In assessing the status of an applicant for a further advance, the lender will look at the same areas that are critical to a mortgage application.
1.2.1.2.1 Personal circumstances of the borrower
It cannot be assumed that the borrower has the same or a better income than when the original advance was granted. Income and occupation must be checked in respect of every party to the mortgage.
The lender must obtain comprehensive details of regular and irregular expenditure. Other borrowings will be of particular concern, as well as normal household expenditure. Lenders will usually reduce the amount they will lend to take account of a customer’s other loan commitments.
If a customer’s outgoings seem on the high side, one option might be, on repayment mortgages, to consider extending the term of their existing mortgage to reduce monthly payments.
1.2.1.2.3 Family circumstances
An assessment must be made of overall family circumstances. The number of dependants will often affect the ability to repay the loan.
Since the original advance was made, one party to the mortgage may have left the home or others may have moved in. If the former applies, it is unlikely that the person who has left will take on an additional debt burden with no benefit. In the latter case, the lender will require a ‘consent for mortgage’ form to be signed by the person who is not a party to the mortgage, to waive rights of residence. This would also apply to children who are 17 or over when the further advance is made and intend to live in the property as their main home.
1.2.1.2.4 Conduct of existing account
It is necessary to look at any account history to see that the applicant for the further advance has been a good payer – this can be readily established by looking at the records. Many lenders adopt a practice of insisting that arrears be cleared before a further advance is considered, no matter how small or insignificant these might appear. Where the borrower had problems in the past but has since maintained the account in a satisfactory manner for a number of years, it is unlikely to influence the lender’s decision if all other factors are satisfactory.
1.2.1.3 Assessment of security
When considering a further advance, the lender will need to reassess the security on which it will be based.
The size of the loan will be constrained by value. Since the original loan was granted, the property may have increased or decreased in value. Even if work has been done to improve the dwelling, there is no guarantee that this will have automatically enhanced its value. Since the property slump of the 1990s confirmed that the value of property can fall as well as rise, it cannot be assumed that an existing mortgaged property will have increased in value since the original mortgage was granted.
If the original loan-to-value figure was high, it may be necessary to commission a new valuation to determine whether the property offers sufficient security for the higher borrowing commitment. In other cases it may be obvious that the property is adequate as security.
Many further advances are for home improvements. In such cases, the lender may be prepared to consider the enhanced value of the property once the work has been completed. Before doing so, plans and estimates will be required and, in case of some structural alterations, evidence of planning permission. Work may be subject to final inspection by a suitably qualified person.
The overall loan-to-value ratio is the most crucial factor here: this is the outstanding debt plus the further advance as a percentage of the value of the property. The lender will also wish to ensure that total new borrowing will be in line with its standard income multipliers.
1.2.1.3.3 Location and neighbourhood
Property experts regard location as the most critical factor in property value. This needs to be assessed from a long-term viewpoint: is the area new or mature; is it improving or declining; what plans are in place to develop infrastructure and local amenities; are there imminent plans to build roads or housing estates that might increase or reduce eventual value?
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Example In a ten-year period, one village in the Midlands experienced the following changes: • a new ring road constructed less than half a mile away; • a sewage plant constructed adjacent to the village; • a juvenile remand home opened less than half a mile away; • high density local authority housing was erected in the village, eliminating its ‘exclusive’ image to potential purchasers. |
If the loan is for improvements or repairs, these must be consistent with conditions imposed by local authorities or national town and country planning legislation. Failure to take sufficient account of these factors can result in work being carried out, only to have the local authority impose an enforcement order to undo what has been done.
There are specific obligations for building societies under the Building Societies Act 1986 (as amended by the Building Societies Act 1997) to assess the adequacy of security for each and every mortgage to be secured on land. This does not necessarily mean that a new valuation should be made for all applications; societies can satisfy their statutory obligations as long as an assessment is made, which may or may not require a valuation to be carried out (ie they may be happy to assess the further advance based on the original valuation, if it is not too old). If in any doubt, however, the society will instruct a valuer to make an inspection to make doubly sure that they are in full compliance with the law.
Other lending institutions have no similar statutory duties: their engagement of the services of valuers is purely a matter of prudent lending practice.
The lender must balance two sets of factors that can conflict:
• the need to obtain good quality lending business and sales of related products; and
• the need to lend within acceptable risk parameters.
Generally, it is necessary to consider further advances in the context of the overall risk exposure of the institution. This implies treating the application in much the same way as the original loan.
Although marginal mortgage applications can often be appealing to the lender because of the prospects of lucrative future cross-sales of mortgage-related services, this is not necessarily a good reason to lend in itself. Short-term gains from commission earnings can quickly be eroded by longer-term losses arising from default.
There are a number of other factors that a lender must consider when looking at an application for a further advance.
1.2.3.1 Variation of conditions
When a further advance is made, it enables the lender to reconsider the conditions applicable to the entire lending agreement. Such conditions might include:
• interest rates;
• fee and charge structure;
• conditions applicable to the parties to the mortgage;
• covenants concerning the property.
1.2.3.2 Postponement of second charges
A second charge is a right over the mortgaged property exercised by a lender subsequent to the first mortgagee. A legal mortgage that does not enjoy the security of the deposit of title deeds is known in law as a puisne (pronounced ‘puny’) mortgage. Most of these loans are made by banks and finance houses. Building societies are constrained by law on the amount they can in respect of properties subject to second and subsequent charges.
The priority of legal mortgages is governed by the Law of Property Act 1925, which states that the priority is determined by the date of registration.
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Example If lender A advances £20,000 on a property worth £40,000 on 1 August 1993 and lender B enters into a secured arrangement for £10,000 the following year, clearly lender A’s mortgage has priority over that of lender B. In the event of default, A will be repaid first and so incurs lower risk. If lender A makes a further advance of £5,000 two years after the original one, however, this £5,000 will take third priority after the original two loans – effectively, a higher risk than both. Lender A may not be prepared to take his place in a line of mortgagees due to the increasing risk of being paid out last. In some instances, Lender A will persuade lender B to postpone its prior charge in favour of the new one – if it does not agree, lender A may offer a mortgage to consolidate the whole debt and lender B will lose out altogether. |
To set aside a second charge, a deed of postponement must be executed. The process of adding a subsequent mortgage to an original one having postponed an intervening second charge is called tacking.
The only exception to the priority rule occurs when an original mortgage deed obliges the lender to make subsequent loans. Here the original mortgagee takes priority, irrespective of dates of subsequent charges.
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Example A relatively new type of loan permits a form of revolving credit to be drawn down over and above the amount of the main mortgage. For example, borrower X obtains a mortgage from lending institution Y comprising: • £25,000 towards purchase of the property, which is worth £40,000; • £10,000, which can be drawn down at will, provided the overall indebtedness on this separate account does not exceed the £10,000 agreed. As the mortgage deed commits the lender at the outset to a whole series of subsequent advances, they are all first mortgages and lender Y will have priority over second charge holders. |
The ranking of securities in Scotland is governed by the Conveyancing and Feudal Reform (Scotland) Act 1970. The holder of a first security receives notice of a second or subsequent (postponed) security. The previous ranking of the prior lender is then restricted to cover his existing advances, interest and expenses. The provisions of the Act may, however, be varied between the debtor and creditor by a ranking agreement.
1.2.3.3 The higher lending charge
If the existing mortgage exceeds the loan-to-value ratio threshold (typically 75%) for the higher lending charge, a further advance will increase the exposure of the lender, requiring a new higher lending charge to be written. This will require an additional premium to be paid by the borrower (or debited to the mortgage account).
The further advance may take a loan that is not currently subject to a higher lending charge above the threshold. In this instance, it will be necessary for the lender to require a higher lending charge policy to be written, with the premium payable by the borrower or debited to the account.
Quite apart from higher lending charge considerations, many lenders have different policy criteria applicable to mortgages in excess of a specified loan-to-value figure.
Further advances for home improvements or alterations are made subject to the ability of the borrower to obtain all necessary planning. As we saw earlier, planning regulations are contained in a number of pieces of legislation, primarily the Town and Country Planning Act 1990. If changes are made, it is unlikely that the local authority would grant retrospective planning consent, leaving both lender and borrower in a potentially disastrous position.
Listed building consent is required where the owner wants to demolish a listed building or change or extend it in a way that would affect its character as a building of special architectural or historical interest (as explained in Unit 3). Such work is covered by statutory legislation – primarily the Listed Building and Conservation Area Act 1990. As with planning consent, any changes made without listed building consent may result in the local authority requiring reinstatement to the previous position.
1.2.3.4.2 Architect’s certificates
If work is not being carried out by a member of the NHBC, the lender will require work to be signed off by a professionally qualified architect. This confirms that the job has been done to a required standard. Typically, either an architect or surveyor will be appointed to oversee the work whether or not the work is carried out by an NHBC member.
The architect’s costs can be substantial and are, of course, the responsibility of the borrower. A typical fee is 12.5% of build cost. This can increase as the level of supervision increases.
1.2.3.5 New (additional) occupants
When a new person moves into a property they are not usually party to any existing mortgage. Consequently, when a further advance is made the lender has two options:
• it can insist that any new resident signs a ‘consent to mortgage’ form to waive rights of residence to prevent the creation of an overriding interest;
• it can permit the new occupant to become a party to the mortgage, subject to status, and hence become jointly and severally responsible for the debt – this requires a variation of the mortgage deed if the new occupant is prepared to take on the obligations imposed by the deed.
If the mortgage adviser becomes aware of a tenant living in the property, under no circumstances should the status of the tenancy be recognised formally – this can affect the ability of the lender to obtain vacant possession in the event of default.
If a customer wishes to borrow further money there may be options other than a further advance: if a customer has a drawdown mortgage, it may be possible to draw down the required funds; if he has a flexible mortgage, it may be possible to miss some mortgage payments and accumulate the money in this way.
A remortgage is simply a replacement loan for one already in force. The existing loan may be with the lender carrying out the remortgage or with a different lender.
The need for a remortgage from the same lender is rare. Nearly all mortgage deeds have clauses allowing a further advance to be made without having to draw up a new deed. Where such a clause does not exist, it is often possible to create a deed of further charge supplementary to the original.
1.4 Second mortgage (or second charges)
A second mortgage is one secured on the same property by a lender other than the first mortgagee. Second mortgages are offered by some banks and virtually all finance houses. By contrast, building societies tend not to offer these unless they already hold the first charge.
Although the second charge is secured on the property, it ranks after prior charges. This means that the lender is taking a higher level of risk than with a conventional mortgage, and will charge a higher rate of interest to reflect that risk. An example of where a second mortgage might be advantageous is shown below:
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Example Jazad and Marie have a property valued at £200,000 and a mortgage of £145,000. They wish to borrow a further £20,000 to build a conservatory. Their existing lender applies a higher lending charge on loans over 75% LTV. This means a higher lending charge on £15,000 of the loan. Taking a second mortgage might incur a higher interest rate but they will avoid the higher lending charge, which might work out as a better deal for them. |
If another lender is approached for additional finance, a questionnaire will be received by the existing lender making enquiries about the conduct of the account and details of the mortgage. In applying for the second mortgage, the applicant will have given consent for this information to be released. A lender is not obliged to supply information to the second lender and a fee is normally charged for supplying the information.
If the second mortgage is granted, the second lender will notify the first mortgagee and will create a charge on the property.
Sometimes, if the conduct of the loan deteriorates significantly, first and second mortgagees will co-operate on litigation for recovery.
The existence of a second charge can be an early warning sign of problems, especially if the borrower has already been turned down for a further advance by the first lender. In particular, finance houses tend to charge higher rates of interest, commensurate with higher risk, indicating that the borrower may be more than anxious to secure a lump sum urgently. Alternatively, the borrower may be capable of taking on the extra debt without the risk of inability to service both loans.
If a mortgage is in default, the lender will eventually proceed to possession and exercise its power of sale to recover the debt. The holder of the first charge (the original lender) takes what is legally due to it from the proceeds then passes the balance of the sale money (if any) to the second mortgagee (the second lender), who takes what is due to it. When all lenders have been satisfied, the balance, if any, is passed to the borrower.
There might even be third, fourth and even subsequent mortgagees, all with loans secured on the same property.
Bridging finance may be required when a borrower moves house and the date of disposal of the existing property falls after the date of acquisition of the new one.
There are two types of bridging finance:
• open bridging arises when a borrower seeks to take out a new mortgage without having obtained a buyer for the existing mortgaged property – this can represent a high risk because there is no guarantee that the latter will be sold within a reasonable period of time, and borrowers should be advised to think very seriously before committing to this arrangement;
• closed bridging arises when the person buying already has a firm buyer for the existing property – this is less risky.
Bridging finance is offered by all banks and some of the very largest building societies. For obvious reasons, lenders are much more prepared to lend in closed bridging situations than open bridging ones.
1.5.1 Advantages and disadvantages of bridging
There are few advantages of open bridging, other than enabling the borrower to complete the purchase of the new property more quickly than would otherwise be possible. It can impose a heavy financial burden on the borrower for quite a long period of time, particularly if he has an inflated view of the value of the property that is on the market.
Closed bridging, however, provides a valuable service:
• it enables a purchase to go ahead that otherwise might break down as a result of the purchase/selling chain being irrevocably disrupted;
• it can usually be obtained at a reasonable rate – and if the borrower sets aside funds during the bridging period, there should be no problems.
There are a few significant disadvantages, even with closed bridging:
• bridging is yet another cost at a time when the borrower is already incurring many other outgoings;
• arranging a bridging loan requires yet another negotiation with the bank manager, involving time and expense;
• many borrowers believe that they pay ‘over the odds’ for bridging finance, particularly when the need for such funds is underestimated.
The practice of many developers in taking properties in part exchange has reduced the need for bridging finance to some extent.
Test your knowledge and understanding with these questions
Take a break before using these questions to assess your learning across Section 1. Review the text if necessary.
Answers can be found at the end of this unit.
1. Walter and Alice have a mortgage with the Providential Building society. They wish to extend the mortgage by a further £18,000 to add another en-suite bedroom to their house. What would be the position of the further advance in relation to the Consumer Credit Act? Explain your answer.
2. Walter and Alice’s proposed extension will increase their detached house from its original size of 600 cubic metres to 700 cubic metres. The extension will follow the existing roof line at the back of the house. What will the lender need to see before agreeing to a further advance?
Answer true or false to the following statements.
3. Any loan of up to £25,000 for a property extension is exempt from regulation by the Consumer Credit Act 1974.
4. If an application for a further advance shows that a borrower's income has greatly reduced, the lender can call in the original loan.
5. The value of the security should be reassessed if a further advance is requested.
6. A ‘puisne mortgage’ is one where the lender does not have possession of the title deeds.
7. A ‘remortgage’ is a replacement loan for one already in force and is always with a different lender.
8. Closed bridging is seen as riskier than open bridging.
9. A £10,000 loan to buy a car, secured on a first charge basis, would be covered by consumer credit regulations.
10. Listed building consent will be required where the owner wishes to demolish a listed building.
Answers
1. The loan will be exempt because:
• it is for the improvement/enlargement of their main dwelling house; and
• the original loan is with the same lender.
2. They will need to see evidence of planning permission.
3. False: the loan will only be exempt if it is also from the same lender as the original mortgage.
4. False: if a borrower’s income has reduced at the time of applying for a further advance, the lender should only flag the original loan as ‘impaired’.
5. True: there are several possible reasons why the property value may have gone down.
6 True: a puisne mortgage might, for example, be a second mortgage.
7. False: a remortgage may be with the existing lender, who may offer better terms to retain the business.
8. False: open bridging is riskier than closed because there is no guarantee of when the loan will be repaid, if at all.
9. True: although secured on property, the loan is for the purchase of a car.
10. True: Consent is required for all listed building demolitions.
Arrears, debt management and recovery
Section 2 explains the MCOB rules applying to those in arrears; outlines the options open to lenders when dealing with those in arrears; explains the assistance available from the state and other agencies for those in arrears; explains the implications of using mortgages to consolidate unsecured debts; and also details the lender’s legal remedies.
Section 2 covers parts 3, 4, 5 and 6 of the syllabus for Unit 6.
2.1 Mortgage Conduct of Business Rules
Before looking at the detailed process firms undertake in relation to arrears, it is important to consider the FSA requirements, as set out in MCOB 13.
MCOB 13 requires that a borrower who has arrears or a mortgage debt shortfall must be dealt with fairly by the lender. The lender is required to put in place written policy and operational procedures for dealing with such cases.
The procedures should include:
• using reasonable efforts to reach agreement with the customer over the method of repaying the arrears or shortfall;
• liaising with a third-party source of advice regarding the arrears or shortfall;
• adopting a reasonable approach to the time over which the arrears or shortfall should be repaid, taking into account the borrower’s circumstances;
• allowing the borrower to change the mortgage payment date or repayment method, unless it has good reason not to do so;
• where no reasonable payment arrangement can be made, considering allowing the borrower to remain in the property until a sale is made;
• taking possession of the property only when all other reasonable attempts at resolution have failed.
The FSA considers that a ‘reasonable period’ for repayment of arrears or shortfall will depend on the borrower’s circumstances. In some cases, this can mean spreading the payments over the remaining mortgage term.
The lender must keep records of its dealings with borrowers who are in arrears or have a shortfall debt. The record must be kept for a year from when the borrower cleared the arrears or debt.
Under MCOB 13, the lender must write to the borrower within 15 days of becoming aware that the account is in arrears. The letter must contain:
• the current FSA information sheet on mortgage arrears;
• a list of due payments either missed or partly paid;
• the total of the arrears;
• the charges incurred as a result of the arrears;
• the total outstanding debt, excluding charges that may be made on redemption;
• the nature and level of charges that will be incurred unless the arrears are cleared.
2.1.3 Procedure before taking possession
Before taking action for possession, the lender must:
• provide a written update of the information (see above);
• ensure the borrower is informed of the need to contact the local authority to establish his eligibility for rehousing after repossession;
• clearly state the possession procedure.
The lender must not put pressure on the borrower through excessive telephone calls or correspondence, or by contact at an unreasonable hour. A reasonable hour is generally considered to be between 8am and 9pm, but taking into account the borrower’s work patterns and religious faith.
2.1.5 Marketing a repossessed property
Once a property has been taken into possession, the lender must take steps to:
• market the property for sale as soon as possible;
• obtain the best price that might be reasonably paid, taking into account market conditions and the increasing debt.
If the proceeds of the sale are less than the debt, the lender must advise the customer as soon as possible after sale of:
• the mortgage shortfall;
• whether another firm – mortgage indemnity insurer, etc – may pursue the debt.
Where a lender decides to recover any shortfall, it must notify the borrower of this intention within six years of sale. If the proceeds of the sale are more than the debt, the lender must take reasonable steps to inform the borrower and pay the surplus to him, subject to the rights of any subsequent mortgagees.
2.2.1 Lender assistance to borrowers in arrears
Lenders should always encourage borrowers to contact them as early as possible in cases of difficulty.
Lenders must do all they can to help borrowers try to bring their mortgage accounts to order. The assistance that can be provided can take the form of short, medium or long-term measures.
• Short-term measures are those that are taken prior to litigation, usually when the account is between one and three months in arrears.
• Medium-term measures are those introduced once litigation has commenced and may be applicable for cases with up to 12 months’ arrears of repayments.
• Long-term measures are those that attempt to restructure or reschedule the loan over a longer term.
If it appears that the arrears situation can be retrieved, the lender has many options. The decision will also be influenced by the lender’s perception of the risk posed. For example, where the current loan-to-value is relatively low, the lender’s security is under less threat; it may be prepared to consider a wider range of options.
2.2.1.1 Payment of arrears over a given period
The borrower may agree to clear the arrears by paying more than the monthly instalment for an agreed period. This may be possible, for example, when a period of unemployment is followed by the borrower taking a job at a salary level that can sustain the increased monthly payments.
Most lenders want to help borrowers but cannot do so indefinitely. It is therefore vitally important to:
• permit increased repayments, but only where these can genuinely be met and there is a real desire on the part of the borrower to address the problem;
• increase payments to bring the account up-to-date within a reasonable period of time – many lenders permit a maximum one year period for this to be done.
The courts can take a more generous view of the rescheduling period, sometimes expecting the lender to permit up to four years (or even more) to bring the account to order. Courts have the power to enforce this under the Administration of Justice Act 1973.
The borrower can be helped to put his mortgage account back on track if a representative of the lender works through the household income and outgoings in a thorough and logical way. Many experienced debt counsellors find that borrowers get into financial difficulties because they are unable or unwilling to take time to plan their budgets and prioritise payments due to others. Some lenders have budget factfind aids for use by debt counsellors, others use outside specialists who are either independent and experienced practitioners or established firms working in this field.
If this type of arrangement is permitted, it should be fully documented for internal records and confirmed to the borrower in writing. If the arrangement is not maintained, the existence of such documentation is crucial in enforcing the mortgage through litigation.
2.2.1.2 Full or partial suspension of monthly payments
The full or partial suspension of monthly payments is chiefly used where the mortgage is on a capital repayment basis, where there is already a reasonable amount of equity (and therefore security) in the property and where the lender believes that the borrower’s personal and financial circumstances merit it.
It is essentially a short-term measure: the lender grants a payment ‘holiday’ or partial suspension of monthly payments. Arrears will therefore build up over the period of the ‘holiday’ or suspension, which the borrower will be expected to make good within a set time after the end of the concessionary period.
The lender will need to be confident of the borrower’s ability not only to service the normal monthly payments but also the additional payments necessary to clear his backlog. If he has already fallen behind on the basis of the standard monthly payment, what changes to his income or spending habits will need to be in place to enable him to bear the additional payments at a later stage? If the reason for his having fallen behind relates to a one-off set of circumstances that were beyond his control and which are not expected to recur, the lender may be inclined to be sympathetic – and to be more optimistic for the success of this option.
2.2.1.3 Accepting interest-only payments
If the loan is a capital and interest mortgage, the lender may be prepared to accept interest payments only for a specified period. Many loans are, however, set up on an interest-only basis already, which renders this option inappropriate.
One problem with interest-only payments is that, in the early years of a capital and interest mortgage, most of the monthly repayment is made up of interest. The concession of removing the capital element might be worth very little.
A lender will need to weigh the merits of this course of action: will any real benefit accrue to the borrower on a monthly basis if the capital element of the loan at this stage is only small? What are the prospects for recouping the deferred capital payments at a later stage?
The mortgage account can be put back on course by extending the term. This can either be on a short-term or long-term basis. In the longer term, a customer with a ten-year term mortgage could extend it by 15 years to reduce the payments.
This option is used with great care by lenders. The borrower must be genuinely committed to keep the account on course. It cannot be repeated time after time.
With-profits endowment mortgages cannot usually have their term extended because they mature on a particular date. Other repayment vehicles, like unit-linked endowments and ISAs, are more flexible and more likely to allow the holder to increase payments or increase the term.
2.2.1.5 Capitalising the arrears
A lender may also agree to capitalise the arrears: a mortgage of £50,000, but with £2,000 arrears (balance outstanding £52,000) might have the arrears effectively built into the loan, making it now a loan of £52,000 but with no arrears.
This can be suitable where a customer has gone through a difficult period (say unemployment) but is now able to make full monthly payments again, albeit that they are now slightly higher. Most lenders will regard capitalisation of arrears as a ‘one-off’ remedy, not usually to be repeated.
2.2.1.6 Surrendering the endowment policy (changing to a repayment mortgage)
In serious default, the surrender of an endowment policy is pursued as a matter of course because many lenders have the endowment policy assigned to them. If the policy has not been assigned, this cannot be done. There will also be a fair chance that the assurance policy will have lapsed already if the borrower is in financial difficulties.
It is not good investment practice to surrender a life assurance policy very early. Nearly all policies are geared to long-term capital growth and perform badly over short periods. Early surrender is a way of obtaining capital in a hurry – but in such cases, financial advice should always be sought.
A disadvantage of surrendering the policy is that the loan is converted to a capital repayment mortgage. Payments will increase and alternative life cover must be arranged.
Some life assurance companies prefer to allow borrowing against the surrender value of the policy rather than see the policy surrendered. Another option can be to sell the endowment policy in the secondary market. This can sometimes be a better option than surrendering the policy. There are now a number of specialist intermediaries who can arrange the sale of second-hand endowment policies (SHEPs), or traded endowment policies (TEPs), as they are sometimes known (or SHEPs and TEPs for short).
If the borrower has a commitment that simply cannot be sustained, the best option may be to trade down to a cheaper property. Often the lender will suspend litigation proceedings if there is a genuine attempt to sell the property with a view to buying a cheaper one. This action may release equity not only to remedy the arrears situation but also to place a sizeable deposit for a subsequent purchase.
Borrowers in difficulty are not the only ones who trade down.
Until recently, the most common incidence of trading down was older people retiring to a smaller home once the children had grown up. This practice may be the trigger for several other needs because trading down can release equity for investment or income generation as well as create a whole new set of personal circumstances.
Before any of these options can be considered, it is necessary for the lender to urge the borrower to take early action to discuss the specific problems relating to the conduct of the mortgage account. Quite often, the borrower will feel intimidated about coming to the office to discuss arrears problems, so the lender may have to follow up standard letters by telephone calls to bring about an early interview. Many lenders are prepared to arrange home visits by trained debt counsellors to discuss the situation in the borrower’s own environment.
A lender might also consider allowing a customer to rent out a room of their home, to generate more income, but care must be taken to ensure that a tenancy with rights of occupation is not created.
2.2.2 State assistance to borrowers in arrears
For those who are unemployed, the government provides assistance by way of Income Support for mortgage interest (ISMI). To qualify for this, the borrower must have no more than £8,000 in savings. Only the first £100,000 of a loan qualifies for Income Support assistance.
Income Support regulations were changed radically in October 1995 by the Social Security (Income Support and Claims and Payments) Amendment Regulations 1995. The following key features of the system were introduced:
• borrowers with a new loan after 1 October 1995 are deemed to have ‘new housing costs’; they do not receive Income Support for their mortgage interest during the first 39 weeks of a claim. The full entitlement is paid from week 40;
• borrowers with a mortgage prior to 2 October 1995 are deemed to have ‘existing housing costs’. Income Support is not paid during the first eight weeks of the claim and during the following 18 weeks only 50% of the entitlement is paid. The full entitlement is paid from week 27;
• all payments of Income Support for mortgage interest (ISMI) are paid direct to the claimant’s lender participating in the mortgage direct payment scheme;
• borrowers over 60 years of age are not subject to these time restrictions but are subject to the standard rate without having to wait 39 weeks;
• all payments of ISMI are calculated using a standard rate of interest and adjustment is triggered by a 0.25% movement in the official average rate, calculated using the building societies’ rate of interest, as reported in Table 7.1 of the Office for National Statistics’ Financial Statistics;
• restrictions are imposed on the payment of interest on loans taken out for major repairs and improvements. ISMI is now payable on loans used to finance work carried out to maintain a property’s fitness for occupation. This will rule out the majority of further advances;
• ISMI is not payable on arrears that accumulate during an exclusion period;
• from 2 October 1995, claimants have received ISMI at the actual rate charged where this is below 5%. Where the rate is between 5% and the standard rate, Income Support is paid at the standard rate;
• an exclusion period in respect of ISMI will commence on a claim for either unemployment benefit, statutory sick pay or incapacity benefit, regardless of entitlement to Income Support; in other cases, the exclusion period will start on the date of an initial claim for Income Support;
• payments not eligible for Income Support include:
– endowment premiums;
– buildings and contents insurance premiums;
- deferred interest in certain cases;
• where the claimant is receiving ISMI and is about to start a job that will last for five weeks or more, he can claim mortgage ‘interest run-on’. This means that the benefit will be paid for a further four weeks rather than stopping immediately.
2.2.2.1.1 The 52-week linking rule
A borrower who has already served the waiting period and then ceases to claim benefit for up to 52 weeks will not have to serve a further waiting period at the start of the second claim. This means that those who claim the benefit will be able to take up offers of short-term or seasonal work without losing their entitlement to mortgage interest payments.
The regulations represent an attempt by the government to reduce the public spending budget on Income Support. The measures were heavily criticised by many mortgage lenders as ones that will cause considerable hardship, particularly to borrowers who run into financial difficulties very quickly after becoming unemployed.
There is a range of bodies that provide advice to those who run into difficulties with their mortgages.
Most major towns and cities have a Citizen’s Advice Bureau, which can provide guidance to those who do not know where to turn when they experience difficulties in paying their mortgage. The advice given is free and bureau advisors will usually be able to spell out the various options available. It is quite common for the borrower to be advised to contact the lender as early as possible in order that the problems do not become worse. In addition to providing guidance on short, medium and long-term arrears problems, the Citizen’s Advice Bureau also produces information packs on insolvency and bankruptcy.
In addition to Citizens Advice Bureaux, borrowers can also contact the following organisations:
• money advice centres – many local authorities provide free debt and benefit advice through money advice centres;
• the consumer credit counselling service – a registered charity whose purpose is to assist people who are in financial difficulty by providing free, independent and realistic advice from trained advisers. The CCCS offers advice through its free telephone advice line and eight centres in the UK;
• financial advisers – although not free, the services of a good financial adviser can be of great assistance in sorting out debt problems.
There are several other sources of assistance to borrowers in difficulty. Quite often, the local office of the Department of Social Security should be the first port of call. Sometimes borrowers are not aware of the benefits they can claim or with whom they should consult. A typical example might be eligibility for the Working Families Tax Credit.
Some local housing associations are also involved in schemes to assist those in financial difficulties. Several have introduced innovative packages of measures, including schemes offered as mortgage rescue packages.
During the early 1990s, lenders came up with innovative and successful schemes. The schemes are not mortgage products in themselves but are schemes designed to try to assist customers in need.
One mortgage rescue scheme was based on the Business Expansion Scheme (BES).
Several lenders set up mortgage rescue schemes where properties belonging to those in financial difficulties would be purchased via a BES company and let to the owner-occupier. The BES approach was pioneered by the Nationwide Building Society.
A different scheme was introduced by the Bradford and Bingley Building Society, enabling people to stay in their own homes on a tenancy basis and pay rent if eligible for benefit.
Some lenders have adopted a partnership approach with housing associations. One such scheme involves the housing association purchasing a whole or part-interest in the property of the owner-occupier, with the latter becoming either part-tenant, part-owner or purely a tenant.
All of these schemes are designed to enable a family to remain in a dwelling they would otherwise lose. Before considering a borrower’s eligibility for inclusion in a rescue scheme, however, the lender has to be certain that the owner-occupier is absolutely determined to tackle the difficulties before them and avoid future problems.
2.2.4.1 Mortgage to rent scheme (Scotland)
The Scottish Executive introduced the mortgage to rent scheme in 2003. It protects homeowners by allowing them to switch tenure from ownership to Scottish secure tenancy. The scheme is managed by Communities Scotland. Owner-occupiers in mortgage difficulties can arrange for a social landlord – housing association or local authority, etc – to buy the home and can continue to live there as a tenant.
2.2.5 Mortgages and debt consolidation
Mortgages can provide viable options for those who have mounting debt problems. Consolidating debts into a mortgage has advantages, particularly because mortgage interest rates are generally well below those for other types of borrowing.
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Example Ricardo and Tina have a mortgage of £80,000 on their house worth £150,000; the mortgage interest rate is 6.5% and the mortgage has 15 years to run. They have debts of £10,000 on credit cards, with an interest rate of 16.9%. The credit cards are costing them £140 a month in interest (this will reduce each month as some of the capital is repaid) and they have to pay at least £200 a month (2% of the balance); this is affecting their cash flow. If they add the credit card debt to their mortgage by taking a further advance or remortgage, they will pay £54 a month on an interest-only basis, or £89 on a repayment basis, for the additional borrowing. This will save them a significant amount each month and ease their cash flow problem. |
One way to control such consolidation is to arrange a mortgage with a drawdown facility. This allows further funds to be withdrawn to pay debts, but no interest is charged until the funds are taken.
Consolidating debts in this way can seem a very attractive proposition, but there are a number of additional points to consider:
• the debt being consolidated will now run for the rest of the mortgage term, rather than for around six or seven years, as would be the case if a borrower kept things as they are;
• the extended term is likely to mean paying more interest than would be paid by keeping the existing arrangements – a borrower needs to check comparative costs;
• the new mortgage will have to be within the lender’s normal income multiples and loan-to-value limits;
• a remortgage is likely to involve costs – potentially up to £500. These will have to be offset against potential savings in order to decide if the consolidation is viable;
• if a borrower is happy to take out a variable rate mortgage, he might consider remortgaging with a cashback offer. Depending on the size of the cashback, he can pay off some of the credit card debt with it and reduce the amount of the further borrowing;
• moving to a new fixed rate or discount rate might save even more money. The borrower will have to assess if any redemption penalties will impact on the strategy;
• consolidating the debt will reduce the equity in the property – an important consideration if planning to move in the future;
• the borrower might be well advised either to overpay the mortgage to clear the consolidated debt more quickly or to set aside some of the savings with a view to paying off some of the new debt early;
• increasing the secured debt in this way will reduce equity and increase the risk of the repossession.
Having consolidated the debt, a borrower must maintain discipline to avoid putting themselves in the same position a few years later.
Legal remedies are those actions laid down by law that a lender can take against a borrower in default. There are separate legal codes in England and Wales on the one hand and in Scotland on the other.
In England and Wales, legal remedies are laid down by the Law of Property Act 1925. There are five legal remedies, of which only four are used in practice today:
• sue for possession;
• exercise the power of sale;
• sue on the borrower’s personal covenant for recovery of the debt;
• appoint a receiver;
• foreclosure (now rarely used).
The first two of these remedies are the most commonly used. Here the lender sues the borrower for possession of the property and then sells the property in order to recover the debt.
In order to take possession, it is necessary to petition the county court for a possession order. Before the county court will even consider granting a possession order, it has to be satisfied that every other option has been explored by lender and borrower and that possession is a very last resort. The county court can then take one of three courses of action:
• it can grant an outright possession order, enabling the lender to take possession, usually within 28 days;
• it can grant a suspended possession order imposing on the borrower an obligation to make payment in accordance with the court’s decision, with the suspended possession order enforceable if the borrower fails to keep up the repayments;
• it can adjourn the case until a future date.
The lender must be well prepared for the court hearing. It was once possible for an official of the lending institution to swear a single-page affidavit setting out the position on the account. It is now necessary to make available to the court full and itemised details of transactions including credits, debits and transfers. In addition, the lender must be seen to have done everything possible to help the borrower bring the account to order.
Once a possession order has been granted, the lender can proceed to take possession. The court decides a date on which this order is enforceable. In the majority of cases, the borrower vacates the property prior to the date of possession. If necessary, however, a bailiff of the court can enforce the possession order, usually accompanied by a representative of the lending institution. It is important to note that, even after the date of possession, the lender still owes a duty of care to the borrower and the borrower can still return to the lender to settle the mortgage account right up until disposal of the property.
The right of the lender to sue the borrower on his personal covenant to repay the debt arises from the contractual obligations in the legal charge. This is often futile because the borrower may not have any financial resources. In the event of mortgage loss, the lender may take further action for recovery if it believes the borrower does have the financial means to make good the loss.
The right to appoint a receiver is exercised when there is an income pertaining to the property. This happens, for example, when the property has tenants who are paying a rent. The receiver acts on behalf of the lending institution to collect rents and any other income applicable to the property, and this money is applied to the mortgage account to reduce the overall debt. A receiver in this context should not be confused with the Official Receiver who has a different function.
A receiver acting on behalf of a mortgagee can be an employee or agent of the lender, but serves as agent for the borrower in respect of disbursement of money received and his duties of accountability to the borrower. If there is an unauthorised tenancy at the property, the lender must do nothing that could be considered as formally recognising that tenancy. A receiver might instead be appointed when the statutory power of sale becomes exercisable and will then be able to collect the rent and pay it to the lender while the lender can still formally deny approval of the tenancy.
The remedy of foreclosure is of historic importance only. Despite the word being used generically to mean pursuing recovery of a debt, a foreclosure order is never used in the UK today. When a lender forecloses, it takes over ownership of the property and can keep all of the sale proceeds. Today, this is considered to be unfair to the borrower.
A foreclosure order results in the borrower forfeiting the equity of redemption – all rights to the property are be extinguished. The lender is theoretically able to take possession, sell the security and retain any surplus. The borrower loses the right to redeem the mortgage once it has been taken into possession. This is now regarded as inequitable.
The foreclosure procedure is extremely complicated: the petition must be made to the Chancery Division of the High Court of Justice and, in the case of joint borrowers, separate foreclosure orders must be sought.
Under Scots law, the remedies available to a lender to which a borrower has granted security fall under the following headings:
• calling up;
• notice of default;
• sale;
• entering into possession;
• repair and alteration;
• poinding of the ground;
• adjudication;
• foreclosure.
These remedies are available under the Conveyancing and Feudal Reform (Scotland) Act 1970. Of these, it is only necessary to consider the first four remedies.
The solicitor will serve on the borrower either:
• a calling-up notice – this requires the whole debt to be repaid; or
• a notice of default – this requires only the arrears to be brought up-to-date or another breach of the mortgage conditions to be remedied (eg a failure to repair the property).
Alternatively, if the borrower is insolvent, the lender may obtain a court warrant to sell the property.
Failure by a borrower to comply with a calling-up notice or a notice of default enables the lending institution to proceed to possession and ultimate sale. If the borrower does not leave the property of his or her own accord, the lender must take court action to seek ejection of the debtor. The principles of possession and sale are similar to those applicable to England and Wales.
The Mortgage Rights (Sc) Act 2001, which came into force on 3 December 2001, is also relevant. It provides increased protection to debtors and their families from lenders exercising remedies on default. The Act gives the debtor (and certain other parties including a cohabitee of either sex) the right to apply to the court for suspension of enforcement proceedings. An order may be granted where it is considered reasonable in all the circumstances, with particular regard to the nature of and reasons for the default, the applicant’s ability to remedy the default within a reasonable period, any action taken by the creditor to assist the debtor remedy the default and the ability of the applicant, and those residing with him or her to secure reasonable alternative accommodation.
The Act also provides for a notice to be issued to an occupier of the property. This allows a tenant the opportunity to give reasons for suspension of enforcement proceedings.
Possession procedures are described in Figure 2.1 (Figure 2.1 for the procedure in Scotland) below.
Figure 2.1 Possession procedures
The eviction of borrowers often receives high-profile media coverage. In the majority of cases, the property is vacated voluntarily – eviction is comparatively rare and a last resort. Many borrowers simply hand over the keys to the lender.
Once vacant possession has been obtained, it is important to ensure that the borrower cannot regain entry to the property. Arrangements must be made immediately with a locksmith to change the locks of the property and secure all points of entry.
Other matters that must be considered are as follows:
• utilities such as water, gas and electricity must be disconnected. The local water and sewerage authorities should be advised that the property is empty;
• gas and electricity meters must be read. The borrower is responsible for payment of these services used prior to the readings being taken;
• the telephone company must be asked to prepare a statement to include all calls up to the date of possession. All outgoing calls after that date should be blocked or the telephone disconnected altogether;
• the local police must be advised that the property is unoccupied and informed from whom the keys to the property may be obtained;
• any fittings left behind by the borrower are held in trust on his behalf and, if not claimed by a specified time, may be disposed of, with any proceeds credited to the mortgage account. If the borrower reclaims fittings, the lender must take care not to readmit him to the property, otherwise a new possession order may be required. A mortgagee in possession can be held to have been negligent if it can be established that a duty of care is owed to a borrower in respect of personal belongings he has left behind in the property.
Figure 2.2 Possession Procedure – Scotland
2.3.4 Sale procedure including mortgagee obligations
Figure 2.3 Sales procedure
Once a property has been taken into possession, the lender will seek to dispose of it as quickly as possible in order to recoup the funds advanced. Valuation will be necessary in order to determine an appropriate selling price. Some lenders use property disposal agencies who specialise in bringing properties to market that are in the hands of mortgagees in possession. Other lenders rely on their own internal resources.
In dealing with properties in possession, lenders have obligations to their former borrower. In the eyes of the law, the borrower retains what is called an equity of redemption. This is a right to settle the mortgage debt at any time. In addition, the lender has a duty of care to obtain the best price reasonably obtainable, although it does not necessarily have to look after and maintain the security indefinitely to obtain a higher price. In order to establish that this obligation has been fulfilled totally, many lenders in England and Wales will, having obtained an acceptable offer for the property, place an advertisement in a newspaper seeking last and final offers by a particular date.
In the 1944 court case of Reliance Permanent Building Society v Harwood-Stamper, it was held that the lender, while having an obligation to get the best price reasonably obtainable, is not obliged to ‘nurse the security’ indefinitely. In the 1991 Scots case of Dick v Clydesdale Bank, it was held that a lender, being in the position of a quasi-trustee for the seller when exercising a power of sale, was required to take account of the potential ‘development value’ of land when conducting the sale.
When in possession, a lender still needs to ensure that it is acting reasonably and not in a way that might prejudice the borrower’s rights: fixtures (ie items that are permanently fixed to the property) pass to the mortgagee; fittings (items like furniture that are not fixed) are retained by the mortgagor. The mortgagor should have removed all fittings before leaving the property but, if this has not been done, it is wise for the lender to produce a list of any such fittings and to document how the items are dealt with. It might allow the borrower back into the property to remove them, or it might arrange for them to be removed and placed in storage. The lender needs to be careful because it can be liable if it acts negligently.
Figure 2.4 Sale procedure – Scotland
In Scotland, the debtor may redeem the mortgage at any time up to conclusion of missives of sale. In respect of disposal of the mortgaged property, the Conveyancing and Feudal Reform (Scotland) Act of 1970 imposes a duty on the lender to advertise and to meet a specified minimum standard of advertising.
Some lenders consider auction as well as private treaty to ensure that the highest price possible is obtained for the property. If a lender sells a property and fails to obtain an appropriate selling price due to error or omission from the sale particulars, it can be sued for damages by the former borrower. In a case that occurred in 1971, one lender had to pay in excess of £10,000 damages to the former borrower because the sale particulars omitted any reference to planning permission that existed on the property that would have substantially increased the potential selling price.
Recent court cases have emphasised the need for lenders to take great care in this area. In one recent case, a county court judged that a higher potential purchase price could be obtained by allowing the borrowers to remain in the property, provided that there was a serious effort to bring the property to market and eventual sale. In another case, a borrower was able to establish in court that the lender was taking too long bringing the property to market and that the mortgage debt was accumulating faster than necessary.
2.3.5 CML Possessions Register
The increase in the number of possessions during the 1990s has made it necessary for lenders to collaborate in order to ensure that information on a borrower’s debt history can be shared. Lenders experience a fairly high level of fraud – in a survey by the Police Federation in the early 1990s, it was found that 1 in 20 mortgages had been subject to some kind of fraud. The nature of fraud varies from simple overstatement of income to highly organised attempts to obtain thousands of pounds from financial institutions.
The CML Possessions Register is a database holding information on those borrowers who have had their properties repossessed by the Council of Mortgage Lenders (CML) members. A CML member can consult this database when considering any mortgage application in the same way that orthodox credit searches are carried out. The CML Possessions Register is fully computerised and maintained by the secretariat of the Council of Mortgage Lenders at its London headquarters.
2.3.6 The right of subrogation
The higher lending charge is often used to arrange a mortgage indemnity guarantee (MIG). This insurance policy pays the lender any shortfall on sale of the property when it exercises the power of sale. The MIG will pay any shortfall up to the amount guaranteed less any excess on the policy. The borrower pays the premium for this policy but the policy protects the lender only.
In turn, the insurance company underwriting the MIG can sue the former borrower for the amount that has been paid to the lender under its right of subrogation. This practice was deemed to be legally acceptable in a 1996 court case between a Mr Browne and the Woolwich Building Society. The mortgage deed commits the borrower to meet all payments due under contract. It is unrealistic to expect to be able to insure away this obligation with a one-off insurance premium.
Mortgage advisers must confirm that a borrower understands this principle: while some borrowers may bring legal action of the type taken by Mr Browne on a matter of principle, some may have been advised wrongly in the past on what the MIG actually does.
Figure 2.5 Procedure on default where a MIG is in place
Test your knowledge and understanding with these questions
Take a break before using these questions to assess your learning across Section 2. Review the text if necessary.
Answers can be found at the end of this unit.
1. What must a lender do if it becomes clear that a borrower’s mortgage account is in arrears?
2. Gavin has a mortgage of £125,000, £90,000 of which was taken out in May 2001, with a further advance of £35,000 to build an extension taken out in August 2003. He was made redundant on 1 February 2004, receiving £5,000 in compensation. This is his only capital. Explain Gavin’s position with regard to Income Support for mortgage interest.
Answer true or false to the following questions.
3. Lenders are under no obligation to contact borrowers about mortgage arrears.
4. Accepting interest-only payments is a way of helping repayment mortgage borrowers in financial difficulties.
5. Extending the term in order to reduce mortgage repayments is not appropriate for low-cost endowment mortgages.
6. Income Support mortgage interest is not available to people whose savings exceed £4,000.
7. People with post-1995 mortgages are entitled to have half of their mortgage interest paid after 39 weeks of claim.
8. Income Support mortgage interest does not assist with the payment of contributions to the repayment vehicle on an interest-only mortgage.
9. An outright possession order granted by a court gives the lender immediate possession of a property on which the mortgagor is in default.
10. A suspended possession order automatically becomes an outright possession order if the borrower fails to keep up the agreed repayments.
11. Appointing a receiver is a legal remedy available where a property is let to tenants.
12. When a property has been taken into possession, the borrower has the right to repay the arrears at any time until the property has been sold.
13. Lenders have a legal obligation to sell a repossessed house for at least the amount of the mortgage.
14. A register of persons who have had their properties repossessed is maintained by the Financial Services Authority.
15. The right of subrogation enables insurers to sue borrowers for any amount paid out on a mortgage indemnity guarantee policy.
Answers
1. A lender must write to a borrower within 15 days of it becoming aware of the account being in arrears. The letter must contain:
• the current FSA information sheet on mortgage arrears;
• a list of due payments either missed or paid in part;
• the total of the shortfall;
• the total outstanding debt, excluding charges that may be made on redemption;
• an indication of the nature and level (if possible) of charges likely to be incurred unless the shortfall is cleared.
2. He has ‘new housing costs’, which means he will not receive any benefit until 39 weeks have elapsed.
He will receive benefit from week 40, based on the first £90,000 of his mortgage. He will not receive benefit for the further advance because it was for improving the home and the maximum loan for benefit purposes is £100,000.
He will receive benefit for interest payments only.
The benefit will be paid directly to Gavin’s lender.
3. False: a lender must contact a borrower within 15 days of becoming aware of arrears.
4. True: making interest-only payments will reduce the monthly payment, although it should only be seen as a temporary measure.
5. True: the term of with-profit endowments cannot normally be extended.
6. False: the ISMI may be reduced where savings exceed £4,000, but is not removed altogether until £8,000.
7. False: the full ISMI entitlement is paid after 39 weeks to people with post-1995 mortgages.
8. True: ISMI will not cover endowment or other similar payments and neither does it cover other expenses such as buildings insurance.
9. False: an outright possession order can normally be executed after 28 days.
10. False: a suspended possession order, if enforced, requires that the borrower make payment. If he does not, the lender can return to court to seek possession.
11. True: the receiver applies rental income to ensure that the mortgage payments are maintained.
12. False: until sale, the borrower has only the equity of redemption, which is the right to repay the whole debt.
13. False: the lender must sell a repossessed property at the best price reasonably obtainable.
14. False: the possessions register is maintained by the Council of Mortgage Lenders.
15. True: the right of subrogation has been tested in the courts and confirmed.
Other post completion matters
Section 3 describes the main changes that may be made to a mortgage contract; explains what is meant by transferring equity and the implications of so doing; details the difference between redemptions and part-redemptions and the implications of each; lists the implications of moving homes and remortgaging; and describes the implications of unauthorised lettings; and how home income and reversion plans may be suitable for certain homeowners.
Section 3 covers part 2 of the syllabus for Unit 6.
3.1 Changes in interest rates and fees/charges
The interest rate and charges made in connection with a mortgage can only be changed in accordance with the terms set out in the contract. Over the life of a mortgage, the conditions imposed by the lender on new borrowers are likely to change several times.
Older borrowers will remember times when interest rates on mortgages were almost constant, even though they were permitted to be varied under the mortgage deed. It is now common to expect several rate changes each year. To variable rate borrowers, these changes can have a significant effect on the household budget. For each contract, it is the terms and conditions that are in force at the time of completion that bind both lender and borrower.
In some instances, the lender may be prepared to relax some of the conditions of mortgage, resulting in an advantage to the borrower: one lender has a clause in its older mortgages that six months’ interest may be charged on early redemption. When this attracted widespread adverse publicity, the lender introduced a concession that only three months’ interest would be charged. The condition in the mortgage stayed the same but the lender was, in this instance, prepared to forego some of the income that might legally be derived from it.
Older mortgages may also have a minimum period of notice specified before repayments can be adjusted following an interest rate change. Such a period might be three or even six months. This creates a disadvantage for the lender – when interest rates are rising, investors expect to see the immediate benefit of these, but the cost of paying increased interest to investors cannot be passed on to borrowers immediately. The condition cannot be changed retrospectively, so the lender has to wait for these mortgages to be paid off until new conditions can be imposed across the board.
Building societies are mutual institutions whose constitution comprises a memorandum and a set of rules. Historically, many societies had a rule that stated that interest rate changes would be notified to borrowers by post – a time-consuming and costly exercise. This factor can reduce competitiveness when interest rates change frequently, so most societies with this rule have changed it by consent of the members via a special resolution passed at a general meeting.
As most mortgages in the UK are offered on a variable rate basis, at least for the major part of the term, interest rate changes inevitably affect almost every borrower at some time. The lender must have a system in place through which changes in repayment can be formally notified. Most lenders have information systems that bring a high degree of automation to this process.
At each rate change, the lender should also be ready for the increased number of telephone calls and letters from borrowers that the change will generate.
All lenders have a tariff of charges imposed on borrowers as well as an interest rate structure, which sets out the price of each lending product in the portfolio.
Examples of these charges are:
• late payment fees;
• redemption fees;
• part-redemption fees;
• final inspection fees;
• clawbacks of discounts and cashbacks.
Mortgage legislation commits lenders to notifying these charges in advance of borrowers incurring them and making sufficient information available to the borrower before he signs up for a product so that an informed purchasing decision can be taken. Changes to tariffs of charges must be notified on an annual basis.
Lenders will consequently make a special point of publishing a scale of charges for all to see, removing any ambiguity wherever possible. Despite these efforts, banks and building societies have had to deal with many complaints from borrowers in respect of charges. Some of these complaints have been referred to the appropriate ombudsman for further consideration.
It is especially important that a borrower is kept fully aware of any procedure that may increase his debt in the future. An example of this may be where a borrower’s monthly payment is adjusted annually under an annual review scheme.
At the beginning of a 12-month period, the monthly payment is set at the current interest rate. Any rate changes during the ensuing 12 months will affect the amount of interest charged to the account and a new monthly payment will then be calculated at the end of the period. If the interest rate has increased several times, then the borrower may be faced with a substantial increase in his monthly payments. The good mortgage adviser will explain in detail, at the application stage, how such a scheme operates if the applicant is considering taking it up, because those on annual review schemes can be particularly hard hit in a period when interest rates rise several times.
Where discretion is used by lenders, this must be applied fairly rather than in an arbitrary fashion. For example, some lenders waive redemption fees under certain circumstances. The lender must avoid a situation where it is seen to act differently towards one borrower than another.
3.2 Variation of mortgage conditions
As well as changes in interest rates and the tariff of charges made in connection with mortgages, other conditions of a mortgage may be varied. These include:
• transfers of equity – where a borrower is added to or removed from the mortgage deed;
• permission to let the property for a specified period;
• extension of the mortgage term;
• change from capital and interest method of repayment to interest-only;
• change from interest-only method of repayment to capital and interest;
• release of part-security.
These are all events that affect the contractual relationship between lender and borrower and some are considered in the sections that follow. If formal changes to the contract are to be made, a deed of variation may be required. Other changes can be made without the consent of the borrower, such as changing the interest rate from time to time. As a general rule, contracts cannot ordinarily be altered without the agreement of both parties.
In most cases, where a variation of mortgage conditions is permitted, it is necessary to complete legal formalities to bring about the change in a proper manner. Lenders may also make administrative charges for changes – these charges have to be consistent with the lender’s published tariffs.
A transfer of equity arises when:
• a borrower is released from the mortgage contract; or
• a borrower is added to the mortgage contract.
Figure 3.1 Equity transfer
In either case, the lender has the final say on whether this course of action is acceptable or not. The legal charge, or standard security, is made between the parties specified in the original contract – the contract can only be varied by agreement of those parties.
A transfer of equity request is often made at the same time as a request for a further advance (eg the remaining borrower needing to raise finance to buy out the borrower that is leaving the property). It is normally the borrower who originates the request.
The most common reason for a borrower to request to be released from the mortgage is where joint borrowers split up through divorce or separation. About one in three marriages in the UK end in divorce, meaning that this can be a common feature of mortgage administration.
A less common reason for a request to release a borrower from the mortgage contract is where that party is seeking to escape creditors. It is a common fallacy that a person faced with bankruptcy can protect assets by transferring them to a partner or spouse: in practice, the trustee in bankruptcy can seize those assets anyway.
Similarly, a person may wish to be added to the mortgage when a relationship is formed and that person moves in with the existing borrower. This makes little difference to the occupant’s rights if the two people legally marry – under the Family Law Act 1996, an occupying spouse has rights whether named on the mortgage deed or not.
The lender must consider many factors when a request for a transfer of equity is made, and these include the following.
3.3.1 The purpose of the request
The purpose of the request may be straightforward or concealed. The lender must investigate the request in order to understand the borrower’s motives for the approach.
A request to transfer equity can result in additional business arising from unfortunate circumstances. Often when two people split up, additional mortgage finance is required: by one person to buy out the other, and for the person leaving to buy a new home. There are also other related product needs that a revised factfind for both parties would reveal.
If a person is to be removed from the mortgage, the remaining person’s financial circumstances must be examined in order to discover whether his income and outgoings are compatible with the mortgage outstanding. This may involve taking references and/or examining statements, as well as carrying out a credit search for details of any other bad debts.
If the transfer request is due to separation or divorce, the lender must be aware that the borrower remaining might have maintenance payments – these may or may not be finalised at the time of application, but they can substantially affect his ability to repay the loan.
Impairment of the status of the borrower may also take the loan outside the criteria acceptable for mortgage indemnity guarantee cover.
Evidence of impairment of the loan (that is, where the ability to service the loan has deteriorated) may necessitate making a provision for potential loss, whether or not a transfer of equity is sanctioned.
If a person is moving in, it must be established whether he intends to become a party to the mortgage contract. If so, normal status enquiries should be made before the legal procedure is carried out.
If the new occupier is already living in the property at the time of transfer and the lender is aware of this, it is necessary for the non-owning occupier to complete a ‘consent to mortgage’ form, waiving rights of residence should the lender have to pursue vacant possession. Failure to do this can result in the occupier enjoying a right of residence that overrides the mortgage under s 70 of the Land Registration Act 1925 (England and Wales only). In effect, the lender will not be able to obtain vacant possession following litigation for possession unless the consent has been obtained.
The track record of the account to date is important but the lender needs also to ascertain which of the parties has been paying the mortgage up to this point. If it is the person seeking to be released, the individual who is to remain in the property must be made aware of the serious obligation that the mortgage entails – the borrower may have no idea what he is taking on board. It is very important that the person remaining is fully aware of the consequences of releasing the other party to the mortgage.
Less can be learned from looking at the track record if the loan is relatively new. If, on the other hand, the borrowers have a long-standing relationship with the institution, it may be possible to learn quite a lot from examining the past conduct of the account, as well as (sometimes) the adviser’s knowledge of the individuals concerned.
If the loan is supported by a guarantee, any proposed changes in the terms and conditions of the guaranteed mortgage must be sanctioned by the guarantor(s).
If the mortgage is interest-only, there may be a life assurance policy in existence, the proceeds of which were originally intended to repay the loan on maturity of the mortgage. Quite often these policies are in joint names.
If the policy is assigned to the lender as security, then the lender must be involved in any variation of the policy terms. If the policy is not assigned, it should be transferred or assigned to one or other of the policyholders, usually as part of any settlement. Where a party is to be added to the mortgage, they should consider the way in which the mortgage will be repaid. For example, if both original policies had ISAs to repay the ban, there will be a shortfall as the person ‘leaving’ the mortgage takes their ISA with them. The new party to the mortgage will need to consider how to address the shortfall.
The borrower’s ability to repay must be considered alongside the current loan-to-value ratio on the mortgage. Only by looking at these two factors will the lender better identify the risk. A revaluation of the property may be necessary.
The lender will charge a fee for the transfer of equity, which will be borne by the borrower.
The method of transfer will be by deed (deed of variation in Scotland). It is normal to take legal advice and arrange for a solicitor to act.
For a lender, a transfer of equity is both an opportunity and a risk: an opportunity to review needs and address new, or additional, needs; a risk in that the release of a borrower may impact on the reliability of payments.
It is the right of any borrower to redeem any loan at any time. The law does not permit lenders to obstruct this right, although they are at liberty to make a reasonable charge to cover their lost income.
The borrower might take the opportunity to make early redemption (provided there are sufficient funds) if, for example:
• a legacy is received;
• there is a desire to move and take a new mortgage with the same, or different, institution;
• it is felt that personal wealth in the form of savings and investments will be better used to clear the loan.
Early redemption may not always be the best course of action for the borrower. The borrower should be encouraged to take an overall view of his financial circumstances to decide whether there are more efficient ways of using the funds.
On receipt of a request for early redemption, many institutions now have systems designed to try to capture further lending business. A major reason for loss of mortgage business is that a borrower may see a ‘better deal’ elsewhere and pursue this without consulting his existing lender. It is likely that the lender will maintain contact with the borrower to promote further borrowing, provided that the borrower has been a regular payer.
For early redemption to be made, a date of redemption is required – the information systems of the lender will provide details of what amount is necessary to pay off the loan, as well as daily interest to be debited should the redemption be delayed.
Many lenders charge early redemption interest to offset loss of anticipated interest from the loan. This will have been expressed in the mortgage deed or conditions at the time the mortgage was completed, and is readily available information on request. These fees are usually expressed in terms of so many months’ interest or a flat charge. This fee can amount to a significant sum and must be taken into consideration in the overall calculation.
In extremely rare circumstances, a court can decide that a redemption penalty is a ‘clog on the equity of redemption’. This means that the court feels that a condition has been imposed deliberately to prevent a borrower from paying back the loan. In such cases, the court can set aside the clause in the mortgage allowing the borrower to make early redemption.
3.4.1 Redemption and part-redemption
Once a borrower has made all payments in accordance with the conditions of the legal charge, the loan is redeemed. If the lender is satisfied that all charges to the account – interest, capital, fees, costs, charges etc – have been paid in full, the borrower can be released from the mortgage. The lender’s action in doing so is called vacation of the mortgage (or discharge in Scotland).
In order to vacate or discharge the mortgage, an officer of the lending institution signs a receipt to this effect. This is either a form specially used for the purpose, or a part of the legal charge or standard security document itself. A solicitor then completes the legal work. When completed, the borrower is released from the mortgage to the lender. A release fee is sometimes charged.
As an added service, some lenders hold a small amount (usually £1) as a debit balance on the mortgage account so that the mortgage is still in force. Basically, this provides a free safe custody facility for the borrower in respect of the title deeds.
Sometimes a borrower may wish to pay a lump sum to reduce the mortgage balance. This is called a part-redemption.
When a part-redemption is made, subject to the agreement of the lender, the borrower can either:
• continue repayments at the same amount and reduce the mortgage term; or
• reduce the amount of monthly payments and keep the same term.
The most common reason for making lump sum repayments is because the borrower wishes to pay off the mortgage earlier than the agreed redemption date.
Most lenders set down a minimum amount that will be accepted by way of capital reduction. This can be as little as £500. This stipulation is mainly in place to enable the transaction to be completed as a capital reduction rather than an earlier-than-scheduled monthly repayment. As more lenders move towards daily interest systems of calculating interest, the need to differentiate between capital reductions and other payments becomes less important.
It is important for the borrower to make sure he knows the lender’s attitude towards part-repayment. Some lenders will not apply the money to the account until the end of the year, which means it will have no effect until then. Many lenders will accept part-repayment but need to be told to use it immediately to reduce the capital – otherwise it will sit in an account until the year end. Where the part-repayment represents part of a special deal mortgage – fixed-rate, discount, etc – a proportional penalty may apply.
3.5 Changing the mortgage term
It is possible for a mortgage term to be reduced or extended.
To reduce the mortgage term, the borrower can make larger monthly repayments than those in the mortgage contract. This reduces the total amount of interest payable on the mortgage. Some borrowers leave their monthly repayments unchanged when interest rates are falling, based on the idea that they have been able to make the payments up to now and can continue to do so. This reduces the mortgage term.
The term of the mortgage can also be extended. This is sometimes an option for borrowers who have run into financial difficulties. It has the effect of reducing the monthly repayment and so makes the mortgage more affordable.
Lenders will only agree to extend the term if it is felt that it represents a genuine solution to the problems of the borrower. If the lender feels that the ability to repay the loan will not be helped, an extension of the term will not be allowed.
No money will be saved directly by extending the term of an interest-only mortgage The only time this may be of benefit will be to give the associated investment vehicle more time to grow.
Borrowers are often tempted to convert their existing mortgage deal to another. This can often result in a lower rate of interest or a more attractive arrangement. Lenders often impose charges when a borrower switches to another ‘deal’.
These may include:
• arrangement fees;
• early redemption charge on the original loan (if applicable);
• valuation.
The borrower should weigh up the potential savings against the set-up costs to see if the new ‘deal’ is viable.
3.7 Transferring to a new lender
There are two main reasons for borrowers seeking to transfer their mortgage to a new lender:
- when they move house – in order to obtain a better rate or a more advantageous deal;
- to remortgage their existing property in order to raise money, or to arrange existing borrowing on better terms.
Moving home is an opportunity for the borrower to reassess existing arrangements and decide whether better terms can be achieved elsewhere. Factors that could influence the decision include:
• the existing lender’s service standards;
• the existing lender’s interest rates compared with the market;
• special deals available elsewhere and the existing lender’s efforts to retain the borrower;
• the comparative costs and attractiveness of offerings from new and existing lenders.
Moving home is not an inexpensive process, and the owner should weigh up the benefits of moving compared to the costs. In general people move for three reasons:
• the move may be required as part of a job change, where it is impractical to remain at the current location. In this case, the buyer should be sure that he has researched the proposed area, assessed property available within the budget, and ensured family needs can be met by local facilities, like schools, shops, medical facilities and so on. Closeness to work might also be a consideration, depending on the situation. For example, a non-driver who works in town would probably like to be on a bus route; and a commuter might like to live within walking distance of a railway station. Conversely, someone who works in a mobile role, or works on a detached basis may not view closeness to work as an important factor. The owners may be fortunate and move to an area where house prices are lower, in which case they may be able to reduce borrowing or choose a larger house. Conversely, they may be forced to move to an area where prices are higher, resulting in a much higher mortgage or a smaller property for their money. Finally, moving a family to a new area can be traumatic, particularly for children, who would have to settle into a new school and make new friends;
• the move may be required as the family expands and a larger home becomes essential, usually in the same area. Similar considerations apply as moving to a new area, although the owners will have the benefit of knowing the area and family disruption can be minimised;
• the owners decide to move through desire, rather than necessity. This would include moving to a ‘nicer’ area, a more attractive or larger home, or just something ‘different’. This is more likely to be the case with buyers who either have yet to start a family, or whose family are independent.
Moving home involves costs, as considered in Unit 4. To summarise, they include:
• an estate agent’s fees;
• mortgage fees – arrangement, reservation, valuation;
• a possible higher lending charge;
• a broker’s fees;
• legal and search fees – buying and selling;
• Stamp Duty Land Tax.
On the sale of a £200,000 house and the purchase of another one for £250,000, typical costs might be £8,000 or even more. This means that the buyer needs to factor the costs into any new borrowing.
Where an existing borrower is considering remortgaging, several matters should be considered:
• purpose of the loan – this determines whether the loan:
– falls within the current lending policy;
– is to be regulated by the Consumer Credit Act 1974;
• status and personal circumstances of the applicant;
• value of the security offered for mortgage;
• other underwriting considerations, including MIG, guarantor, insurance, etc.
The procedure for remortgaging is relatively straightforward and mirrors in many ways the normal mortgage application procedure:
• as mentioned above, the necessary status and security information has to be gathered;
• in particular, details of the existing mortgage have to be confirmed – the lender should obtain details of the existing mortgage, together with statements going back over a reasonable period of time;
• the lender should check whether the information given at application stage is consistent with evidence presented by the existing lender – for example, the borrower may state that the switch is to get a lower rate of interest, but evidence might suggest that the existing lender is at an advanced stage of action for recovery;
• the borrower should obtain a redemption statement in order to establish accurate borrowing requirements – otherwise there may be a shortfall that cannot be met from personal resources;
• once the remortgage is assessed as acceptable by the lender, a formal offer of advance will be issued;
• once the borrower is happy, the conveyancing work can start;
• the solicitor acting for the borrower will arrange to pay off the existing mortgage from the proceeds of the advance cheque, alongside any other costs, fees, or expenses involved.
3.7.2.1 Issues facing the borrower
Remortgaging can be a painless way of raising extra money, and the costs can be reduced by taking a deal that offers free valuations and legal services. However, the borrower should be aware of the following issues before remortgaging.
• Replacing a mortgage without raising additional capital can be a good way to reduce the interest paid, or to take advantage of special offers. The borrower should make sure he understands the terms and conditions – often there are tie-in conditions with financial penalties for early redemption, or other conditions that may not be obvious.
• There are likely to be fees and costs associated with remortgaging, unless the lender offers free valuations and legal services. They would include arrangement fees with the new lender, valuation and conveyancing fees; and might also include redemption penalties from the existing lender. In view of this, the borrower should consider the impact of the costs on the overall arrangement. For example, if the fees on a three-year fixed rate deal amount to £500 and the borrower pays them from his own resources, he will need to save at least £14 a month in order to make it viable. If he chooses to add the costs to the amount borrowed, he should consider what impact this will have over the term of the mortgage.
• Replacing an existing mortgage with an increased loan to consolidate other debts can be a money saver in the short term, as mortgage rates are lower than other forms of borrowing. However, the borrower will be paying interest on the consolidated debt until the end of the mortgage term, which will usually be longer than the original loan it replaced. Over the full term of the mortgage, the costs will be higher.
• Moving unsecured loans to secured status can be risky. If the borrower defaults on a mortgage, his house could be repossessed, whereas this would not happen with an unsecured loan.
• Using a remortgage to raise additional money for other purposes – car purchase, holidays etc – can be attractive at the time, as mortgage rates are generally lower than other forms of borrowing. However, the borrower will be paying the increased borrowing to the end of the mortgage term; this could mean the car is financed for upwards of 20 years, even though it will lose value rapidly.
• Increasing the level of borrowing in this way may result in a loan-to-value in excess of the new lender’s threshold for a higher lending charge. In this case, the higher lending charge should be taken into account when calculating the overall benefit of the new arrangement.
Implications for those considering transferring to a new lender include:
• redemption penalties on the existing mortgage. Those who took advantage of a special deal in the past – a fixed rate, for example – might be subject to a charge if they transfer the mortgage to another lender during the term of the special deal. The typical charge will apply until the end of the fixed rate term but some deals are subject to an ‘overhang’, where the penalty continues beyond the term. Many lenders offer a portability option, where an existing mortgage can be transferred to a new property during the special term without penalty, providing the same terms and conditions apply. For example, a borrower with a £75,000 five-year fixed rate deal would be allowed to move without penalty within the five-year term, providing that £75,000 of his new mortgage was on the same deal. Effectively, he would be transferring that mortgage to the new property. Other companies offer portability on the basis that the new mortgage must be for at least the same amount but may be on different terms;
• administration fees – most lenders charge a fee to close a mortgage account. In some cases, this can be as high as £295;
• loyalty offerings. Some lenders offer borrowers special loyalty bonuses after a specified period. For example, the borrower may be given a 0.5% discount from the standard variable rate once he has held the mortgage for five years.
• relationships. Many borrowers develop a positive relationship with their lender and feel a degree of loyalty. In some cases, the relationship has enabled them to overcome problems, or to arrange lending outside the lender’s normal criteria.
3.8 Lettings – authorised and unauthorised
All lenders specifically exclude, in the legal charge, the right to let the mortgaged property. Anyone who lets a property without permission from the lender is in breach of the mortgage and is in default.
Tenants can represent a serious risk to the lender. There are many cases where the condition of properties has deteriorated significantly as a result of the actions of tenants. The most important reason for caution is that a tenancy can, under certain circumstances, become binding on the lender as well as the borrower. When a property has to be sold with a ‘sitting tenant’, its value will be a fraction of its market value with vacant possession.
Lettings requests are not always rejected out of hand. In some cases, it can be beneficial to have a tenant living in a mortgaged property.
• if the property would otherwise be empty, the buildings insurance cover could be adversely affected or even become invalid;
• there can be a greater risk of an empty property being subject to vandalism;
• if a borrower falls on hard times, income from a tenant can mean the difference between keeping up the repayments and losing the property.
Any requests to establish a tenancy must be referred immediately to the lender. Each lender will have a policy relating to lettings and these must be followed strictly in order to avoid later problems.
3.9 Home income and home reversion plans
Homeowners in, or nearing, retirement often have a requirement for additional cash or income. They have equity in their property, which will normally allow them to raise additional finance by a remortgage or a further advance. This route is likely to pose problems:
• any additional income produced by investing the cash raised will be eroded by the increased mortgage payments;
• they may not have sufficient income to validate the extra borrowing;
• to make payments affordable, they may have to extend the mortgage term past retirement age.
There are two alternatives in this situation:
• a lifetime mortgage, often called a home income plan, where the mortgage is on an interest-only basis, with no defined term. The interest payable is usually rolled up rather than paid when due;
• a home reversion plan, where the property is sold in return for a lump sum or an income, together with a guaranteed tenancy for life.
Both these plans were considered in detail in Unit 5: at this stage we will consider the advantages and disadvantages of choosing these products.
3.9.1 Advantages and disadvantages of lifetime mortgages
The advantages of a lifetime mortgage include:
• with an interest roll-up plan, no monthly payments are required. This means that all the cash or income raised can be used as the borrower(s) wish;
• most lifetime mortgages offer a no-negative-equity guarantee, which means that the debt will never exceed the value of the property;
• the borrowers will be able to benefit from the additional finance without having to move house;
• the borrower retains ownership of the property;
• if the property increases in value at a higher rate than the interest accrues, the borrower’s estate will benefit;
• an annuity-linked home income plan fixes the interest rate payable and the annuity received. The interest is paid from the annuity, which alleviates the need for interest roll-up.
Their disadvantages, however, include that:
• interest may roll up quickly, depending on the rate charged;
• ‘younger’ borrowers are likely to live for many years, allowing the debt to increase significantly;
• the borrower has little control over the increasing debt and may see his children’s legacy significantly reduced;
• increases in income or capital may affect eligibility for means-tested state benefits, like Income Support and Pension Credit;
• it may not be possible to move house because repaying the mortgage plus rolled-up interest may leave insufficient capital to buy another property.
3.9.2 Advantages and disadvantages of home reversion schemes
The advantages of the home reversion scheme include that:
• no interest is payable or rolled up. This means that the planholder does not have to worry about repayment;
• the scheme will probably provide more cash than a mortgage-based scheme;
• the planholder is guaranteed tenancy for life;
• part-reversion is available, allowing the planholder to retain an interest in some of the equity in the property.
The disadvantages of the home reversion scheme include:
• the cash or income provided will be at a discount to the value of the property given up;
• increases in income or capital may affect eligibility for means-tested benefits, like Income Support and Pension Credit.
• the owner loses all rights to the increase in value of the part of the property given up;
• if the plan holder dies relatively shortly after starting the arrangement, it will have been a very costly way of raising the cash or income;
• schemes are quite inflexible. Moving may be a problem;
• any improvements made to the property will not benefit the plan holder as the provider owns it.
Test your knowledge and understanding with these questions
Take a break before using these questions to assess your learning across Section 3. Review the text if necessary.
Answers can be found at the end of this unit.
1. Alan and Ann are divorcing and Ann will take over their mortgage. The joint endowment can be left as it is.
Answer true or false to the following statements.
2. The terms and conditions of a mortgage contract can be changed by the lender but not by the borrower.
3. Lenders must tell prospective borrowers about their tariff of charges before the mortgage is completed.
4. Changes in a lender's tariff of charges must be notified to borrowers within two weeks of the change.
5. A transfer of equity occurs when a mortgage or block of mortgages is sold by one lender to another.
6. Removing a borrower from a mortgage deed cannot be done without the lender's permission.
7. Changes to terms and conditions of a mortgage are subject to the agreement of any guarantor involved.
8. If a borrower requests early redemption, it is inappropriate for the lender to attempt to sell them a further loan.
9. If a court determines that a redemption penalty imposed by a lender is too high, it can set it aside.
10. Releasing a borrower from his mortgage obligations at the end of the term is known as ‘vacation’ of the mortgage.
11. When interest rates fall, borrowers with interest-only mortgages can choose to reduce the mortgage term and retain the same level of repayment.
12. When a second mortgage is taken, the new lender informs the original lender of the situation.
13. Moving home could cost as much as £8,000, even more in some circumstances.
14. An unauthorised tenancy does not confer rights of occupation, even if the rent has been regularly paid.
15. Borrowers can sell part of their property without the lender's consent.
Answers
1. False: the endowment should be assigned or transferred to one party.
2. False: contract terms can only be changed with the consent of both parties.
3. True: for a cashback scheme, for instance, changes to a tariff or charges would include details of possible clawback.
4. False: changes in a lender’s tariff must be notified at least once a year.
5. False: transfer of equity is the addition or removal of a borrower from the mortgage deed.
6. True: removing a borrower from the deed may result in a fundamental change in the remaining borrower's ability to pay the mortgage.
7. True: changes to terms and conditions may affect the likelihood of a guarantee being called in.
8. False: on the contrary, offering a further loan instead of early redemption makes good business sense because mortgages are often redeemed in order to obtain a better deal elsewhere.
9. True: a penalty that is too high might be said to be a ‘clog on the equity of redemption’.
10. True: vacation is the technical term in England and Wales for the release from obligation at the end of the term (‘discharge’ in Scotland).
11. False: only borrowers with capital and interest mortgages can reduce the term and maintain the same payments.
12. True: the new lender will wish to receive any surplus after the first mortgage has been paid off on repossession and sale.
13. True: Fees and costs can often amount to a sum in excess of £8,000.
14. True: this is different from a spouse living in the property, who can establish right of occupation.
15. False: any sale may reduce the property value to less than the outstanding loan and a borrower cannot sell without the lender’s consent.