Applying Mortgage Advice Knowledge Flashcards

A client discloses a satisfied County Court Judgement (CCJ) from two years ago for £800. They are now applying for a mortgage. What is the most likely implication of this disclosure on their mortgage application?

Answer: Their choice of lenders will be restricted, and they may face a higher interest rate.

Lenders view adverse credit history, even satisfied CCJs, as an indicator of increased risk. This typically limits the applicant's access to the most competitive rates and products from mainstream lenders, restricting them to specialist lenders or specific product tiers that cater to this risk profile, often at a higher interest rate.

A couple is buying a property for £300,000. They have saved a £20,000 deposit, and a parent is gifting them a further £25,000 towards the purchase. What is the correct Loan to Value (LTV) for their mortgage application?

Answer: 85.0%

The Loan to Value (LTV) is calculated by dividing the mortgage loan amount by the property value. The total deposit is £45,000 (£20,000 savings + £25,000 gift). The required loan is £255,000 (£300,000 - £45,000). Therefore, the LTV is (£255,000 / £300,000) x 100 = 85.0%. Lenders will require written confirmation that the gift is non-repayable.

Which of the following is the primary factor used by lenders to assess affordability for a standard Buy-to-Let mortgage application?

Answer: The property's potential rental income relative to the mortgage interest payments.

For standard Buy-to-Let mortgages, the primary affordability assessment is the Interest Coverage Ratio (ICR). This calculation ensures the anticipated rental income is sufficient to cover the mortgage interest payments by a certain margin (e.g., 125% or 145%) at a stressed interest rate. While personal income can sometimes be used to support an application ('top-slicing'), the rental income is the primary consideration.

A client has a portable fixed-rate mortgage and is planning to move to a more expensive property, requiring an additional loan amount. What is a significant consideration regarding the additional borrowing?

Answer: The client will need to undergo a full affordability and credit assessment for the entire new loan amount.

Porting a mortgage is not an automatic transfer of the loan; it is a new application for the new property. The lender must conduct a full underwriting assessment, including affordability and credit checks, based on the client's current circumstances to ensure they can afford the total new mortgage amount. The additional borrowing is typically placed on a separate product from the lender's current range.

What is the primary purpose of a Mortgage Indemnity Guarantee (MIG) policy?

Answer: To protect the lender against financial loss if the property is repossessed and sold for less than the outstanding mortgage debt.

A Mortgage Indemnity Guarantee (MIG), also known as a Higher Lending Charge, is an insurance policy that protects the lender, not the borrower. It is typically required on high Loan to Value (LTV) mortgages and covers the lender for any potential shortfall if the borrower defaults and the sale of the repossessed property does not cover the outstanding loan. The borrower usually pays the one-off premium for this policy.

An adviser is assessing a client who is employed full-time, earns rental income from one property, and has a freelance business that is 6 months old. When presenting this case to a mainstream lender, how are the different income streams most likely to be treated for affordability purposes?

Answer: They will use the full-time employment income and rental income but are likely to disregard the freelance income.

Lenders prioritise stable and proven income. Guaranteed PAYE employment income is considered most reliable. Rental income is also commonly used, though often only a percentage is factored in. Newly established self-employed or freelance income (typically with less than 1-2 years of accounts) is often seen as too volatile by mainstream lenders and is likely to be excluded from the affordability calculation until a longer track record is established.