance 97
Redemption 98
Early redemption 98
Clog on the Equity of Redemption 98
Part Redemption (lump sum redemption) 98
Redemption – Vacating the Mortgage 98
Mortgages and debt Consolidation 99
Areas to consider before going into the arrangement 99
Variation of Mortgage Conditions 100
Factors that require a Deed of Variation: 100
Changing The Mortgage Term 102
Property Moves 102
Reasons for Moving 102
Costs 102
Re-mortgaging 103
Lender will assess as follows: 103
Second Mortgage (Second charge) 103
Letting the Property 104
Arrears 104
State Assistance to Borrowers in Arrears 107
Homeowners Mortgage Support Scheme 107
Support from Mortgage Interest 107
Mortgage Rescue Teams 108
Sources of Advice 109
Mortgage Rescue Schemes 109
Legal Remedies on Default 109
Possession 110
Council of Mortgage Lenders Possession Register 110
The Right of Subrogation 110
Equity Release 111
Lifetime Mortgages 111
Home Reversion Plan 111

Question Time Review for Unit 6 113

Answers & Additional Content:

Review: Answers for Unit 3 114

Review: Answers for Unit 4 116

Review: Answers for Unit 5 118

Review: Answers for Unit 6 120

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.