Mortgages - rights of the mortgagor v rights of mortgagee PDF

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rights of the mortgagor v rights of mortgagee...

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Repayment mortgage: Cheap mortgage – monthly outlay. Loan repaid over the mortgage term (25 yrs). Each monthly repayment by the borrower to the mortgagee compromises part interest and part capital (small at start mortgage). Mortgagee takes out separate mortgage protection policy – if borrower dies during lifetime of mortgage the debt is repaid. Monthly premium few £. Who should use this type of mortgage? A client without dependants who is looking for the lowest monthly mortgage cost.

Pension mortgage: This type of mortgage is linked to personal pension policy. The proceeds of the policy used to discharge the loan. Who should use this type of mortgage? Suits a self-employed person who has a personal pension. The contributions to the pension policy are tax deductible which is attractive for higher-rate taxpayers.

Endowment mortgage: More expensive than an ordinary repayment. Mortgage is linked to a life assurance policy that matures at end of mortgage term. None of the capital loan is repaid during the life of the mortgage, monthly repayments to the mortgagee being interest only. Borrower pays monthly premiums on the life policy to a life company. Policy value should be sufficient to repay capital loan. Returns on endowment policies have suffered over recent yrs and there is no guarantee the proceeds will repay the loan. Any shortfall on the mortgage debt will have to be funded by the client – waned of this possibility. Who should use this type of mortgage? The risk of shortfall together with the abolition of tax relief on endowment policy premium has reduced the attraction on this type of mortgage.

TYPES OF MORTGAGES:

Mortgage guarantee scheme: To boost the housing market, from 1 Jan 2014 a gov funded mortgage guarantee scheme was introd in which loans from high st lenders were partly underwritten by the gov. ended 31 Dec 2016. Scheme covered new/old homes up to £600k and the gov guaranteed 15% of the value of the mortgage. Lenders were more willing to accept smaller deposits from borrowers and so lend a higher % of the value of the property.

Help to buy ISA: Equity loan scheme aimed at first time buyers of brand-new houses and flats. Continues until 2023. Government contribute money to ISA based on your monthly contribution to ISA. Who should use this type of ISA? First time buyers

Lifetime ISA: First time buyer under 40 can use a lifetime ISA (individual savings account) to help fund the purchase and save up to £4k tax free each year. The gov will pay a 25% bonus on the clients contributions, up to a max of £1000 a yr. Who should use this ISA? First time buyer under 40

Help to buy shared ownership ISA: Available to first time buyers . allows individuals or couples earning less than £80k to buy a share of a home at 25-75% of its value. They pay rent to a housing association, who owns remaining share of prop, but have the option to increase their ownership later. Who should use this type of ISA? First time buyers

Interest-only mortgage: Cheapest mortgage monthly for a client. No capital is repaid, only interest, and the mortgage isn’t linked to any policy or pension. Client would need to find a way of paying off the loan eventually. Who should use this type of mortgage? Lenders should only offer interest-only loans to borrowers who can demonstrate that they have arrangements in place for repayment of the loan e.g. out of an existing pension fund. Make client aware of risks involved.

Sharia-compliant mortgages: Islamic law forbids Muslims from paying interest. This excludes Muslims from the conventional mortgage products that are on offer. Specialist Muslim lenders such as the Islamic Bank of Britain offer sharia-compliant alternatives. These involve the lender initially buying the subject property and then selling it on to the Muslim purchaser at a higher price. Who should use this type of mortgage? Muslims

MORTGAGES: Note: o Solicitors duty to ensure that the client’s arrangements are satisfactory according to their needs and wishes – e.g. someone without dependants who wishes to secure the lowest monthly outlay would generally be advised to take out an ordinary repayment mortgage, not a more complicated and expensive mortgage. o Warn clients about the dangers of attractive-looking fixed interest rate mortgages – often contain hidden penalties for early redemption o Always check the conditions of the mortgage offer carefully FUNDING DEPOSIT FOR PROPERTY WITHOUT MORTGAGE: make client aware a deposit must be paid up front and can not come from mortgage payment as this payment wont be received until on completion! Deposit reqd up front! - savings - gifts from family members - if client is selling their house, could use the deposit the buyer of their house gave them - private loan - deposit guarantee scheme - help to buy isa UK Finance Mortgage lenders handbook: - As a result of the mortgage market review in 2014, lenders conveyancer is now reqd to inform lender straight away if seller hasn’t owned the property for at least 6 months – key requirement - Any sub-sale must also be reported Handbook contains 3 parts: 1. Sets out main instructions and guidance which must be disclosed by the conveyancers 2. Details each lenders specific reqs that arise from those instructions 3. Applies where the conveyancer is only representing the lender in a residential conveyancing transaction

LEASEHOLD MORTGAGES:

For mortgages secured on residential leasehold properties, you should check the matters listed: o Ensure you have a clear receipt for the last ground rent. o Ensure there is no provision for forfeiture on bankruptcy of the tenant or any superior tenant. o Ensure there is a mutual enforceability covenant allowing the tenant to enforce other tenants’ covenants in the block. o Check that the lessor’s covenants for repair and maintenance of the structure and common parts are adequate. o Check that you have the current name and address of the lessor and any management company and that, if limited companies, neither have been struck off the register.

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Are you satisfied with the past three years’ accounts of any management company? If not, send them to the lender for clearance. If the tenants control the management company, you must keep with the deeds an up-to-date copy of the company’s memorandum and articles of association, the borrower’s share certificate, and a blank transfer signed by the borrower. Check that any management company has an interest in land and that the lessees are all members of it. If this is not the case, the lessor should be obliged to carry out the management company’s obligations should it fail to do so. If required, check that the lessor’s consent to the proposed lease assignment has been obtained. If required, check that the lessor’s consent to the proposed mortgage on the leasehold property has been obtained.

PERFECTING THE MORTGAGE AFTER COMPLETION: o Following completion, If the borrower is a INCORP COMPANY – mortgage must be registered at Companies Registry within 21 days of completion – CA S860. o If its NOT registered, charge will be void against company’s creditors/liquidator/administrator. o REGISTERED LAND – register mortgage at Land Registry before expiry of the property protection period of your official search. o UNREGISTERED LAND – apply for first registration within 2 months of completion. o LEASEHOLD – check notice reqs in the lease. Usually you give notice to lessor of any mortgage of the leasehold estate within a set time and pay a fee. Notice should be given in duplicate with a req that one copy be returned receipted. COMMERCIAL PROPERTY MORTGAGES: o Lender normally instructs an indep firm to act for it. o Buyers solicitor must ensure, before committing buyer to exchange of contracts, that the lenders solicitor is satisfied with the title, result of searches etc. Requesting information: Borrowers solicitor asked to supply copied of all relevant docs to transaction - full abstract or epitome of title or official copies of the registered title, all necessary searches, replies to pre-contract enquiries, planning permissions, details of all occupiers, and, assuming the borrower is also buying, the dated and signed contract, replies to requisitions, precompletion searches, and the approved draft purchase deed. Investigation of title: o Lenders solicitor double checks title and any other queries which may need to be raised with borrowers solicitor. o Borrowers solicitor expected to supply completed Land Registry form. o Lenders solicitor will insist on an undertaking from borrowers solicitor to be responsible for lenders costs whether or not transaction proceeds to completion – cover abortive fees. Procedure: o Lenders solicitor prepares security docs e.g. mortgage deed – contents must be properly examined by borrower o Docs executed in the presence of borrowers solicitor – sings as a W

o Completion – can either occur at a meeting attended by lender solicitor or borrowers solicitor can act as agent on completion

Conduct points: 1.Ensure Money Laundering Regulations 2017 are complied with! o Do not accept large sum of cash from borrower client o Your firm must have procedures in place for obtaining satisfactory evidence of your client borrower’s identity. o Most reliable form of ID is a passport, and it is safe practice to inspect the borrower’s full passport to confirm their identity and then keep a copy of it on file for future reference.

2.Confidentiality: o Obtain borrowers consent before passing on any confidential info to the lender. o If the borrower refuses to consent to disclose, you should send only those parts of your file that relate to work done for the lender. o Some lenders get borrowers to sign a waiver of confidentiality at the time of the mortgage application. o In this case, you may need to disclose whole file to lender, check the clients waiver for details of what can or cant be disclosed! 3.Guarantors: o Any guarantor of borrower who is executing the mortgage deed should be told to take indep legal advice before signing. o Guarantor may become liable instead or/as well as the borrower for all the money owing under the deed. 4.Conflict of Interest: o Ensure no conflict of interest arises between borrower and lender. E.g. if solicitor becomes involved in negotiations re the conditions of the loan agreement, there will be a conflict. o A conflict may also occur if you discover that the borrower intends to breach a condition of the mortgage offer (e.g. to use the property for prohibited business purposes) – explain to the borrower that a conflict has arisen and you can no longer act for the borrower or lender unless the lender permits you to continue to act for the borrower alone. As you can no longer act for the lender, the lender’s papers should be returned. o Duty of confidentiality to the borrower - (continues even after termination of borrowers retainer) you cant disclose the reason why you cant act. You must inform the lender that a conflict of interest has arisen only. o Signing certificate - POTENTIAL FOR A CONFLICT: between interest of occupier and that of lender/borrower. Possibility of undue influence to sign dec: - Take reasonable steps to ensure person signing has an adequate understanding of the nature/effect of transaction. - Solicitor must ensure person signing is separately advised.

Acting for borrower and lender: Commercial transactions – lender usually instructs own solicitor Residential transactions – lender will instruct you to act for it as well as the borrower Solicitor can NOT act for both lender and borrower in a transaction IF there is a CONFLICT or a SIGNIF RISK of a CONFLICT. EXCEPTION: Clause 6.2(a) of the Code contains an exception where solicitor may act for 2 clients where there is a conflict provided the clients have a substantially common interest. Lender and borrower: the common interest is both parties will want to ensure that the subject property has a good and marketable title free from matters that would adversely affect the property’s value. Thus you CAN ACT FOR BOTH lender and borrower in rel to a mortgage provided: a) The mortgage is a standard mortgage of property to be used as the borrowers private residence Standard mortgage – mortgage is on standard terms, not negotiated by lender/borrowers solicitors. b) You are satisfied that it is reasonable and in the clients best interests for you to act; and c) The certificate of title reqd by the lender is in the form of the approved by the Law Society and the Council of Mortgage Lenders. -

NOTE: Solicitor can normally act for both in terms of a standard mortgage. If it isn’t on standard terms, the lender and borrower will most likely need to be separately represented.

What happens if a conflict does arise when acting for lender and borrower? You must CEASE acting for both parties unless you can continue to act for the other with the consent of the parties. Examples of a conflict: - Where the borrower misrepresents to the lender that the purchase price is in fact higher than the price agreed with the seller - Where the terms of the mortgage offer are clearly unfair to the borrower - Where the solicitor becomes involved in negotiations regarding the loan agreement. Only act for both where: o Mortgage is a standard mortgage of a property to be used as the borrowers private residence o You are satisfied that its reasonable and in the clients best interests for you to act o Certificate of title reqd by the lender` is in the form approved by the Law Society and the Council of Mortgage Lenders. Check the mortgage instructions contained in the UK Finance Mortgage Lenders’ Handbook.

MORTGAGE FRAUD: o If you know client is engaging in fraudulent activities, you’re obliged as a matter of professional conduct to cease acting. If you continue to act you risk: a) Disciplinary proceedings – SRA – breaching conduct rules b) Civil proceedings – negligence/breach of contract e.g. by a lender who has suffered loss c) Criminal prosecution – aiding and abetting a fraud/conspiracy to defraud. Risk custodial sentence and being struck off the roll. Key points: o Inform lender client of any price alteration or other info that may be relevant to the lending decision. Duty of Confidentiality – to borrower client so borrower must consent to any disclose you make to lender o Unusual transactions – if instructions/transaction unusual ask your client for a full explanation. If client is attempting to commit a fraud or if you’re in any doubt about your clients motives, discontinue acting. o Ensure all monies are paid through solicitors accounts, NOT between the parties direct o Be on guard against any false mortgage application/inflated property valuations. If in doubt make further investigations. o When acting for more than one client (joint borrowers) take instructions from each client in person. Best practice is for all borrowers to sign mortgage deed in your presence to avoid possible forgery o If you become suspicious about any transaction, take appropriate steps/stop acting for the client.

MORTGAGE OFFER: Mortgage offer: o Buyer reqs mortgage- Solicitors duty to ensure before exchange of contracts that an acceptable written offer of a mortgage is made and accepted. o Solicitor should also receive written offer. Should not rely on the clients word that it has been issued o Read mortgage conditions carefully and after discussing them with client est that the mortgage offer is acceptable. Advising client on mortgage offer: o Advise client about precise terms of the mortgage offer clearly to ensure they understand them o Draw clients attention to the mortgages general conditions. General conditions – found in small print or separate booklet. They apply to all mortgages by a lender. Common examples: not to make alterations to the property and not to let the property without first obtaining the lenders consent. o Special conditions – ensure that any special conditions in the mortgage offer can be met by the client. Examples: a) Retention for repairs: o Lenders survey may recommend that essential repairs are made to the property. o Hence lender may impose a mortgage cond that a specified sum is held back from the mortgage advance until repairs have been carried out. o Client will have to fund the shortfall in order to complete. o Client will also need to pay for repairs themselves after completion. b) Retention for making up roads and drains: o Made in respect of new property to cover risks associated with the developer defaulting in making up the roads and drains. o Buyer may seek to persuade the developer/seller to agree a similar retention from the balance due on completion until the mortgage retention is eventually released. Developers reluctant to agree. c) Mortgage indemnity guarantee: o If the loan exceeds a certain % of the lenders valuation of the property, e.g. 75%, the lender may req some additional security. o This covers situation in which the borrower defaults and the lender is forced to sell the property at a loss to cover outstanding debt – repossession. o Additional security takes the form of a separate indemnity guarantee policy protecting the lender against this risk. o The insurance company offering the guarantee charges single premium of a few hundred pounds. o The borrower pays the premium and should be made aware of this o This is paid by the lender initially and either deducts from the mortgage advance or adds to the loan account.

THE MORTGAGE DEED: o Req: Legal mortgage must be made by deed – S85 LPA 1925. o Registered land – Rule 103 of the Land Registration Rules 2003 provides that a legal charge may be in Form CH1 – not compulsory o Procedure - Lender will supply its own printed mortgage form which is sent to solicitor along with the instruction pack. Solicitor will complete the blanks in readiness for execution by borrower before completion Advising the client – mortgage deed: Before your client EXECUTES mortgage deed you should explain to your client its nature and effect. E.g: a) Point out initial rate of interest and amount of first monthly repayment – explain that the lender may vary them at any time unless mortgage is fixed rate. b) Explain the borrowers covenants – e.g. covenant to keep the property in good repair, the covenant not to make alterations w/out lenders consent, and any prohibition against letting/sharing possession without the lenders consent (lodgers often help to pay mortgage) c) Lenders rights against failing to repay/breaches – narrower should note that if there is any default on mortgage repayments or breach of covenant, the lender has the right to call in the loan and sell the property d) Penalty charges – penalty charges for early repayment should be explained. Often the case in attractive looking fixed-rate packages. e) Monies charged – if mortgage secures all monies owed to the lender, breach of this would allow lender to call in other loans if borrower made any. Most mortgages are all monies charged. Joint borrowers – this incs sums advanced to them individually on sole mortgages on other properties f) Insurance – lender right to insure property and recover premiums from borrower should be explained. Deed & S101 LPA 1925 contains express power for lender to insure. Note: chain purchase – if mortgage monies being used to finance a contemporaneous purchase, deed must be executed BEFORE completion of the purchase. When to sign the deed – a good time to sign is when you see the client to explain mortgage terms and you can then act as the clients witness as well. Lender doesn’t need to execute deed unless lender is entering into new covenants. Execution - Ensure client executes mortgage before completion and leave it UNDATED in your file. On completion, you will then date the mortgage deed at the same time as you date the purchase deed.

Financial Services and Markets Act 2000: o Consider this statute when advising on mortgages o Solicitors who conduct mainstream investment business (e.g. advising on specific investments) must be authorised to do so by the Financial Conduct Author...