F. Other Types of Mortgages PDF

Terms for subsection: F. Other types of mortgage Term: 01. Mortgages on a foreign property Mortgages on a foreign property If someone wants to buy a property abroad they may raise the finance by: Taking a further advance on a mortgaged property in the UK Remortgaging an existing property for a highe...

Terms for subsection: F. Other types of mortgage Term: 01. Mortgages on a foreign property Mortgages on a foreign property If someone wants to buy a property abroad they may raise the finance by: Taking a further advance on a mortgaged property in the UK Remortgaging an existing property for a higher amount with same or different lender Taking a second charge with a different lender which is secured on a property that is already mortgaged; and Taking a first mortgage with an overseas lender secured on the foreign property (foreign mortgage) First three options dealt with by lenders in standard way as conventional applications for further advances, remortgages and second charges Lender will ask purpose of loan but it’s unusual for the purpose to influence whether it will be approved or not Loan from an overseas lender is possible for existing owner-occupiers and those who do not currently own a property Overseas lenders will often consider applications from non-residents especially if there is a strong demand from such customers A number of companies in the UK specialise in providing overseas mortgages Term: 01. Mortgages on a foreign property (2) Mortgages on a foreign property (2) However, there are many additional risks and other factors to consider for a prospective borrower shown in the table below. Factors to Consider Possible Consequences A mortgage taken in a foreign country will be denominated in the currency of that country The borrower is exposed to currency risk (unless they are paid in that currency) Overseas mortgages usually have interest rates that are fixed throughout the mortgage term The borrower is locked into that rate agreed at the start of the contract If a variable rate mortgage is available the borrower should consider that interest rates are typically more volatile than in the UK It is impossible to budget for the nominal monthly repayment and exchange rate risk Costs of buying property may be higher or lower than in the UK, but will almost always have to be assessed in relation to what is actually being paid As an example, in some countries it is necessary to involve a notary to oversee execution of the contract as well as a conveyancing solicitor The transfer of funds may be subject to long clearing periods, often up to 21 days This still applies in many European Union Member States Home buying process may be very different to that in UK In some countries, the equivalent of exchange of contracts takes place on completion date The system of land tenure is different to that in UK The rights and obligations attached to property / land should be understood before committing to purchase Property tax rates (the equivalent of stamp duty land tax – SDLT) are generally higher overseas than in the UK In some countries the equivalent of council tax or domestic rates is also higher (in USA for example) The laws of the country in which the property is purchases may require tax documentation, even if the owner remains non-resident For example, the buyer may need to obtain a tax reference number at the outset and complete an annual tax return thereafter Some countries, e.g. Malta, have restrictions to protect the ability of residents to afford a loan There may be a collar on the price at which a non-resident may purchase a property If purchasing a property using UK funding, the lender will not insist on a valuation A valuation is essential to ensure that the property represents good value and a sound security If building a property overseas there are additional risk factors For example, planning permission, building, connection of utilities etc Inheritance laws may be different to those applicable in the UK. For example, in Greece the rights of close family members override provisions in a will On death, persons other than those specified in the will as entitled to the property may have a right to legal ownership. For this reason, it is usually desirable to make a second will in the country where the property is located As the UK is no longer a member of the EU, UK Citizens the purchase of either a holiday home or permanent residence within the EU should be aware that an automatic right of residence not longer exists unless certain eligibility criteria for the country are met. Recommended Reading: Which? - Overseas mortgages explained Barclays offshore - International Mortgages HSBC – Overseas Mortgages Term: 02. Foreign currency mortgage on a UK property (1) Foreign currency mortgage on a UK property These are mortgages secured on a UK property and denominated in a foreign currency Commonly euros Loan amount and repayments expressed in that currency and if the loan amount/repayments need to be sterling the exchange rate at the time the loan is set up and repayments made will be used Therefore, the borrower is subject not only to changes in interest rates but also currency changes affecting the repayments and amount of capital owed when converted to sterling Interest rates charged are those applicable to the foreign country’s economy If the borrower has an income source in the currency from which they make repayments the currency fluctuations will not affect them unless the property is sold and the proceeds converted to sterling These factors can be to the advantage of the borrower but may also disadvantageous Borrowers should be aware of the other factors increasing the volatility of these mortgages Recommended Reading: Wikipedia - Foreign currency mortgage Coreco - Foreign Currency Mortgages FCA - Foreign Currency lending Term: 02. Foreign currency mortgage on a UK property (2) Foreign currency mortgage on a UK property FCA reinforced its MCOB rules following enactment of the Mortgage Credit Directive (MCD) The FCA has adopted the MCD definition of a foreign currency mortgage as a credit agreement where the credit is Denominated in a currency different to that which the borrower is paid in; or, Denominated in a currency different to that of an EEA member state in which the borrower is resident For example, borrower raises a mortgage in £/sterling but is paid in $ Borrower raises a mortgage in UK that is denominated in euro The regulatory status of the mortgage is determined at the time that the parties enter the contract MCOB rules (MCOB 2A.3)require firms to ensure that The customer has the right to convert the foreign currency mortgage into an alternative currency under specified conditions; or There are other arrangements in place to limit the exchange rate risk to which the customer is exposed The other arrangements may be a cap or a risk warning Where such a risk warning would be sufficient to limit any exchange rate risk to which the customer is exposed The firm is not compelled to make the warning specific to the individual borrower – but it may do so Lenders are required to advise a borrower with a foreign currency mortgage if there is an adverse exchange rate movement which means that either the total capital outstanding or the regular payments increase by 20% or more (MCOB 7A.4) Many large retail banks have offshore subsidiaries offering these types of loan, often with a choice of currencies These subsidiaries are usually registered in foreign jurisdictions meaning the borrower cannot rely on the Financial Ombudsman Service (FOS) or Financial Services Compensation Scheme (FSCS) Many jurisdictions now have their own domestic versions of these schemes Details of these are available on the websites of relevant regulatory authorities Term: 03. Mortgages for self and new build projects (1) Mortgages for self and new build projects Self-build is where a person purchases a plot of land to build a house for themselves or they will hire a builder to do it for them New build is where the new home is supplied by the builder in kit form to be erected on site Costs typically funded by either: Buying the land themselves, contributing a portion of the building costs and obtaining a mortgage for the remainder Loan is usually released in stages as the work progresses; or Financing the land cost, building and architect fees fully through a mortgage Lenders will usually lend 95% of the costs releasing funds in three of four stages So there is no need to get bridging finance for intermediate bills For self-builds lender will insist that builder is a member of NHBC or something similar If not the case the minimum requirement will be that construction is supervised by a qualified architect In every case lender requires a final inspection by someone suitably qualified to ensure work complete Term: 03. Mortgages for self and new build projects (2) Mortgages for self and new build projects Two types of stage payment: In arrears, with payment released once specific stages of the build are completed In advance, payment released before work on each stage commences Self-build projects are high risk for borrower and lender For the individual the project management aspects may be daunting Even well organised projects can be affected by unexpected problems For the lender the worst case scenario is that the borrower abandons a part complete project or ceases work with no clear plan to resume May lead the lender to take possession of a part completed property Could be worth less than site value Due to costs of demolition and clearance Self-build remains attractive for a niche group of customers Particularly those seeking to build holiday or retirement homes. Recommended Reading: Halifax Intermediaries - Mortgages for self-build Money.co.uk - Compare Self-build mortgages MoneySuperMarket - Self Build Mortgages Term: 04. Mortgages with a high loan to value Mortgages with a high loan to value Some borrowers, such as first time buyers, do not have funds of their own / only have a limited amount of funds to put towards a purchase Some lenders will lend 95% or more of the LTV but will make a higher lending charge If renovation work is required for the property lenders were, at one time, willing to lend over 100% of the LTV Through a mixture of secured and unsecured lending Building societies cannot lend more than 100% - so anything over this is unsecured Since sub-prime crisis of 2007/08, availability of this loan type practically non-existent The main exception is loans arranged through the Government’s Help to Buy Equity Loan scheme (and the now withdrawn NewBuy scheme) Recommended Reading: Love Money - High loan to value mortgages Unbiased - How the loan to value affects your mortgage Term: 05. Right to buy mortgage Right to buy mortgage For right to buy – see section 4 Term: 06. Mortgage for a buy to let property Mortgage for a buy to let property A buy to let mortgage enables an individual/entity to buy a rental property with a loan secured on it Borrower aiming to produce income and get long-term capital growth from the investment This market is lucrative for borrowers and lenders Property has been a good hedge against inflation over long-term Lender has collateral that usually increases over time Borrower builds wealth that can be liquidated in future years or passed to future generations Many risks with buy-to-let: No guarantee that property prices will rise or that will be steady demand for rental properties Property may be untenanted for periods meaning no rental income Tenants may not maintain property If financial difficulties arise the owner may not be as committed to taking suitable action to keep the property as they would be in respect of their own home As with the residential house market the buy-to-let market has ‘hot spots’ where there is high demand for rental properties and areas where much lower Most mainstream lenders offer buy to let mortgages Usually subject to more restrictive lending criteria than standard mortgages Also many specialised lenders that offer tailored buy-to-let products Main difference between buy to let and standard mortgage is that a buy-to-let mortgage is usually underwritten on basis of projected cash flows from rent Many lenders require prospective rent of 120-125% of the mortgage payment allowing for surplus during non-occupancy periods Applicant’s personal status also considered Recommended Reading: Skipton International - Choosing a buy to let property Halifax - The Range Uswitch - Find the best buy-to-let mortgages This is Money - Ten tips for buy-to-let: the essential advice for property investors Term: 06. Mortgage for a buy to let property (2) Statement of best practice on buy to let mortgage lending In April 2015, the Council of Mortgage Lenders (now part of UK Finance) issued a statement of best practice Aims to ensure there is a clear explanation of the obligations of buy to let borrowers in respect of their mortgage contracts Also indicates the availability of information from other organisations About the responsibilities of being a landlord Statement of best practice has been endorsed by: Residential Landlords Association Association of Residential Letting Agents The Association of Mortgage Intermediaries The Intermediary Mortgage Lending Association The British Bankers Association (now part of UK Finance) The statement sets out principles that lenders should use in relation to: Lending principles Information provided to customers Customer responsibilities Lender responsibilities in respect of affordability Handling borrowers in financial difficulty Fraud prevention Complaint handling Term: 07. Introduction to equity share mortgages Introduction to equity share mortgages Shared ownership (equity share) and shared appreciation mortgages are designed for those who would not otherwise be able to make their first move onto the property ladder to buy a property with the help of a mortgage that is affordable Under these arrangements the lender or another body will take a stake in the property Reducing the size of mortgage required so monthly payment is less Recommended Reading: MoneyHelper - Shared Equity or partnership mortgages Leeds Building Society – Shared Equity and Shared Ownership Mortgages Unbiased – Shared Equity Mortgages Term: 08. Mortgage for a shared ownership property Mortgage for a shared ownership property Most common equity share arrangement is shared ownership mortgage Purchasers buy a share – usually 25% or 50% of the property and the remainder owned by the lender or, more commonly, a housing association Schemes operated by housing associations at a local level Housing associations are not for profit organisations set up to provide affordable housing for sale/rent or element of both Many are registered social landlords When part share bought, purchaser pays mortgage repayment on capital borrowed and rent to owner of remainder of the property If property sold, borrower entitled to capital from the sale on pro-rata basis Depending on share owned Shared ownership mortgage is flexible in that borrower can buy additional shares of property up to 100% For example could go from 50% to 75% to 100% A process sometimes called staircasing Shared ownership often organised on basis of partnership between lenders, housing associations and local authorities Earliest schemes established late 1970’s by the (then) Abbey National Building Society in cooperation with Abbey Housing Association and Tower Hamlets local authority in London More schemes introduced during urban regeneration initiatives in; Bristol, Liverpool and other major cities during early 1980s Currently small but established secondary market for properties sold on shared ownership basis Shared ownership can also work the other way with some lenders having rescue schemes for those experiencing financial difficulties If appropriate the lender may permit the borrower to sell a share of the property to a housing association Reducing the mortgage payment and replacing this with rent payable on the share owned by the housing association Lenders are cautious when considering this as in many cases it may fail to address the underlying financial issues Also an issue that borrowers may feel they are being treated unfairly when the package is available to some and not others for reasons they don’t understand Recommended Reading: MoneyHelper - What is Shared Ownership Property? Shared ownership org - Share to Buy Money co uk - Compared shared ownership mortgages Term: 09. Shared appreciation mortgage Shared appreciation mortgage Second less common version of equity share is shared appreciation mortgage Pioneered by Nationwide Building Society in 1980s Under the scheme (using powers conferred by Building Societies Act 1986) lender provided mortgage at low interest rate and in return took a stake of equity in the property when it is sold This had effect of reducing monthly payment (early years large portion of monthly payment is interest) enabling buyer to get into the market earlier than they would have been able to Only attractive to lenders when property prices rising and slump of 1990s killed the momentum for this scheme Few such schemes still exist Recommended Reading: Investopedia - Shared Appreciation Mortgage Ellis Jones - Shared Appreciation Mortgage This is Money - Shared Appreciation Mortgages Term: 10. Equity release Equity release Many older people own a property on which they have no or a very low mortgage (a major asset) whilst simultaneously struggling to afford daily living costs Equity release provides a way of using the value of the property to improve finances Two main scheme are the lifetime mortgage and the home reversion plan A lifetime mortgage – works on same principle as shared ownership with two main distinctions: Only available to older applicants – typically aged over 55 but this is provider policy not a legal or FCA requirement; and No prescribed redemption date – so it is captured under the FCA’s definition of a regulated lifetime mortgage contract (see chapter 13) Lifetime mortgages are mainly offered by insurance companies and some specialist providers Some mainstream mortgage lenders have recently re-entered the market Home reversion plans Serve a similar purpose to lifetime mortgages Home owner is able to free up equity by selling the property or a proportion of it to a reversion company Price paid is much less than market value but scheme enables more money to be raised than through a lifetime mortgage Owner is able to stay in the property until death or earlier move into a care home Not a mortgage but regulated under MCOB A niche market that is dominated by a small number of specialist lenders In 2020 only two providers were active in the home reversion market Lifetime mortgages are currently a more popular method of releasing equity Recommended Reading: Equity Release Centre - Different types of lifetime mortgages MoneyHelper – Equity Release Aviva - Equity Release Term: 10. Equity release (2) Retirement interest-only (RIO) mortgages Retirement interest-only mortgages introduced to address problems encountered by borrowers with interest-only mortgages who face a shortfall at the end of mortgage term Often due to underperformance of repayment vehicle RIO’s allow borrower to raise funds equal to the shortfall amount No interest is payable unless borrower decides to do so Capital and any interest accrued is payable from estate when borrower dies, or earlier if they decide to sell the property Initially RIO mortgage were classed as lifetime mortgages but FCA now class them are regulated mortgage contracts Term: 11. Islamic law and home purchase plans Islamic law and home purchase plans According to FCA handbook – ‘A home purchase plan serves the same purpose as a regular mortgage – it provides consumers with finances for buying a home – but it is structured in a way that makes it acceptable under Islamic law. As interest is contrary to Islamic law, a home purchase plan is in essence a sale and lease agreement’ Home purchase plans often generically referred to as Islamic mortgages Koran promotes doctrine of ‘riba’ which forbids charging of interest on loans Therefore, devout Muslims living in countries like the UK where charging of interest is integral to loans can find it difficult raising finance for a house purchase Islamic banks have devised products to help with this problem – Koran compliant ways of raising finance for a house purchase available from UK branches Recently a high street bank started to offer these with 2.5 million Muslims living in UK – more likely to follow Recommended Reading: Islamic Mortgages Compare the Market - Islamic Mortgages Unbiased - What is an Islamic / Sharia Mortgage MoneyHelper – Sharia Compliant Mortgages Bank Rate – Guide to Islamic Mortgages DV Solicitors – Islamic Mortgages Term: 12. Home purchase plans ljara Home purchase plans ljara Most common and popular form of Islamic home finance is ljara Involves bank buying the property and leasing it to the customer Lease agreement will show the customer’s right to occupy the property Customer will make monthly payments to bank – part of this applied to purchase the property and part is rent By the end of the agreement term the property will have been bought from the bank – lump sums can be paid anytime to reduce or pay off the purchase price balance Payments fixed for 12 months at end of which the rent/repayment is reassessed Unlike a conventional mortgage where the lender never legally owns the property with Islamic finance, based on this model, the bank owns the property and is ‘bought out’ over time Term: 13. Home purchase plans Murabaha Home purchase plans Murabaha Variation is the Murabaha system – bank buys property and immediately sells it back to customer at a higher price This is paid off over a term of up to 15 years Repayments are fixed so similar to fixed rate mortgage Providers prefer to stress the differences to a conventional mortgage as opposed to similarities Maximum terms, income multiples and percentages of property values tend to be lower than conventional mortgage A reason behind a surge in interest in Islamic mortgages was the decision by the government to abolish the double stamp duty charge that applied to them Previously as the financer bought the property and it was then gradually bought by the occupier stamp duty had to be paid for both transactions As of 1 December 2003 this was reclassified as one transaction, reducing cost Term: 14. Mortgages for applicants with impaired credit ratings Mortgages for applicants with impaired credit ratings Revised MCOB rules from April 2014 fundamentally changed the market for sub-prime mortgages A mortgage that doesn’t meet a mainstream lender’s typical approval requirements Affordability assessment is now required in all cases Some of practices prevalent in the non-status market before the new MCOB rules were introduced are now no longer allowed However, there will still be many existing borrowers who arranged their loans under the previous regulatory regime Some lenders specialised in lending to ‘non-status’ borrowers Borrowers with impaired / low credit ratings Under to obtain a mortgage under normal terms Sub-prime (non-prime, non-conforming or non-status) applicants include self-employed applicants with less than 3 years’ accounts, those with multiple jobs, workers on short term contracts, those buying a property to let to others and credit impaired Credit impaired include ex-bankrupts, people who have defaulted on mortgage/rent payments and with County Court Judgements (Court Decrees in Scotland) against them. Failure to meet financial commitments in the past could have resulted from a one off business downturn, redundancy period, ill health or marriage breakdown May simply have been unfortunate enough to live at a property previously inhabited by a debtor Under traditional credit score these types of applicants would be treated as higher risk and not eligible for a prime mortgage on standard terms An affordability assessment is now required in all cases Some lenders may still seek business from credit impaired customers but affordability assessment must be as rigorous as for ‘prime’ customers The practice of ‘self-certification’ (taking the borrower’s word on income etc.) is no longer allowed Term: 14. Mortgages for applicants with impaired credit ratings (2) Mortgages for applicants with impaired credit ratings (2) Interest rates typically variable and expressed as base rate plus a certain percentage The additional percentage is determined by the risk involved Sub-prime rate for self-cert mortgages is around 1% more than standard rates; and Rate for credit repair mortgages can be 3-4% above standard rates Specialised lenders more prepared to lend in such cases at a higher rate Under MCOB rules, classed as sub-prime and lender is obliged to make an assessment of affordability and suitability when processing Recommended Reading: Sub-Prime Lending Money Super Market – Sub-prime Mortgages Online Mortgage Adviser – Sub-prime Mortgages Term: 15. Mortgages for commercial purposes Mortgages for commercial purposes A limited company has separate legal personality in law Can own its own assets and incur obligations separate from owners/managers of company Can be held responsible for actions in criminal and civil law When limited company enters a borrowing contract it is the company that’s liable to pay Therefore, in event of default lender has to take action against the company with money coming from company resources Therefore many lenders have special lending policies for limited companies Conditions reinforce lender’s position if the company is unable to pay If personal guarantees are required as a condition of the loan, guarantor should be advised to seek independent legal advice If the guarantee is supported by a charge over matrimonial home spouse/partner should be joint guarantor and also advised to seek independent legal advice Underwriting requirements of a limited company similar to those applying to an unincorporated trader Lender requires: Details of directors and company Secretary and, if the company has owner-directors, who owns the shares and in what proportion Private limited companies are no longer required to have a company Secretary under Companies Act 2006 Three years of financial accounts Confirmation that the applicant is authorised to apply For example, board minutes showing this Business plan Possibly cash flow projections Some lenders also insist on seeing the Memorandum and Articles of Association If a company is owned by one or very few shareholders who are actively engaged in everyday work of the business lender can treat application in different ways depending on lending policy: May lend to company on basis of earned profits May lend to individuals based on wages drawn from company Term: 15. Mortgages for commercial purposes (2) Mortgages for commercial purposes (2) A small company with few shareholders is similar to unlimited partnership even though constitutionally different Main consideration is that business has sufficient cash flow to service the debt in the foreseeable future When dealing with commercial entities, the lender is obliged under the money laundering/ terrorist financing regulations to carry out due diligence checks If the ownership and management structure is opaque and complex, the lender must satisfy itself as to the persons who act as the 'mind and management' of the company Semi-commercial mortgages A semi-commercial mortgage is a loan on a property that has a combination of uses, one of which is residential A good example of this is a shop with living accommodation directly above it Mortgage applications on such properties are considered in the same way as loans to businesses, though lending policy may be explicit on certain features of such properties and related matters The lender may: impose limits on the value or number of loans outstanding in a particular locality limit the types of business that will be considered specify that the owner of the business and the occupant of the residential accommodation must be the same person One special problem here is that where there is a commercial element to the proposition, property values can be much more volatile in the short term than for residential properties. Again, lower loan to value or shorter lending terms may apply. The interest rate structure may also be different than for purely residential properties Recommended Reading: Commercial mortgages HSBC - Commercial Mortgage Moneysupermarket - Commercial mortgage guide Equifax – What is a Commercial Mortgage Barclays – Commercial Mortgages GoCompare - Commercial mortgages MoneySuperMarket - What is a commercial mortgage? Limited companies Online mortgage advisor- Advantages of a Limited Company Tutor 2 U - Study notes Term: 16. Green Mortgages Green mortgages In recent years there has been increasing concern about the effects of climate change on future generations This is reflected in changes in Government policy, such as the promotion of energy efficiency, and also public opinion, as an increasing proportion of the population now consider it important to live in an environmentally sustainable way Green mortgages are now offered by several lenders. Their features do not differ from conventional types of mortgage, so they can be offered as fixed or variable rate mortgages, with cashbacks or discounts and so on Eligibility for the products depends on the property meeting pre-determined criteria relating to energy efficiency To qualify for a green mortgage, the customer must be: purchasing or living in an energy-efficient home (typically with an energy performance certificate rate of A or B); or carrying out home improvements consistent with a sustainable lifestyle. These may include wall or loft insulation, replacing single-glazed windows, replacing boilers with heat pumps or installing electric vehicle charging points If the property offered as security meets the criteria laid down by the lender, it may be possible to borrow at a lower interest rate than for conventional mortgages or to qualify for other incentives, such as cashbacks Green mortgages may be the only products offered by financial institutions that have been established as 'ethical institutions', such as Etica Bank, Ecology Building Society and Triodos Bank. however, mainstream lenders are increasingly committing themselves to similar developments, reflecting their stakeholders' concerns Recommended Reading: ABC Finance - Semi commercial mortgages Ascot Mortgages – Semi-commercial Mortgages Term: 17. Changing mortgage product Changing mortgage product A product transfer is where a borrower with a particular mortgage product changes to another one provided by the same lender For example, a borrower moving from a fixed rate to a discounted rate Several reasons why a borrower may switch from one mortgage product to another: Conditions in current product may be due to change Leading to additional cost or less favourable terms The introduction of a new, and more attractive, product Customer circumstances may have changed Market conditions may have changed Customer realising they previously took out the wrong product As long as the borrower meets normal lending criteria the lender will normally be happy to allow a product switch Lender may impose certain terms and conditions For example, a switch from a fixed rate to a variable rate product would normally involve payment of a fee The lender will have priced the fixed rate product on basis that customer remains on that rate for the entire fix period Lender will generally be happy to allow a switch if there are no arrears or if arrears are within certain limits Alternatively, the lender may specify that a switch is only allowed if not more than a certain number of payments have been missed in the last 1 / 2 years A borrower may only be allowed to switch if they have had their current product for an agreed minimum period or only if the current balance is above a specified minimum amount It is possible that a switch is only available to those borrowing for residential purposes