CeMAP The Mortgage Application Process 5 — Questions and Answers
Question 1: What is the main purpose of anti-money laundering (AML) checks during the mortgage application process?
- To assess the borrower's credit rating
- To verify the identity of the borrower and confirm that funds used are from legitimate sources (Correct answer)
- To comply with the Mortgage Credit Directive
- To calculate the correct stamp duty liability
Correct answer: To verify the identity of the borrower and confirm that funds used are from legitimate sources
AML checks are legally required to verify the borrower's identity and confirm that any deposit or funds being used have a legitimate, traceable source.
Question 2: When is a Higher Lending Charge (HLC) typically applied by a lender?
- When the borrower is self-employed
- When the loan-to-value exceeds a certain threshold, often 75% or 90% (Correct answer)
- When the property is a new build
- When the borrower applies for a fixed-rate product
Correct answer: When the loan-to-value exceeds a certain threshold, often 75% or 90%
An HLC (formerly known as a Mortgage Indemnity Guarantee) is charged by some lenders when the LTV exceeds their threshold, to cover the increased risk of default.
Question 3: A borrower's application is referred for manual underwriting after an automated assessment. What does this most likely mean?
- The application has been automatically approved with conditions
- The automated system could not make a definitive decision and a human underwriter will review it (Correct answer)
- The application has been declined and no further action is possible
- The lender requires a full structural survey before proceeding
Correct answer: The automated system could not make a definitive decision and a human underwriter will review it
A referral to manual underwriting means the automated scoring system flagged the case for human review, often because the application falls outside standard lending criteria.
Question 4: Which of the following best describes a 'repayment' (capital and interest) mortgage?
- Monthly payments cover only the interest; the capital is repaid at the end of the term
- Monthly payments cover both interest and capital, guaranteeing the mortgage is fully repaid at the end of the term (Correct answer)
- The borrower pays a lump sum at the start and interest only thereafter
- Capital is repaid via a linked investment vehicle such as an ISA or pension
Correct answer: Monthly payments cover both interest and capital, guaranteeing the mortgage is fully repaid at the end of the term
A repayment mortgage reduces the outstanding capital with each monthly payment so that, provided all payments are made, the loan is fully repaid at the end of the agreed term.
Question 5: What is the significance of 'exchange of contracts' in the property purchase process?
- The mortgage offer is formally issued by the lender
- The buyer and seller become legally bound to complete the transaction (Correct answer)
- The property valuation is confirmed by the lender's surveyor
- The borrower signs the mortgage deed
Correct answer: The buyer and seller become legally bound to complete the transaction
At exchange of contracts, the transaction becomes legally binding and both parties are committed; withdrawal after this point can result in significant financial penalties.
Question 6: Under the Consumer Credit Act, what is a key characteristic of a second charge mortgage regulated under its provisions?
- It must be arranged by the same lender as the first charge
- The borrower has a 14-day right to withdraw after signing the agreement (Correct answer)
- It is only available to borrowers over the age of 55
- Interest rates on second charges are capped by law
Correct answer: The borrower has a 14-day right to withdraw after signing the agreement
Regulated second charge mortgages carry a 14-day cooling-off period under the Consumer Credit Act, during which the borrower can withdraw without penalty.
Question 7: What does 'completion' mean in the context of a mortgage and property purchase?
- The lender finalises the mortgage offer document
- The legal transfer of ownership occurs and the mortgage funds are released to the seller (Correct answer)
- The borrower signs the mortgage application form
- The conveyancer submits searches to the local authority
Correct answer: The legal transfer of ownership occurs and the mortgage funds are released to the seller
Completion is the final stage of the property purchase when the mortgage funds are released, the purchase price is paid to the seller, and legal ownership passes to the buyer.
CeMAP The Mortgage Application Process 5
What is the main purpose of anti-money laundering (AML) checks during the mortgage application process?