Professional Documents
Culture Documents
CeMAP Module 3
2013/14
These learning materials are up-to-date for examinations
from 1 October 2013.
ISBN 978-1-84516-997-8
9 781845 169978
The Institute of Financial Services is a division of the ifs School of Finance, a registered charity incorporated by Royal Charter.
Published by the Institute of Financial Services, a division of the ifs School of Finance, a registered charity
incorporated by Royal Charter.
The Institute of Financial Services believes that the sources of information upon which the book is based
are reliable and has made every effort to ensure the complete accuracy of the text. However, neither the
Institute, the author nor any contributor can accept any legal responsibility whatsoever for consequences
that may arise from any errors or omissions or any opinion or advice given.
All rights reserved. No part of this publication may be reproduced in any material form (including
photocopying or storing it in any medium by electronic means and whether or not transiently or incidentally
to some other use of this publication) without the prior written permission of the copyright owner except
in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a
licence issued by the Copyright Licensing Agency Ltd. Applications for the copyright owners written
permission to reproduce any part of this publication should be addressed to the publisher at the
address below:
ifs School of Finance
ifs House
49 Burgate Lane
Canterbury
Kent
CT1 2XJ
T
F
E
W
01227 818609
01227 784331
editorial@ifslearning.ac.uk
www.ifslearning.ac.uk
Contents
CeMAP Syllabus
vii
xix
MCOB 1
29
57
85
vii
Updates
The syllabuses and study materials for CeFA and CeMAP are updated
annually, with updated materials being published in July for examinations taken
from the following September. For 2013/14 there is no separate update for
each module to be used alongside the existing edition of the text. Instead, the
new edition indicates in the margin where a change has been made.
Amendments to the text are the result of changes to the syllabus and the
Chancellors last Budget.
Materials are designed by the Institute of Financial Services to support learners
in their studies and as such they have been prepared to cover the requirements
set out in the syllabus for the subject you are studying. The questions in
examinations are based upon the content and learning outcomes documented
in the syllabus. All questions, live and specimen, are references to the syllabus. It
is therefore very important that you fully familiarise yourself with the content
viii
CeMAP Module 3
of the syllabus for this module/unit, both at the outset of your preparation for
an assessment and as a reference point as you progress towards attempting a
test. To help you in this, syllabus has been made easy to access from a number of
different sources. It is printed in full at the front of the learning materials, or can
be obtained on request from Institute FE Customer and Student Enquiries on
+44(0) 1227 818609 (option 1). Please make sure you have access to a syllabus
as you begin to work towards the examination.
It is your responsibility to ensure that you have the up-to-date
learning materials for your examination.
Syllabus
The syllabuses for the two knowledge modules of CeMAP are printed within
this booklet at page xix.This should be familiar to you if you have already passed
these two exams. Although the Institute has determined the number of units
and modules required to complete our qualification, the topics and learning
outcomes are the result of the consultation process embarked upon by the FSA
and the Skills Council. Therefore, while in keeping with other awarding bodies
we have had input into the review process, the Institute is not solely responsible
for determining the full range of topics that appear in the syllabus.
ix
When working through the study manuals you will have come across some
study exercises, including some based on given scenarios. These were included
as a study aide to help you assimilate the knowledge, they were not
representative of exam style questions. However, the shadow paper provided
in this booklet is a true representation of the live exam both in terms of the
number of case studies and the style, format and number of questions. It has
been produced using the same quality assured process that creates the live
bank of questions from which your final examination will be drawn. It has been
seen and approved by the Examiner as being a fair representation of a real live
CeMAP synoptic exam. Although there will be similarities in relation to topics
and themes covered none of the case studies or questions that appear in this
shadow paper are copied from the live bank. As the name implies, a shadow
paper is produced alongside and in a similar way to the live questions whilst
remaining separate from them. Additional shadow papers are available for
you to buy if you would like further practice before taking the final exam (see
the FE Customer and Student Enquiries contact number under Additional
Support).
Please note that this booklet is to be inserted within one of the binders you
will have received when studying for a previous module.
CeMAP Module 3
Read the whole of each case study very carefully before you attempt to
answer the questions. It may help to:
t
It is important to understand the context of the case study and identify the key
principles or issues it addresses. One way of doing this is to review the case
study using the same criteria you would use as part of a fact find when
assessing the needs of a customer to whom you might be offering advice. You
should look out for details such as:
Family details
Income and expenditure
Taxation
Policies/protection/pensions
Assets
Liabilities
Risk
Aspirations
Needs
xi
UK financial regulation
The ConservativeLiberal Democrat coalition government has made
fundamental changes to the system of financial regulation in the UK. The
changes are detailed in the Financial Services Act 2012, which focuses on
changing the structure and delivery of regulation within the financial services
sector. The Financial Services Act came into effect from 1 April 2013.
The headline points are as follows.
xii
Three new bodies have been created: the Financial Policy Committee
(FPC) within the Bank of England and the Prudential Regulation
Authority (PRA) will be a subsidiary of the Bank of England. Both have
powers relating to the regulation of financial services. A further body,
the Financial Conduct Authority, has been created.
CeMAP Module 3
xiii
The FCA and PRA can create threshold condition codes and vary firms
permissions on their own initiative. It is intended that the threshold codes will
be stronger than the statutory guidance previously given by the FSA.
Notes for students
Please note that all Institute of Financial Services assessments in the area of
regulation are based on fact and standing legislation. Students will not,
therefore, be assessed on aspects of regulation that are not confirmed by
underpinning legislation.
The Institute will publish updates to its learning materials for key regulatory
issues and will advise students, in a reasonable timeframe, of the dates when
this content will be assessed.
xiv
CeMAP Module 3
Support services
In addition to the study manual you also have access to the following services.
Our website www.ifslearning.ac.uk for all general enquiries and update
information on the qualification structure.
The FE Customer and Student Enquiries team is available to assist in helping
candidates who need further information and guidance. To ensure that your
query is fully understood and dealt with appropriately, we strongly encourage
you to contact us in writing, by fax or email.
To contact FE Customer and Student Enquiries:
Tel: 01227 818609
Email: customerservices@ifslearning.ac.uk
Fax: 01227 784331
Examinations
To book examinations the hotline number is 0870 6081915
Please note that if you are re-sitting an exam you will first need to register
your re-sit with the Institute of Financial Services: this can be done by
contacting Institute FE Customer and Student Enquiries on 01227 818609
(option 1).
xv
xvi
CeMAP Module 3
Additional Support
The following are available at additional cost to enhance your prospects of
passing the examinations. These are NOT intended to be used as a
replacement for your study manual. Many financial services companies
subscribe to some or all of these products, so it is advisable for you to check
with whoever handles your companies training needs to establish whether
they currently have access to these products. Otherwise please direct your
queries to our FE Customer and Student Services number 01227 818609
(option 1).
Shadow papers available for each unit and module in printed form. These
mirror the live exam for style, coverage of learning outcomes, etc. Each is
supplied with a full list of answers.
Online Subject Expert Support an online forum to which subscribers
can post technical and study-related queries relevant to the syllabus. A subject
matter expert with experience in training students for CeFA and CeMAP
examinations will post a reply. You can also use this service to communicate
with others studying your module.
ifs School of Finance 2013
xvii
xviii
CeMAP Module 3
Disclaimer
These learning materials have been designed by the
Institute of Financial Services to support students in
their studies and in particular to help them prepare for
their assessment(s). The assessments are based upon the
content and learning outcomes documented in the
award/module/unit syllabus, which is printed in full at the
front of the learning material.
The learning materials have been prepared to cover the
requirements of this syllabus and a comprehensive
knowledge and understanding of the content of these
learning materials should allow students to be successful
in the assessment(s).
Because some of the topics within the syllabus are interrelated and the learning materials are written in a style
that is intended to explain concepts and engage the user
in active learning, there are occasional instances where it
is not possible to find a specific reference point to answer
each question. This is particularly true of questions
relating to case studies where the application of
knowledge is being tested.
Here, a candidates knowledge of all preceding modules is
relevant and consequently questions may relate to more
than one point in the learning materials.
xix
xx
UK Financial Regulation
Certificate for Financial Advisers (CeFA) and
Certificate in Mortgage Advice and Practice
(CeMAP)
Module 1 Syllabus
Learning Outcomes
Unit 1 Introduction to Financial Services
Environment and Products
On completion of this part of the module, candidates will be expected to:
Demonstrate an understanding of:
1
the main financial asset classes and their characteristics, covering past
performance, risk and return
the UK taxation and social security systems and how they affect personal
financial circumstances
the impact of inflation, interest rate volatility and other relevant socioeconomic factors on personal financial plans.
xxi
the main aims and activities of the Financial Conduct Authority (FCA),
and its approach to ethical conduct by firms and individuals
how other non-tax laws and regulations impact upon firms and the
process of advising clients.
how the regulator's rules affect the control structures of firms and their
relationship with the regulator
the main features of the rules for dealing with complaints and
compensation
how the Data Protection Act 1998 affects the provision of financial advice
and the conduct of firms generally.
xxii
CeMAP Module 3
Detailed Syllabus
Key: K = Knowledge. U = Understanding. An = Analyse. As = Assess. A = Apply.
Outcome
Indicative Content
xxiii
U4.1 Budgeting
U4.2 Protection
U4.3 Borrowing and debt
U4.4 Investment and saving
U4.5 Retirement planning
U4.6 Estate planning
U4.7 Tax planning
xxiv
CeMAP Module 3
6
Attainment
Level
Demonstrate
a knowledge
of:
Outcome
Indicative Content
K1.1
K1.2
K1.3
K1.4
K1.5
K1.6
K2.1
K2.2
K2.3
K2.4
K2.5
EU directives
K3.1
xxvi
CeMAP Module 3
Demonstrate
an understanding of:
U1.1
Authorisation of firms,
regulated activities &
regulated investments, firms status
U1.2
U1.3
U1.4
U1.5
U2.1
U2.2
U2.3
U3.1
U3.2
Types of client
U3.3
U3.4
U3.5
U3.6
Suitability of advice
U3.7
U3.8
U3.9
xxvii
xxviii
U4.1
U4.2
U4.3
U4.4
U4.5
Reporting procedures
U4.6
Training requirements
U4.7
Enforcement
U4.8
U5.1
U5.2
U5.3
U5.4
U5.5
U6.1
U6.2
U6.3
Mortgages
Certificate in Mortgage Advice and Practice
(CeMAP)
Module 2 Syllabus
Learning Outcomes
Unit 3 Mortgage Law, Policy Practice and Markets
On completion of the module, candidates will be expected to
Demonstrate a knowledge of:
1
2
the principal types of property defect that surveys can identify and
understand their implications when seeking a mortgage, including the
options available to consumers
the common types of borrower and how their main mortgage related
requirements may differ and what factors may disqualify people from
borrowing.
xxix
the key features of the different types of mortgage repayment options and
their benefits and drawbacks for different types of borrower
the key features of the common types of mortgage product and interest
rate options
the main features and functions of different forms of life assurance and
other insurances (eg mortgage payment protection insurance (MPPI), life,
accident and sickness insurance (ASU), building insurance, contents
insurance) associated with arranging a mortgage.
xxx
CeMAP Module 3
xxxi
Detailed Syllabus
Key: K = Knowledge. U = Understanding. An = Analyse. As = Assess. A = Apply.
Indicative Content
xxxii
CeMAP Module 3
Demonstrate 1 The main requirements of the
an underMortgage Conduct of Business
standing of:
Rules and the legislation affecting
mortgages
xxxiii
.
Indicative Content
Demonstrate 1
an understanding of:
U1.1
Affordability
U1.2
Suitability
U1.3
Risk
U1.4
Term of mortgage
U1.5
U1.6
U1.7
U2.1
Gazumping
U2.2
Gazundering
U3.1
U3.2
xxxiv
CeMAP Module 3
4
U4.1
Reservation fees
U4.2
Application fees
U4.3
Arrangement/booking fees
U4.4
U4.5
U4.6
Valuation fees
U4.7
U4.8
Legal/solicitors fees
U4.9
xxxv
U5.1
Type of property
U5.2
Location
U5.3
U5.4
Age of property
U5.5
Freehold/commonhold/leasehold
(England & Wales)
U5.6
Tenure
U5.7
Multiple use
U5.8
Vacant possession
U5.9
Reinstatement value
xxxvi
U6.1
U6.2
Requirements of lenders
U6.3
U7.1
U7.2
U7.3
CeMAP Module 3
Indicative Content
U1.1
U1.2
U1.3
U1.4
U2.1
U2.2
U2.3
U2.4
U2.5
U2.6
Flexible mortgages
U2.7
U2.8
U2.9
xxxvii
U3.1
Commercial mortgages
U3.2
U3.3
U3.4
U3.5
U3.6
U3.7
U3.8
U3.9
xxxviii
U4.1
U4.2
Accident/sickness/critical illness/
unemployment/redundancy
insurance
U4.3
U4.4
U4.5
CeMAP Module 3
Indicative Content
U1.1
U1.2
Further advances
U1.3
U1.4
U1.5
U1.6
Bridging loans
U1.7
Charging structures
U1.8
Legal implications
U2.1
U2.2
U2.3
U2.4
U2.5
U2.6
U3.1
U3.2
U3.3
U3.4
xxxix
xl
U4.1
U4.2
U4.3
U4.4
U5.1
U5.2
U5.3
U6.1
U6.2
Learning Outcomes
Unit 7 Holistic assessment of knowledge and
understanding covered in Units 1 6
Demonstrate an ability to analyse consumers circumstances and suitable
mortgage solutions taking account of any existing arrangements
Demonstrate and ability to apply suitable mortgage solutions to specific
consumers circumstances
Demonstrate the ability to identify consumers needs and demands and
recommend suitable and affordable mortgage solutions, using their knowledge
and understanding of
t
the UK finance industry, and the regulatory and ethical framework for
giving mortgage advice
the different types of mortgage solution and the criteria for determining
their suitability and affordability
xli
Detailed Syllabus
Unit 7 Holistic assessment of knowledge and
understanding covered in Units 16
Attainment
Level
Demonstrate
an ability to
analyse:
Demonstrate
an ability to
apply:
Outcome
Indicative Content
1.1
1.2
1.3
1.4
1.5
1.1
1.2
1.3
1.4
1.5
1.6
Demonstrate the ability to identify consumers needs and demands and recommend suitable and
affordable mortgage solutions, using their knowledge and understanding of
t
the UK finance industry, and the regulatory and ethical framework for giving mortgage advice
the different types of mortgage solution and the criteria for determining their suitability and
affordability
xlii
MCOB 1
Introduction
The Financial Services Authority (FSA) took over the regulation of mortgage
sales from 31 October 2004. The Financial Services Bill (2012) amended the
Bank of England Act 1998, the Financial Services & Markets Act (2000) and the
Banking Act (2009). From a mortgage perspective the main change was the
transfer of regulation from the FSA to the Financial Conduct Authority (FCA)
for the sale and marketing of mortgages. The regulations now apply to all
Home Finance Activities, which include:
t Regulated mortgage contracts (including lifetime mortgages)
t Home purchase plans
t Home reversion plans
t Regulated sale and leaseback arrangements
For the purpose of this study text we will focus on the rules applying to
regulated mortgage contracts.
The following are excluded from regulation by the FCA:
t second charges;
t corporate mortgages, ie loans to companies.
To be more precise, the FCA now regulates the sale and administration of
home finance activities that satisfy each of the following critieria:
t the lender is providing the plan to an individual or trustee;
t in the case of a mortgage, the borrowers obligation to repay the
mortgage is secured by a first legal mortgage on land (other than
timeshare accommodation) in the UK;
t at least 40% of that land is used, or is intended to be used, as or in
connection with, a dwelling by the individual or by a related person.
A related person means either
t the borrowers spouse; or
t the borrowers parent, brother, sister, child, grandparent or grandchild.
ifs School of Finance 2013
MCOB 3
For ease of reading we will use the term mortgage as a generic term for home
finance unless otherwise stated.
A mortgage contract will be classed as a regulated contract only if the three
criteria described above are satisfied at the time the contract is entered into.
Contracts that were entered into before 31 October 2004 cannot
subsequently be regarded as regulated mortgage contracts, even if they satisfy
the required criteria.
The majority of residential mortgages will meet the above criteria, as well as
some commercial mortgages where the borrower or related person occupies
at least 40% of the land as a dwelling.
Title
MCOB 1
rules on inducements
MCOB 2
MCOB 3
MCOB 4
Conduct of Business
Standards: General
Financial Promotions
CeMAP Module 3
MCOB 4
independence
suitability of advice
non-advised sales
MCOB 5
MCOB 6
MCOB 7
Disclosure at Start of
Contract and After Sale
annual statements
MCOB 8
Equity release:
Advising and Selling
Standards
MCOB 9
Equity release:
Product Disclosure
MCOB 12 Charges
MCOB 5
The key points of each of these chapters (except 8, 9 and 10) that are
considered to be most relevant to this qualification are produced in a simplified
format in the following pages. Paragraphs shown in bold type represent actual
Rules, whereas those shown in ordinary type represent either an
interpretation of, or commentary on, those Rules.
Chapter 1
Application and purpose
1.1 The purpose of this chapter is to set out:
t
1.2 The MCOB Rules apply to every firm that carries on regulated mortgage
activities.
1.3 The application of the Rules is expressed by reference to four types of
firm, ie:
t
1.4 The MCOB Rules apply if the customer of a firm carrying on regulated
mortgage activities is resident in:
t
1.5 The Rules also apply to those business loans where the customer is not a
large business customer. A large business customer is defined as one with
a turnover (or group turnover if part of a group) of more than 1m a year.
1.6 Only regulated mortgage contracts entered into on or after 31 October
2004 are subject to the MCOB Rules. Any variation made to a contract
that was entered into before that date will not be subject to the Rules,
but the provisions of the Consumer Credit Act 1974 may apply instead.
MCOB 6
CeMAP Module 3
contact the customer and provide a statement to the effect that the
contract is regulated and subject to the MCOB Rules, and stating the
position with regard to any redress or compensation
provide a statement that the Consumer Credit Act 1974 will not
continue to apply to the contract, if this was originally the case.
Chapter 2
Conduct of business standards general
2.1 This chapter applies to:
t
Prescribed terms
2.2 In any communication to a customer, a firm must:
t
describe any higher lending charge as a higher lending charge and not
use any other expression to describe such a charge;
Communication of information
2.3 When a firm communicates information to a customer, it must take
reasonable steps to communicate it in a way that is clear, fair and not
misleading.
ifs School of Finance 2013
MCOB 7
2.4 When considering how to comply with this Rule, a firm should take into
account the level of the customers knowledge of the regulated mortgage
contract to which the information relates.
2.5 This Rule covers all forms of communication with customers, ie oral
statements, written statements, telephone calls and correspondence.
Inducements
2.6 The purpose of the following Rule is to ensure that firms conduct business
with integrity, act in the interests of customers and treat them fairly.
2.7 A firm must take reasonable steps to ensure that it, and any person acting
on its behalf, does not:
t
Accessibility of records
2.10 The records that a firm is required to keep by the MCOB Rules must be
readily accessible for inspection by the FCA.
2.11 Records are deemed to be readily accessible if they are available for
inspection within two business days of the request being received.
MCOB 8
CeMAP Module 3
Chapter 3
Financial promotion
3.1 This chapter applies to every firm that approves a qualifying credit
promotion, ie a financial promotion for a regulated mortgage contract as
well as a promotion for qualifying credit.
3.2 An example of a qualifying credit promotion that complies with the
MCOB Rules detailed in this chapter is shown below.
ABC ASSOCIATES
Finance Broker
With access to hundreds of products from most main lenders
were sure to find the right solution for you.
Need advice on whats best?
No problem all our staff are fully-trained
Our charges are usually just 250.
Call us today on
0800 000 000
Your home may be repossessed if you do not keep up
repayments on your mortgage.
3.3 Certain qualifying credit promotions are exempt from the MCOB Rules.
Essentially, these are promotions that contain only one or more of the
following:
t
a logo;
3.4 This chapter distinguishes between real time and non-real time qualifying
credit promotions.
ifs School of Finance 2013
MCOB 9
use a comparison that meets the same needs or is intended for the
same purpose
not create any confusion in the market place between the firm and a
competitor.
3.8 It is recommended that firms should avoid the use of small print to qualify
claims that are made in a prominent way in a non-real time promotion.
3.9 If a non-real time promotion includes information on the firms
performance, interest rates or market conditions then such information
should be relevant and recent.
3.10 A non-real time qualifying credit promotion that promotes a product that
is conditional upon the customer obtaining further products or services
must prominently state the compulsory nature of these purchases.
MCOB 10
CeMAP Module 3
express the APR as follows the overall cost for comparison is x% APR
clearly distinguish the APR from any other rate quoted, but ensuring
that no other information is placed between the two figures.
The firm is not required to explain the basis on which the APR is calculated,
or to provide a figure for the total charge for credit.
MCOB 11
checks that the recipient wishes him to proceed if the time and
method of communication were not previously agreed;
at any time on a Sunday or other days or times when the firm is aware
that the customer would not wish to be called.
3.20 The Rule detailed above in paragraph 3.18 also applies to call centre
operators who initiate communication with customers.
Records
3.21 A firm must make an adequate record of each non-real time qualifying
credit promotion. The record must be retained for at least one year from
the date the promotion was last communicated.
3.22 Records can be kept in such form as the firm chooses, provided it is
readily accessible for inspection by the FCA.
MCOB 12
CeMAP Module 3
Chapter 4
Advising and selling standards
4.1 The whole of this chapter applies to all mortgage lenders, mortgage
advisors and mortgage arrangers.
4.2 The purpose of this chapter is to ensure that:
t
4.3 A firm must take reasonable steps to ensure that the scope of the service
given to a customer, and the regulated mortgage contracts offered, is
based on a selection from one of the following:
t
Whole of market
4.4 A firm which states that it gives information or advice to customers on
regulated mortgage contracts from the whole market must not give such
information or advice unless it has considered a sufficiently large number
of regulated contracts that are generally available from the market.
4.5 Every firm that offers customers a selection from the whole market must
make sure that its analysis and knowledge of the market is kept up-todate.
4.6 The whole market approach can be satisfied by a firm using a panel of
lenders, although the panel should comprise lenders representative of the
whole market.
MCOB 13
Independence
4.7 When providing information or giving advice to a customer on regulated
mortgage contracts, a firm must not imply that it is acting independently
unless it intends to:
t
enable the customer to pay a fee for the provision of that service.
4.8 It is acceptable for a firm that sells investments and regulated mortgage
contracts to act independently for one but offer only a limited range for
the other. In such circumstances, the firm must ensure that all of its
communications are clear, fair and not misleading so that customers fully
understand the nature of the services provided.
4.9 It is also acceptable for a firm to provide a customer with other payment
options, such as a combination of a fee and commission.
MCOB 14
CeMAP Module 3
establishes with the customer how much he will pay for that advice or
information;
the name of the firm and the commercial purpose of the call;
the scope of the service provided by the firm (see paragraph 4.3);
if the scope of the service is not based on the whole market, that the
customer can request a copy of the list of mortgage lenders whose
regulated mortgage contracts are offered;
whether or not the firm will provide the customer with advice on
those regulated mortgage contracts it offers.
MCOB 15
Advised sales
4.19 A firm must take reasonable steps to ensure that it does not make a
personal recommendation to a customer to enter into a particular
regulated mortgage contract unless that contract will be suitable for that
customer.
4.20 The above Rule also applies where a firm gives a personal
recommendation to vary an existing regulated mortgage contract.
4.21 A regulated mortgage contract will be deemed to be suitable if, having
regard to the facts disclosed by the customer, the firm has reasonable
grounds to conclude that:
t
the contract is the most suitable of those that the firm is able to offer
within the scope of the service provided.
4.22 The firm must explain to the customer that the assessment of whether
he can afford to enter into a regulated mortgage contract based on:
t
CeMAP Module 3
the cost associated with increasing the period over which the debt is
to be repaid
the costs that the customer will be required to meet once any
discount period comes to an end.
MCOB 17
4.28 The above Rule does not require a firm to provide advice on regulated
investments.
4.29 It is important to note that the assessment of suitability should not be
limited to types of regulated mortgage contract that a firm offers. It is not
acceptable to recommend the product that is closest to meeting a
customers needs and circumstances if the firm does not have access to
products which would be fully appropriate to those needs and
circumstances.
For example, a firm that only offers sub-prime products should not
recommend one of these products to a customer with an unblemished credit
record.
Record keeping
4.30 A firm must make and retain a record:
t
that explains why the firm has concluded that its personal
recommendation satisfies the suitability requirements.
The record must be retained for a minimum period of three years from the date
on which the personal recommendation was made. There is no requirement to
keep a record if the customer decides not to make an application.
Non-advised sales
4.31 If a firm arranges a regulated mortgage contract without giving a personal
recommendation, it must ensure that all the questions it asks the
customer about his needs and circumstances are scripted in advance.
4.32 Information provided to a customer in a non-advised sale must be clear,
fair and not misleading. The scripted questions should also be clear, fair
and not misleading.
MCOB 18
CeMAP Module 3
4.33 If, in the course of a non-advised sale, a firm decides that a customer is
considering a regulated mortgage contract that is inappropriate for that
customer, the firm should tell the customer to seek advice. This would
mean that the firm would be paying due regard to the customers
interests and treating him fairly.
4.34 A firm must ensure that all staff using scripted questions:
t
4.35 A firm must make, and keep up to date, a record of all scripted questions
used. The record must be made on the date on which the questions are
first used.
The record must be kept for one year from the date that the questions were
replaced by up-to-date ones.
4.38 In addition, those customers who are looking to vary the terms of an
existing mortgage, either with their current lender or by moving to a new
lender may be dealt with on an execution only basis as long as the loan
amount will not increase.
ifs School of Finance 2013
MCOB 19
4.39 A high net worth customer is defined as one with a minimum annual net
income of 300,000, or minimum net assets of 3m. In the case of joint
applicants at least one of them must meet the definition in their own
right. The firm must satisfy itself that the customer meets the
requirements for treatment as a high net worth customer and keep
records of the sale for at least three years from the start of the contract.
4.40 Lenders can apply higher-level requirements to high net worth
customers, based on three main factors;
t
CeMAP Module 3
4.44 If a customer has rejected the advice given and wishes to take out a
different mortgage on an execution-only basis, the firm can arrange that
as long as the MCOB rules on execution-only sales are satisfied.
4.45 Execution only sales can normally be arranged only in cases where:
t there is no spoken or other interactive dialogue between the firm and
the customer during the sale; or
t if there is spoken or other interactive dialogue between the firm and
the customer during the sale the customer is a high net worth
mortgage customer or a professional customer or the loan is solely
for a business purpose. If any of these apply the customer must
positively elect to proceed on an execution-only basis;
t the customer has rejected advice, identified the product he wants,
provided the firm with details about the chosen product and positively
elected to proceed with an execution-only sale, as described above.
4.46 With the exception of loans to high net worth customers, professional
customers or mortgages solely for business purposes, a firm must not
enter into or arrange an execution-only sale if:
t the customer is intending to use it to exercise a statutory right to
buy their home; or
t the main purpose of the customers entering into it is to raise funds
for debt consolidation; or
t there is spoken or other interactive dialogue between the firm and the
customer at any point during the sale.
4.47 Borrowers seeking to vary the terms of an existing mortgage, either with
their existing lender or by moving to a new lender, can do so on an
execution only basis as long as the new arrangement does not involve
extra borrowing, other than to cover any product or arrangement fees.
4.48 Records of execution only sales must be kept for three years from the
start of the contract, and must include the details given by the customer
about the mortgage product chosen and details of any rejected advice.
4.49. Interest only mortgages are addressed in two parts of the 2014 MCOB
4.7a Advised Sales and 11.6 Responsible Lending. MCOB 4.7a requires a
firm to make sure that the customer demonstrates he has arranged a
clearly understood and credible repayment strategy that the lender has
assessed at the time to have the potential to repay the capital at the end
of the term. The lender is not required to provide advice on that strategy.
ifs School of Finance 2013
MCOB 21
Chapter 5
Pre-application disclosure
5.1 A customer must be provided with an illustration before he submits an
application to a mortgage lender.
5.2 An illustration must be provided if a firm:
t
5.3 The purpose of this chapter is to ensure that, before a customer submits
an application, he is supplied with information that makes clear:
t
5.4 A firm must be able to show that it has taken reasonable steps to ensure
that any illustration it issues is clear, fair and not misleading.
5.5. An illustration on a particular regulated mortgage contract issued by, or
on behalf of, a mortgage lender, must be an accurate reflection of the
costs of that contract.
5.6 A mortgage intermediary must take reasonable steps to ensure that an
illustration which it issues, or which is issued on its behalf by any firm
other than a mortgage lender, is no more than 1% or 1, whichever is the
greater, below the actual figures charged by the lender for:
t
MCOB 22
CeMAP Module 3
t
Record keeping
5.10 A firm must make an adequate record of each illustration it issues. The
record must be retained for a year from the date of the customers
application.
5.11 The record should contain the following information;
t
5.12 A firm is not required to keep a record of any illustration that is issued
to a customer where he does not apply to enter into that particular
contract.
MCOB 23
Tied products
5.13 If an illustration provided to a customer does not contain an accurate
quotation or reasonable estimate of the payments the customer will be
required to make in connection with any tied product, then:
t
Timing
5.14 An illustration for a regulated mortgage contract must be provided
before the customer submits an application for that particular contract.
5.15 An illustration for a regulated mortgage contract must be issued at the
point at which any personal recommendation is made to the customer. If
the personal recommendation is made by telephone, the illustration must
be provided within five business days.
5.16 An illustration must also be provided if a firm provides written
information that is specific to the amount that the customer wishes to
borrow on a particular regulated mortgage contract.
5.17 A firm must not accept fees or commission a valuation until the customer
has had the opportunity to consider an illustration.
MCOB 24
CeMAP Module 3
make the customer aware that the illustration has been prepared on
this basis.
contain all the material set out in the specimen illustration (see
below);
use font sizes and typefaces that make it sufficiently legible to a typical
customer.
An illustration must not contain any material other than that prescribed in the
Rules.
5.20 It is not acceptable for an illustration to contain information relating to
more than one regulated contract, ie comparisons between different
products must not be made.
MCOB 25
MCOB 26
CeMAP Module 3
...
...%APR
Interest
deferred
Amount of
deferred interest
that is added to
the mortgage
Remaining debt
before deferred
interest is added
Remaining debt
with deferred
interest added
MCOB 27
Fee amount
Fees payable to (insert name of mortgage lender) Insert amount of each fee
Other fees
9. Insurance
Insert frequency of
payments for premium
quoted payments
Insert amount(s) if
appropriate
Insert amount(s) if
appropriate
Insert amount(s)
Optional insurance
10. What happens if you do not want this mortgage any more?
Early repayment charges
What happens if you move house?
MCOB 28
CeMAP Module 3
MCOB 29
Any other relevant information given by the customer can also be included.
5.24 Any fees and other charges that are to be added to the loan must be
shown clearly after the amount of the loan
5.25 Similarly, any insurance premiums that are to be added to the loan must
also be shown clearly.
5.26 If the customer is required to pay any fees or charges, but these are not
being added to the amount to be borrowed, the following text must be
added after the loan amount.
No fees have been added to this amount but the fees you need to pay are
shown in section 8.
5.27 If no fees or charges are required to be paid by the customer, and no
insurance premiums are being added to the loan, the following text must
be added after the loan amount
We do not charge any fees for this mortgage.
5.28 If the illustration is in respect of a contract that is part interest-only and
part repayment, it must show the amount that is being borrowed on each
basis.
5.29 At the end of Section 3 of the illustration a statement must be included
making it clear that any changes to the information obtained from the
customer, or any change to the property valuation, could alter the
illustration, and encouraging the customer to ask for a revised illustration.
Section 4 description of this mortgage
5.30 This section of the illustration must
t
unless the interest rate applies for the full term of the loan, confirm
the period during which it will apply and the date on which it ends
where there is more than one interest rate type or rate of interest,
specify the amount of the loan to which each applies
MCOB 30
CeMAP Module 3
t
5.34 At the end of this section the following text must be included:
Unless the interest rate is fixed throughout the term of the mortgage, the
figures given in this section will vary following interest rate changes.
Section 6 what you will need to pay each month
5.35 This section must contain:
t
the amount of the loan on which the illustration is based, including all
fees, charges and insurance premiums that have been added to it;
MCOB 31
the interest rate charged on the mortgage at the time the illustration
is issued;
MCOB 32
CeMAP Module 3
if the interest rate is fixed for part of the term, an explanation of how
increases in the interest rate charged will affect the customers
monthly repayments
if the interest rate is capped or collared , or both, and this applies for
only part of the mortgage term, an explanation of how increases in the
interest rate charged will affect the customers monthly payments
the following statement under the heading What if your income goes
down?
You will still have to pay your mortgage if you lose your job or if illness
prevents you from working. Think about whether you could do this.
5.40 The amount by which the customers payments would increase following
an interest rate increase (see 5.39) must be calculated using:
t
the amount outstanding from the earliest date at which the rate
charged can vary, eg on a fixed rate mortgage, this would be the date
on which the fixed rate ends; and
the interest rate charged at the date the illustration was issued.
5.41 The following text must be included at the end of this section:
The FCAs guide entitled You can afford your mortgage now, but what if,
will help you consider the risks.
MCOB 33
itemise all fees that are included in the APR calculation, excluding any
compulsory mortgage payment protection insurance;
You may have to pay other taxes or costs in addition to any fees shown here.
Fees to be itemised in this section include a fee to re-inspect the property
following completion of works (if known at the time the illustration is
issued), and any fee payable when the loan is fully repaid.
5.43 The fees payable to the lender must be shown separately to any other
fees payable. Other fees include those charged by a mortgage
intermediary for giving advice and arranging a mortgage.
5.44 The following information must be provided for each fee included in this
section:
t
MCOB 34
CeMAP Module 3
Section 9 insurance
5.48 This section must include details of any:
t
It must be clearly stated from whom any tied insurance product must be
purchased, ie the lender or the mortgage intermediary.
5.49 The following information must also be included in respect of each tied
insurance product:
t
details of when the payments for such insurance change, eg if they are
reviewed annually.
5.50 If the customer is not required to take out any tied insurance product
then this must be clearly stated in this section.
5.51 If the lender or intermediary makes a charge where the customer decides
not to purchase a compulsory insurance product through the lender or
intermediary, this must be clearly stated. The amount of the charge and
the frequency with which it is payable must also be stated.
5.52 If the customer has asked for any insurance premiums to be added to the
amount borrowed, the following statement must be included
The annual insurance premium will be added to your mortgage account. This
will increase the amount you owe.
This statement must also give the period within which the premium can be
paid before interest is charged on it.
MCOB 35
Section 10 what happens if you do not want this mortgage any more?
5.53 The following information must be included under the heading Early
repayment charges:
t
whether any early repayment charges are payable, and, if so, when;
5.54 Under the heading What happens if you move house? details must be
provided of whether the mortgage is portable on moving house and if any
conditions or restrictions will apply.
Section 11 what happens if you want to make overpayments?
5.55 This section must include details of any restrictions that apply to lump
sum and regular overpayments, together with a statement as to whether
or not the amount of the loan on which interest is calculated is reduced
immediately on receipt of any lump sum or regular overpayment.
If such recalculation of interest is not immediate, details must also be included
of when the recalculation will be made.
Section 12 additional features
5.56 This section must include details of any additional features under the
following headings:
1
Underpayments
Details of the circumstances in which underpayments can be made and
whether any conditions apply.
2
Payment holidays
Details of the circumstances in which payment holidays can be taken and
whether any conditions will apply.
MCOB 36
CeMAP Module 3
3
Borrow back
Details of the circumstances in which the customer can borrow back any
moneys overpaid and whether any conditions will apply.
4
Incentives
Details of any incentives, eg cashback. If a cashback is provided, the amount of
the cashback and when it will be paid must also be provided.
5
Additional borrowing available without further approval
Details of the circumstances in which the customer can increase the amount
of the loan on which the illustration is based without further approval by the
lender, eg if there are drawdown facilities.
6
Additional secured borrowing
Details of the circumstances in which additional secured lending is offered.
7
Unsecured borrowing
Details of the circumstances in which unsecured lending is offered.
8
Credit card
This must state whether a credit card is offered with the mortgage.
9
Linked current account
Whether a linked current account is compulsory or optional and an
explanation of the interest rates that apply under different circumstances to
the account. The firm providing the linked current account, if not the mortgage
lender, must also be stated.
10 Linked savings account
Whether a linked savings account is compulsory or optional and the interest
rate paid if it differs from the interest rate charged on the mortgage. The firm
providing the linked savings account, if not the mortgage lender, must also be
stated.
MCOB 37
5.57 If any of the additional features under headings 5, 6 and 7 apply, then the
following information must also be given:
t
the total resulting debt that the customer could incur, including the
amount of the original loan;
the name of the lender who will make the payment, and the name of
the mortgage intermediary who will be paid.
5.59 If the amount payable by the lender to the intermediary is 250 or less,
the intermediary need only state that the amount is no more than 250,
unless the customer requests the actual amount.
5.60 The amount payable by the lender must include:
t
CeMAP Module 3
5.63 The name, address and contact point of the firm providing the illustration
must be given under the heading Contact details.
5.64 The following text must be prominently displayed after the contact
details:
Your home may be repossessed if you do not keep up repayments on your
mortgage.
Chapter 6
Disclosure at the offer stage
6.1 This chapter applies only to mortgage lenders and where an offer has
been made by a firm to a customer with a view to the firm
t
switching all or part of the mortgage from one type of interest rate
to another.
6.2 This chapter does not apply to regulated lifetime mortgage contracts.
6.3 If a firm offers to enter into a regulated mortgage contract with a
customer, it must provide an offer document containing an illustration.
The offer must be based on the information set out in the illustration.
Records
6.4 A firm must make an adequate record of each offer document it issues,
and this record must be retained for a year from the date of issue.
MCOB 39
we have recommended, having assessed your needs, that you take out
this mortgage;
clearly state that the payments cover only interest, and not the capital
borrowed;
state the repayment vehicle the customer intends to use where these
details are known if the firm does not know how the customer
intends to repay the capital, it must be clearly stated that the
repayment vehicle is unknown and the customer provided with a clear
reminder of the need to put suitable arrangements in place;
MCOB 40
CeMAP Module 3
avoid amending the format where possible as this could result in the
illustration that forms part of the offer document being difficult to
compare with the original illustration;
6.9 The illustration that forms part of the offer document must form an
integral part of that document. It must not be a separate document.
explaining that once the mortgage has been completed there will be
no right of withdrawal;
explaining that the customer will have a right to repay the mortgage
in accordance with the terms of the contract;
explaining the consequences that might arise from the customer not
entering into the contract, eg any fees that have been paid that will not
be reimbursed.
6.11 A firm must ensure that under the heading Contact details, information
is given on how to complain to the firm about the services it has provided
and whether or not complaints may subsequently be referred to the
Financial Ombudsman Service.
6.12 The offer document must be accompanied by a tariff of charges that could
be incurred.
MCOB 41
Chapter 7
Disclosure at start of contract and after sale
7.1 This chapter applies if a firm
t
Disclosure requirements
7.2 A firm must provide the customer with the following information before
the first mortgage payment is made:
t
MCOB 42
allows
overpayments
or
CeMAP Module 3
Record keeping
7.3 A firm must make an adequate record of the information disclosed to
each customer at the start of the mortgage, and retain this record for a
year from the date the information is provided to the customer.
Annual statements
7.4 A firm must provide the customer with a statement at least once a year
covering the mortgage and any tied products purchased through the firm.
7.5 The annual statement must contain the following:
t
details of the following transactions during the period since the last
statement was issued:
the amount owed by the customer on the date the statement is issued
a revised tariff of charges if changes have been made since the last
annual statement was issued and these have not previously been
notified to the customer.
MCOB 43
Further advances
7.6 Before a customer submits an application to a lender for a further
advance on an existing regulated mortgage contract, or for a further
advance that will be regulated, the firm must provide the customer with
the required illustration detailed in Chapter 5 pre-application
disclosure.
7.7 The illustration must
t
Rate switches
7.8 Covers change of interest rate type requires new illustration for the
whole loan.
CeMAP Module 3
Chapter 8
Equity Release
Chapter 8 applies to the advising on and arranging lifetime mortgages and
home reversion plans, both of which require specialist qualifications for
advisers. Apart from a general understanding of this type of product CeMAP
candidates will not have to demonstrate detailed knowledge of the area. This
MCOBs summary covers the basic requirements.
8.1 The general rules on mortgage advice and suitability apply to equity
release, so will not be repeated here. However, where the plan does not
require regular payments during the applicants lifetime, the rules on
affordability are not applicable.
8.2 The firm must take into account the effect the plan will have on the
customers tax position and eligibility for state benefits as part of the
suitability assessment. It must also consider whether alternative methods
of meeting the customers objectives may be more suitable.
8.3 With regard to non-advised sales, the provider must cover the same areas
when helping the customer to select a product.
ifs School of Finance 2013
MCOB 45
Chapter 9
Lifetime mortgages: product disclosure
9.1 Product disclosure follows the principles for general mortgage advice
with adaptations to allow for the different features of the products, such
as the effect of rolling up interest and the effect of house price changes.
Chapter 10
Annual Percentage Rate
10.1 This chapter deals with the complexities of the annual percentage rate
(APR) calculation. This is not considered to be an essential requirement
of this qualification, although an explanation of the fundamentals of this
particular topic is given in the study material for Unit 5 of CeMAP
Module 2.
Chapter 11
Responsible lending
11.1 This chapter applies to mortgage lenders but only where the lender:
t
11.2 A lender must be able to show that, before deciding to enter into a
regulated mortgage contract with a customer, account was taken of the
customers ability to repay.
11.3 A lender must make an adequate record to demonstrate that it has taken
account of the customers ability to repay. The record must be retained
for a year from the date on which the regulated mortgage contract is
entered into.
11.4 The Rules described in paragraphs 11.2 and 11.3 apply where a further
advance is made on a regulated mortgage contract.
MCOB 46
CeMAP Module 3
the firm must not enter into the transaction unless it can demonstrate
that the new or varied regulated mortgage contract or home purchase
plan is affordable for the customer (and any guarantor).
This requirement does not apply if the new arrangement is to vary the terms
of an existing mortgage or replace an existing mortgage with a new lender,
providing that no further borrowing is undertaken.
11.7 The new affordability measures mean that lenders will always have to
obtain reliable evidence and verification to confirm that the income
declared by the applicant is correct, and that the lending decision should
be based on that evidence.
11.8 The rules specifically prohibit self-certification and insist that evidence of
income must be obtained from a source that is independent of the
customer rather than from the customer.
11.9 Where the firm is, or reasonably should be, aware of any future changes
to the customers income or expenditure, it should take that into account
when assessing affordability.
11.10 If the term of the mortgage will extend beyond the customers expected
retirement date (or state pension age if that date is unknown) the firm
ifs School of Finance 2013
MCOB 47
CeMAP Module 3
11.15 There are transitional arrangements for those borrowers who already
have a mortgage, but may be affected by the new rules when they seek
a new mortgage. For example, those who have an existing interest only
or self-certified loan and wish to move or remortgage. In these cases,
providing the applicant meets certain conditions, a new lender has the
discretion to grant a new mortgage. This can apply when the borrower:
t
The new monthly payment is the same as or lower than their current
payment.
11.16 A firm must make an adequate record for each customer of the steps it
takes to comply with the responsible lending rules. The records must be
in paper or electronic form and kept for the term of the mortgage.
Chapter 12
Charges
12.1 This chapter applies where a firm
t
MCOB 49
12.3 A firm is able to choose its own method for calculating early repayment
changes, except that it should not use the Rule of 78.
12.4 Before entering into a regulated mortgage contract, a firm must disclose
in the illustration provided as part of the offer of advance the maximum
amount payable as any early repayment charge that applies.
Arrears charges
12.5 A firm must ensure that any regulated mortgage contract it enters into
does not impose a charge for arrears on a borrower except where that
charge is a reasonable estimate of the cost for the additional
administration required as result of the borrower being in arrears.
12.6 The above Rule does not prevent a firm from entering into a regulated
mortgage contract under which the rate of interest charged on a fixed or
discounted rate mortgage can be increased to the firms standard variable
rate if the borrower goes into arrears.
However, the standard variable rate must not be one created especially for
borrowers in arrears.
Excessive charges
12.7
A firm must ensure that any regulated mortgage contract it enters into
does not impose excessive charges upon a borrower.
12.8
the extent to which the charge has been disclosed to the borrower;
the extent to which the charge is an abuse of the trust that the
borrower has placed in the firm.
MCOB 50
CeMAP Module 3
Chapter 13
Arrears and possessions
13.1 This chapter applies to the administration of a regulated mortgage
contract and the administration of a mortgage shortfall debt.
It continues to apply to a firm after a regulated mortgage contract has come
to an end following the sale of a repossessed property.
13.2 A firm must deal fairly with any customer who:
t
13.3 A firm must put in place, and operate in accordance with, a written policy
and procedures for complying with the Rule described in paragraph 13.2.
13.4 A firm should ensure that its written policy and procedures include
t
13.5 The regulator takes the view that the determination of a reasonable
period for the repayment of arrears or a mortgage shortfall debt will
depend on the customers circumstances. In some cases this will mean
that repayments are arranged over the remaining term of the mortgage.
ifs School of Finance 2013
MCOB 51
Record keeping
13.6 The lender must keep records of its dealings with borrowers who are in
arrears or have a shortfall debt. The records must be kept for three years
from the date of the dealings.
the nature and level of charges that will be incurred unless the arrears
are cleared.
ensure that the customer is informed of the need to contact the local
authority to establish his eligibility for re-housing after possession has
been taken;
MCOB 52
CeMAP Module 3
Statement of charges
13.9 Where an account is in arrears and charges are being levied, a firm must
provide the customer with a regular written statement of the payments
due, the arrears, the charges incurred and the outstanding debt. The
statement should be provided at least once a quarter.
13.10 The written statement referred to above need not be sent if a
repayment plan is being adhered to and no charges are being made.
Pressure on customers
13.11 A firm must not put pressure on a customer through excessive
telephone calls or correspondence, or by contact at an unreasonable
hour.
13.12 A reasonable hour is considered to be between 8am and 9pm. However,
a firm should also take into account any knowledge that it has of a
customers work pattern or religious faith which might make it
unreasonable to contact him within these hours.
obtain the best price that might reasonably be paid, taking into account
market conditions and the increasing debt owed by the customer.
13.14 If the proceeds of sale are less than the outstanding debt, the customer
must be advised as soon as possible after the sale of:
t
13.15 If the firm decides to recover the mortgage shortfall debt, it must notify
the customer of this intention. Such notification must be made within six years
of the date of sale (five years if the mortgage is subject to Scots Law).
MCOB 53
13.16 If the proceeds of sale are more than the outstanding debt, a firm must
take reasonable steps to inform the customer of the surplus and, subject
to the rights of any subsequent mortgagees, pay it to him.
MCOB 54
Case Study 1
Alec and Clare have lived in a rented flat since they were married two years
ago. Prior to this they redeemed their mortgage on their house when they sold
it to move to a different part of the country for work. They have approached
Western Bank to discuss the possibility of obtaining a mortgage. They are
hoping to purchase a leasehold flat which they have seen, having successfully
negotiated a 6,000 reduction in the original asking price of 254,000. The flat
is one of two above a high street shop, and has an unexpired lease of 75 years.
Each flat and the shop comprise equal floor areas.
They are both in full-time employment, earning guaranteed basic salaries of
44,000 and 40,000 respectively. They have asked the adviser for some
information on stocks and shares individual savings accounts (ISAs), as a friend
has suggested that it might be a good idea to use one of these as the
repayment vehicle for an interest-only mortgage.
Alec is expecting a substantial salary increase when he completes his training
in two years time, but until then he and Clare wish to know the maximum
monthly payment that they will be required to make. They want the cheapest
valuation option offered by Western Bank and are keen to protect the
mortgage with suitable life assurance.
Western Banks affordability criteria requires mortgage payments to be no
more than 80% of free disposable income taking into account committed
expenditure, basic essential expenditure and basic quality of living costs. The
maximum loan-to-value (LTV) is 90%. Additional security is required if the loanto-value ratio exceeds 80%.
Question 1
Which of the following statements is true in respect of the additional security
which the bank would require if an application is approved, the property is
valued at the agreed price, and Alec and Clare provide a 45,000 deposit?
A
The bank must encourage Alec and Claire to seek independent legal
advice.
Question 2
Assuming they meet the lenders affordability criteria and the property is
valued at the agreed price, the maximum that Alec and Claire would be able to
borrow is:
A
198,400.
203,200.
223,200.
228,600.
Question 3
How much stamp duty land tax will be saved as a result of the agreed lower
purchase price?
A
60.
180.
5,140.
7,680.
Question 4
With regard to the freehold of the flat, which factor would prohibit its
purchase under current legislation?
A
CeMAP Module 3
Question 5
If Alec and Clare proceed with their preferred valuation option, what detail will
this confirm?A If the electrical system meets current standards.
B
Question 6
Which of the following mortgage products would be most suitable for Alec and
Clare?
A
A discounted rate of 1.0% below the standard variable rate for a period
of five years.
A variable rate, currently 4.2%, but capped at 4.4% for two years.
Question 7
In comparison to a similar sized flat in a purpose-built block in the same area,
Alec and Clare should understand that their flat is likely to be:
A
Question 8
With regard to the repayment vehicle in which they are interested, and their
desire for protection, of what should Alec and Clare be made aware?
A
Question 9
Which of the following would not be a benefit of the type of repayment vehicle
being considered by Alec and Clare?
A
The maturity date is fixed to coincide with the end of the mortgage
term.
Question 10
What specific information about the most suitable mortgage product must be
included in the key facts illustration provided to Alec and Claire before they
apply for their mortgage?
A
CeMAP Module 3
Case Study 2
Nathan and Louise are moving home and have approached the Island Building
Society for mortgage advice. Their existing mortgage is with their bank and
they have no protection products in place. Nathan, aged 40, is employed as an
operations manager in a local packing company. Louise is aged 39 and works
part-time in a local shop.
The property that Nathan and Louise intend to buy is a semi-detached house
built in 1980, costing 220,000. The couple have two children: Lorna, aged 20,
who is a full-time student, and Ethan, aged 16. Nathan and Louise require a
mortgage of 120,000 over 25 years. Although they regard their income as
adequate, they want to protect their outgoings against potential rises in
interest rates until Lorna completes her university course at the age of 23.
They are both entitled to three months sick pay, but Nathan is anxious to
protect their financial position if he is made redundant, or suffers an illness that
lasts longer than three months.
Nathan and Louise wish to ensure that their mortgage is paid off by the time
Nathan retires at age 65 and require appropriate life cover at the cheapest cost
available.
The couple asked Louises brother, a qualified surveyor, to informally look at
the property prior to making an offer. He has suggested that the house is
generally sound, the asking price fairly represents its value, but that it requires
some external decoration. He feels that the lender may ask for an undertaking
regarding the work.
Island Building Societys affordability criteria requires mortgage payments to be
no more than 80% of free disposable income. The maximum loan-to-value
(LTV) is 85%. As part of its affordability assessment, Island Building Society uses
figures available from the Office for National Statistics rather than exact figures
Question 11
Island Building Societys method of assessing affordability means that Nathan
and Louise will not need to provide detailed evidence of their:
A
long-term commitments.
Question 12
If Nathan and Louises monthly free disposable income is calculated by the
building society as 850, the maximum monthly mortgage payment they could
afford in line with the stated criteria is:
A
680.
722.50.
1,000.00.
1,062.50.
Question 13
In respect of the undertaking to complete the essential external decoration,
when must this be done?
A
CeMAP Module 3
Question 14
To comply with the Mortgage Conduct of Business rules, the Island Building
Society adviser must ensure Nathan and Louise are aware of:
A
how he is remunerated.
Question 15
If Nathan and Louise proceed with their mortgage, Island Building Society will
need to keep details of the illustration it issued in connection with their
application for:
A
six months.
one year.
three years.
twenty-five years.
Question 16
From the range of mortgage products available, which of the following most
closely matches Nathan and Louises requirements?
A
Question 17
Bearing in mind their stated requirements, which life assurance product(s)
would be most suitable for Nathan and Louise in respect of the new
borrowing?
A
Question 18
The income protection product that would provide the protection Nathan
requires at lowest cost would:
A
Question 19
In respect of assessing the property as security, the building society is most
likely to:
A
10
CeMAP Module 3
Question 20
If Nathan and Louise purchase the property at the stated price, what amount
of stamp duty land tax will they pay?
A
Nil.
1,200.
2,200.
6,600.
Case Study 3
Paul and Kelly are customers of Marsh Bank and they are seeking mortgage
advice. Paul, a sole trader, works as a graphic designer. Some years ago,
however, he worked for his father, who became insolvent and Paul is unsure
how this might affect his proposed mortgage application.
Paul is self-employed and full sets of accounts for each of the last few years
show steady profits. Last year he turned in a gross profit of 38,000. The net
profit was 28,000. Kelly is a systems analyst, and earns 24,000 pa.
They are looking to purchase a terraced house for 136,000, and have a
deposit of 24,200. The house was built in 1940 and, due to its age, Paul and
Kelly want to be sure that any defects in the property are identified before they
agree to the purchase.
For the past 10 years, Paul and Kelly have had an interest-only mortgage with
Marsh Bank of 68,000 on their flat, for which they have a unitised with-profits
endowment policy as the repayment vehicle. They would like a degree of
certainty regarding their mortgage arrangements and therefore wish their
additional borrowing to be on a repayment basis. However, they would like to
maintain the endowment as the repayment vehicle for the existing 68,000 as
it is currently on target.
They are considering a 36-month 3.85% capped rate mortgage that the bank
offers, compared with its standard variable rate of 4.00%. The initial mortgage
payments will be 490 per month. Marsh Banks affordability criteria require
mortgage payments to be no more than 85% of free disposable income taking
into account committed expenditure, basic essential expenditure and basic
quality of living costs. The maximum loan to value (LTV) is 90% and a higher
lending charge applies to loans above 80% LTV at a rate of 8%.
ifs School of Finance 2013
11
Question 21
Paul is unsure what information the bank will require about his business in
order to assess his application. Which of the following will not be required?
A
Question 22
What effect, if any, is Pauls fathers insolvency likely to have on any mortgage
application submitted by Paul and Kelly?
A
Question 23
Assuming the purchase proceeds at the agreed price, what amount of stamp
duty land tax, if any, will Paul and Kelly pay?
A
Nil.
1,360.
2,040.
2,380.
12
CeMAP Module 3
Question 24
Based on the figures quoted, to confirm affordability the lender will need to be
satisfied that Paul and Kellys monthly free disposable income is at least:
A
416.50.
490.00.
563.50.
577.00.
Question 25
The most appropriate report for Paul and Kelly to arrange in connection with
their proposed purchase is a:
A
Building Survey.
Condition Report.
HomeBuyer Report.
Question 26
Which of the following is incorrect with regard to the existing repayment
vehicle?
A
Unit values will rise or fall in line with the underlying fund(s) chosen.
13
Question 27
Under the Mortgage Conduct of Business Rules, when advising Paul and Kelly,
Marsh Banks mortgage adviser does not need to provide:
A
Question 28
Under Paul and Kellys preferred mortgage product, the interest rate will:
A
not rise above the stated level for the first three years.
only change if the standard variable rate changes in the first three years.
Question 29
Paul and Kelly are likely to be aware that their endowment is on target:
A
14
CeMAP Module 3
Question 30
If Marsh Bank agrees to lend the amount Paul and Kelly require, and the
property is valued at the agreed price, how much will the higher lending charge
be?
A
240.00.
1,936.00.
2,176.00.
3,000.00.
Case Study 4
Luke and Jessica, both aged 23, recently consulted an independent mortgage
adviser. They were keen to purchase their first property and needed advice
about how much they could borrow and the different repayment methods
available. Luke wanted to know in particular whether it would be worthwhile
using his personal pension plan to repay their mortgage, a method chosen by
his brother.
They have agreed a price of 140,000 on a two-bedroom terraced house. The
basic valuation carried out resulted in the need for an undertaking, although
the property was valued at the agreed price. Luke recently received an
inheritance and has total savings of 46,000 as a deposit.
Jessica has just completed a course of study and is now looking for suitable
employment. Luke is a researcher in the pharmaceutical industry and has been
working on a freelance basis for the past three years. He has achieved a net
profit of 34,000 and made personal drawings of 28,000 in the last year. His
trading in the previous two years produced similar results.
Luke is keen to have some peace of mind that his mortgage repayments are
protected in the event of his inability to work in the short term, particularly as
Jessica currently has no income. However, he wants to keep costs to a
minimum whilst his business is growing.
Luke and Jessica have been recommended a two-year base rate tracker
repayment mortgage at Bank of England base rate plus 2.19%. Bank of England
ifs School of Finance 2013
15
base rate is currently 0.5% and the initial monthly cost per 1,000 borrowed
is 4.58. The recommended mortgage term is 25 years.
Having assessed their income and expenditure, the adviser has stated that,
based on the lenders affordability criteria, they are likely to be able to borrow
a maximum of 96,000. The lender pays a procuration fee of 0.35% of the
advance (minimum 250).
Question 31
To comply with the Mortgage Conduct of Business Rules, what procuration fee
will the broker have to declare to Luke and Jessica, assuming that the maximum
loan is taken?
A
Up to 250.
250.
329.
336.
Question 32
In assessing the affordability of Luke and Jessicas proposed mortgage, stress
testing will involve the lender considering the impact of:
A
16
CeMAP Module 3
Question 33
Ignoring other costs, if Luke and Jessica use all of Lukes savings as a deposit,
their initial monthly mortgage payments will be:
A
210.72.
215.20.
430.52.
439.68.
Question 34
The results of the valuation carried out on Luke and Jessicas new property
indicate that:
A
the full advance will be retained until the work has been completed.
Question 35
Lukes idea of using his personal pension plan with the intended mortgage is
unsuitable because of his:
A
age.
employment status.
protection needs.
tax status.
17
Question 36
In connection with the recommended mortgage product, Luke and Jessica
should be aware that the interest rate may change:
A
daily.
monthly.
quarterly.
annually.
Question 37
In connection with the repayment method chosen by Lukes brother, which of
the following is correct?
A
Any terminal bonus payable is not available for the purpose of repaying
the loan.
Only part of the investment fund can be used to repay the loan.
Question 38
Bearing in mind Lukes needs and concerns regarding the protection of his
mortgage repayments, which one of the following products would be most
suitable?
A
18
CeMAP Module 3
Question 39
An advantage of Luke and Jessicas proposed repayment method compared
with that chosen by Lukes brother is:
A
Question 40
Which of the following is true regarding the most appropriate form of life
cover for Luke and Jessica?
A
The sum assured will accurately reflect the outstanding capital at all
times.
19
Case Study 5
Greg and Cheryl have a 102,000 interest-only mortgage with the Brunswick
Building Society on a property that they own on a joint tenancy basis.
A unit-linked endowment policy supports the mortgage, with a remaining term
of 15 years. The plan is currently projected to have a shortfall of 11,000. In
view of this, they plan to switch the shortfall to a repayment basis and arrange
a further advance using the same repayment method. Three years ago, they
took out a secured personal loan for 7,500, from Kenton Finance, the
proceeds of which they used to buy a home entertainment system.
Repayments on the loan are 155 per month.
Greg is employed as a full-time Administration Manager, earning 37,500 p.a.,
and Cheryl is a full-time physiotherapist and earns 24,500 p.a. They have two
children: Joanne, aged 24. who is employed and lives in a rented flat with her
boyfriend, and Tom, aged 15, who lives at home.
Greg and Cheryl have now approached the society for a further advance of
27,000 to finance a loft conversion on their existing property. They intend to
contribute 5,000, from their savings, towards the cost of this building work.They
estimate that conversion will increase the value of their property to 172,000.
Brunswicks affordability criteria require mortgage payments to be no more
than 80% of free disposable income taking into account committed
expenditure, basic essential expenditure and basic quality of living costs. The
maximum loan to value (LTV) is 85%. A higher lending charge applies if the LTV
exceeds 80%.
Question 41
How will the personal loan arrangement affect Greg and Cheryls application?
A
Payments will be taken into account when assessing their ability to repay.
The Brunswick Building Society will consolidate the personal loan into
the further advance.
20
CeMAP Module 3
Question 42
Greg and Cheryls existing repayment vehicle:
A
does not guarantee to fully repay the loan either on death or maturity.
guarantees to fully repay the loan should either of them die, provided
premiums are up to date.
Question 43
Which of the following will the society require when processing Greg and
Cheryls application?
A
Question 44
The term of the further advance offered by Brunswick is most likely to be:
A
21
Question 45
In relation to the further advance, when might tacking be required?
A
If the original mortgage deed does not oblige Brunswick to make further
advances.
Question 46
How are Greg and Cheryls payments to Kenton Finance likely to be treated
by Brunswick in their assessment of affordability, if at all?
A
As committed expenditure.
Question 47
What requirement for additional security, if any, is likely to be a condition of
the offer by the building society if the further advance application is approved?
A
None.
22
CeMAP Module 3
Question 48
In the event of Greg predeceasing Cheryl, his portion of the property will:
A
Question 49
As a result of the further advance and re-arrangement of the existing loan,
Greg and Cheryl should:
A
Question 50
Which of the following will not be required in connection with Greg and
Cheryls application?
A
23
Case Study 6
James and Diane purchased their flat four years ago for 130,000 with the help
of an interest-only mortgage for 90,000. The repayment vehicle is a low-cost
endowment policy, which has not been assigned to the lender. They are now
divorcing and have agreed that James will pay 40,000 to Diane in return for
taking full ownership of the property, which is now thought to be worth
approximately 150,000.
James has approached his mortgage adviser, Osmans plc, for advice on the
possibility of seeking a further advance from his existing lender, London Bank,
to fund the agreement. Diane has already vacated the property and James has
explained that he is now working in Scotland and has therefore let the
property to a friend for a six-month period. The bank had not consented to
the tenancy, and indeed had actually declined Jamess request to let several
weeks ago.
James expects to return home within twelve months, and it is likely that his
new partner, Sally, will then move into the property with him. He would like
her name to be added to the mortgage as soon as Diane has been released
from her obligations. Sally is a regular equity ISA investor and has told James
that she intends to use the proceeds of this ongoing investment to help repay
part or all of the mortgage early.
Question 51
In relation to the proposed divorce settlement, before releasing Diane from
the mortgage deed, the lender will:
A
carry out an assessment of Jamess ability to service the loan on his own.
24
CeMAP Module 3
Question 52
Before making any firm decisions regarding the continued use of his present
mortgage repayment vehicle, Jamess first priority should be to:
A
Question 53
What additional action, if any, should James consider in respect of the
repayment vehicle?
A
None.
Question 54
What form of additional security is the lender most likely to require if the
further advance is agreed?
A
A personal guarantee.
25
Question 55
James has been advised that if his application is successful, a new mortgage
deed may not need to be drawn up. This is most likely to be because:
A
it is a puisne mortgage.
Question 56
What guidance should Osmans give James with regard to the impact of the
unauthorised tenancy?
A
Question 57
James has asked Osmans what additional actions may be required by London
Bank. Which of the following will not be required?
A
A property valuation.
Dianes agreement.
26
CeMAP Module 3
Question 58
If Sally moves in with James but does not become a party to the mortgage,
what, if anything, will the lender require?
A
Question 59
Which of the following is the lender likely to consider to be of most
importance if Sally is to be added to the mortgage deed?
A
Question 60
Which of the following differentiates Sallys ISA from Jamess endowment?
A
Benefits at the end of the mortgage term will be free from tax.
27
28
CeMAP Module 3
A U3.2
The additional security relates to a higher lending charge. This is for the
potential benefit of the lender in the event of their having to take
possession of the property and sell it, and the amount realised being
insufficient to repay the loan.
Q2
C U1.1
Correct. The maximum LTV is 90%. 90% of the reduced purchase price
of 248,000 is 223,200.
29
Q3
C U4.9
Correct. The price reduction takes the purchase price into the lower
SDLT band. SDLT of 3% on 254,000 is 7,620 and SDLT of 1% on
248,000 is 2,480. The saving is therefore 5,140.
Q4
A U1.9A Correct. We are told that the 2 flats and the shop each have
equal floor areas.This means the shop occupies 33% of the internal floor
area. As this exceeds 25% the freehold purchase is not a right.
We are told that the 2 flats and the shop each have equal floor areas.
This means the shop occupies 33% of the internal floor area. As this
exceeds 25% the freehold purchase is not a right. Otherwise two or
more flats is within scope.
We are told that the 2 flats and the shop each have equal floor areas.
This means the shop occupies 33% of the internal floor area. As this
exceeds 25% the freehold purchase is not a right. The purchase price is
not an issue.
We are told that the 2 flats and the shop each have equal floor areas, so
the shop occupies 33% of the internal floor area. As this exceeds 25%
the freehold purchase is not a right. The lease exceeds 21 years, so
would be within scope.
30
CeMAP Module 3
Q5
C U6.1
Alec and Clare want the cheapest survey which is a basic valuation. A
Condition Report or a HomeBuyer Report would be more expensive
and should give at least some detail on electrics, but a full survey would
include an inspection of the state of the electrical system.
Alec and Clare want the cheapest survey which is a basic valuation. This
will not disclose information regarding the plumbing; a building survey or
specialist reports would be needed to identify such issues.
Alec and Clare want the cheapest survey which is a basic valuation. This
will provide a value for lending purposes and the insurance value. Either
of these could be substantially different from the open market value.
Q6
D U2.4
Alec expects a substantial salary increase in two years. Until then they
wish to know the maximum payment that they will be required to make.
Either a fixed rate product or a capped product would meet the
required outcome. A base rate tracker does not have a ceiling.
Alec expects a substantial salary increase in two years. Until then they
wish to know the maximum payment that they will be required to make.
Either a fixed rate product or a capped product would meet the
required outcome. A discounted rate does not have a ceiling.
Alec expects a substantial salary increase in two years. Until then they
wish to know the maximum payment that they will be required to make.
Either a fixed rate product or a capped product would meet the
required outcome. A standard variable rate would fluctuate.
31
Q7
C U5.7
Flats above shops tend to have a lower value than those in purpose-built
blocks due to the multi-use nature of the building.
Flats above shops tend to have a lower value than those in purpose-built
blocks due to the multi-use nature of the building.
Correct. Flats above shops tend to have a lower value than those in
purpose-built blocks due to the multi-use nature of the building.
Flats above shops tend to have a lower value than those in purpose-built
blocks due to the multi-use nature of the building.
Q8
D U1.4
The repayment vehicle is an ISA. The capital will remain constant during
the mortgage term as it will be an interest-only loan. There is no
guarantee that the ISA value plus decreasing term assurance will meet
the full loan value at death because ISA values can fluctuate during the
investment period.
32
CeMAP Module 3
Q9
B U1.4
The ability to repay the mortgage early if the investment performs well
would be a positive benefit given the saving in interest payments.
Correct. ISAs are investments which are open-ended. The funds can be
withdrawn whenever the investor wishes.
The proceeds of ISAs are not liable to capital gains tax: clearly a positive
benefit.
Equity ISAs are able to invest in a wide choice of funds. This is one way
to spread risk which is a positive benefit.
Q10 D U1.8
A
33
Q12 A U1.8
A
This figure assumes that 850 is 85% of the monthly mortgage payment
allowed.
This figure assumes that 850 is 80% of the monthly mortgage payment
allowed.
34
CeMAP Module 3
Q13 C U6.2
A
The purchaser who will be responsible for the decoration will not own
the property until completion. It follows that they cannot decorate
before contracts are exchanged.
The purchaser who will be responsible for the decoration will not own
the property until completion. It follows that they cannot decorate
before that date.
Q14 D U1.8
A
Correct. It must be made clear to Nathan and Louise that the adviser
can only recommend Island Building Society products.
35
Q15 B U1.8
A
Q16 C U2.3
A
By definition, the standard variable rate will not provide the protection
from interest rate rises required by the borrowers.
36
CeMAP Module 3
Q17 B U4.1
A
Arranging life cover for only half of the mortgage amount each is not
appropriate as it would leave one party with a mortgage debt to service
in the event of the other ones death. A mortgage protection policy is
suitable as a repayment mortgage meets their needs.
Arranging life cover for only half of the mortgage amount each is not
appropriate as it would leave one party with a mortgage debt to service
in the event of the others death.
Q18 D U4.2
A
The product that would meet Nathans needs for cover against illness
and redundancy at lowest cost is mortgage payment protection
insurance (MPPI). Underwriting based on occupation is a feature of
income protection insurance, not MPPI.
The product that would meet Nathans needs for cover against illness
and redundancy at lowest cost is mortgage payment protection
insurance (MPPI).The deferred period for MPPI would usually be 28 days
or one month. A deferred period of 13 weeks would be appropriate for
income protection insurance.
Correct. The product that would meet Nathans needs for cover against
illness and redundancy at lowest cost is mortgage payment protection
insurance (MPPI). Benefits are paid for a maximum period of one or two
years.
37
Q19 D U6.1
A
Correct. The lender will require the value for mortgage purposes and a
reinstatement amount for insurance purposes.
Q20 C U4.9
A
SDLT is charged on the purchase price not the amount of the loan.
1,200 assumes 1.0% on the loan amount of 120,000.
38
CeMAP Module 3
A bank reference and/or statements will indicate how Paul has operated
his accounts and will therefore contribute towards the lending decision.
The profit and loss account will confirm the profit information provided
by Paul and will be used by the lender to make a decision.
Q22 D U1.1
A
Paul and Kelly should be assessed on criteria related to them. The fact
that Paul worked for someone, even his father, who became insolvent
should not be relevant.
Paul and Kelly should be assessed on criteria related to them. The fact
that Paul worked for someone, even his father, who became insolvent
should not be relevant.
Paul and Kelly should be assessed on criteria related to them. The fact
that Paul worked for someone, even his father, who became insolvent
should not be relevant.
39
Q23 B U4.9
A
Q24 D U1.1
A
Q25 A U6.1
A
40
CeMAP Module 3
Q26 D U1.4
A
Correct. The units are purely invested in the with-profits fund and as
such do not go down, although fund growth is subject to underlying
investment performance of the with-profits fund.
Q27 C U1.8
A
41
Q28 B U2.4
A
A capped rate mortgage, the preferred product, may vary but will not
exceed a stated interest ceiling for an agreed period, in this case three
years.
Correct. A capped rate mortgage, the preferred product, may vary but
will not exceed a stated interest ceiling for an agreed period, in this case
three years.
A capped rate is linked to the standard variable rate, but will be frozen
at its ceiling should the standard variable rate fluctuate above that
ceiling.
Once the capped rate hits its ceiling, it will no longer increase even if the
standard variable rate continues to rise.
Q29 D U1.4
A
The guaranteed maturity value will be less than the mortgage amount as
this is a low-cost plan rather than a full endowment.
Current stock market returns may not continue in future and may not
be fully reflected in the providers bonus rates.
Q30 A U4.17
A
42
CeMAP Module 3
Q32 B U1.1
A
Correct. The couple may be able to afford the mortgage payments while
interest rates are low, but stress testing looks at the impact if rates rise
in the future.
43
Q33 C U1.1
A
This figure assumes that the couple borrow 96,000, the maximum
indicated by the adviser.
Q34 C K3.2
A
Correct. The lender may wish to inspect the property at the end of the
undertaking period to ensure the work has been carried out.
Q35 A U1.4
A
Correct. Luke is 23. He will not be able to draw benefits under his
pension plan unless he is at least 55, which is 32 years away. The
mortgage is for 25 years.
Lukes employment status is not a key factor, the age at which he can
draw benefits is the issue.
Lukes tax status is not a key factor, the age at which he can draw
benefits is the issue.
44
CeMAP Module 3
Q36 B U2.2
A
The product tracks the Bank of England base rate which may change
monthly when the Monetary Policy Committee meets.
Correct. The product tracks the Bank of England base rate which may
change monthly when the Monetary Policy Committee meets.
The product tracks the Bank of England base rate which may change
monthly when the Monetary Policy Committee meets.
The product tracks the Bank of England base rate which may change
monthly when the Monetary Policy Committee meets.
Q37 B U1.4
A
A terminal bonus, if paid, is just one element of the total fund under a
personal pension and 25% of that total fund can be taken as a tax-free
lump sum.
Any tax benefits arising apply to the whole of the fund while it is
invested under a personal pension.
45
Q38 C U4.2
A
Critical illness cover only pays out a lump sum in respect of a range of
specific illnesses.
Whilst income protection insurance pays out a monthly sum it is a longterm not short-term arrangement and is more expensive than MPPI.
Correct. Luke seeks short-term cover. MPPI will provide cover for
accident and illness and pay monthly amounts for up to 2 years.
Q39 A U1.1
A
Correct. Luke and Jessica will be paying off capital during the term and
therefore the equity in the property will increase. Lukes brother is only
paying interest so the equity will not increase.
Q40 B U4.1
A
There is no direct link between the life policy and the mortgage. The
sum assured reduces in line with assumptions made in the policy
document - in the event of a claim the amount paid out may differ from
the outstanding mortgage.
46
CeMAP Module 3
Correct. When additional loans are required, a lender must assess the
applicants ability to afford the payments and therefore the loan
payments will be taken into account.
A further loan can be made without the need to repay the existing loan,
providing the lender is satisfied that the borrowers can afford both.
Q42 C U1.4
A
47
Q43 C U7.2
A
Whilst Kenton hold a personal secured loan, they will not be a party to
the new borrowing.
The design of the extension is a matter for the planning authorities, not
the lender.
Q44 D U1.2
A
Correct. A further advance is really a top-up loan and is usually over the
remaining term of the existing loan.
48
CeMAP Module 3
Q45 C U1.8
A
Kenton will not have any power of veto over the new lending.
The society, Brunswick, is providing the new loan as well as holding the
first charge.
Q46 C U1.1
A
Correct. From the information provided it appears that the loan has
approximately two years left to run and the payments will therefore
form part of the couples committed expenditure.
49
Q47 D U3.2
A
Q48 D U1.9
A
50
CeMAP Module 3
Q49 A U1.3
A
Q50 A U1.2
A
A credit search will be undertaken to check if there have been any credit
issues since the original mortgage was granted.
Details of earnings for both Greg and Cheryl will be required as part of
the affordability assessment.
51
Correct. The lender will need to be confident that James can service the
loan before they release Diane, otherwise financial difficulties will quickly
arise and a possible solution will have been removed.
Sally is not currently living in the property and the future may be
considered speculative so there will be no immediate requirement
placed on her.
Q52 B U1.3
A
52
CeMAP Module 3
Q53 C U2.4
A
James will want the endowment policy to continue. He will want Diane
to transfer the policy to him.
Q54 A U1.2
A
The new lending will increase the borrowing to 130,000 which is over
86% of the supposed current value. At this level of loan to value a
mortgage indemnity guarantee policy may be required.
The new lending will increase the borrowing to 130,000 which is over
86% of the supposed current value. At this level of loan to value a
mortgage indemnity guarantee policy may be required.
The new lending will increase the borrowing to 130,000 which is over
86% of the supposed current value. At this level of loan to value a
mortgage indemnity guarantee policy may be required.
53
Q55 B U1.2
A
Correct. If the original mortgage did oblige the lender to make further
advances, the new loan can be tacked on.
If the original mortgage did oblige the lender to make further advances,
the new loan can be tacked on.
Q56 A U1.8
A
The loan could go ahead, but the lender would not be happy with this
situation unless their rights were fully protected.
54
CeMAP Module 3
Q57 A U2.4
A
Correct. Diane will not be involved in the ongoing loan and therefore a
credit assessment is not appropriate.
Diane will need to agree to changes until she is removed from the
agreement.
Q58 A U2.4
A
55
Q59 C U1.2
A
Sallys ISA fund is not relevant to her being added to the mortgage deed.
Q60 C U1.4
A
Benefits arising from both low cost endowments and ISAs would be tax
free when taken at the end of the mortgage term.
56
57
Case Study 1
Roy and Agnes are married with 13 year old twin sons. Their jointly owned
property is worth 250,000 and they have an ISA-backed interest-only
mortgage with the Midland Building Society for 180,000 and a remaining term
of 19 years. They paid a higher lending charge of 1,100 when they arranged
the original mortgage. They have consulted a mortgage adviser about arranging
a remortgage to raise a further 20,000 for home improvements and require
more certainty regarding eventual repayment of the mortgage.
The equity ISA that supports their mortgage has not performed satisfactorily
and they now realise it was perhaps too adventurous for them. They want to
ensure that the mortgage will be repaid in 19 years; they are prepared to make
higher payments if necessary. They now plan to use the ISA funds to help with
university fees for their sons.
Roy earns a basic salary of 31,500 pa, which equates to 2,000 per month net.
He is keen to protect the monthly mortgage payments in the event of his longterm illness. Agnes earns 15,000 pa part-time (1,100 net per month). The
lender adopted the new April 2014 MCOB affordability and responsible
lending rules from March 2013, and will allow maximum mortgage repayments
of no more than 80% of their free disposable income. This is calculated as their
net income less committed expenditure and statistically assessed expenditure.
They have monthly committed expenditure of 250 per month, and the
monthly statistical expenditure used is shown as 800 for a couple and 150
for each dependant.
Their adviser has recommended a base rate tracker repayment mortgage with
a different lender with an initial interest rate of 4%. The lenders mortgage
affordability rate used to assess affordability is 5.9%, which works out at 6.46
per thousand per month. A higher lending charge is required for loans in excess
of 75% of the property value at the rate of 6.5%.
Roy feels strongly that he should not have to pay for another valuation as he
can vouch for the condition and soundness of the property.
If Roy and Agnes take up their advisers recommendation, the adviser will be
entitled to a fee from the lender of 0.3% of the agreed advance.
59
Question 1
Based on the recommended lender's affordability criteria, the maximum loan
available to Roy and Agnes would be approximately:
A
200,000.
216,000.
247,000.
270,000.
Question 2
Which of the following must the adviser do to comply with the Mortgage
Conduct of Business Rules?
A
Advise Roy and Agnes of the exact amount of the fee he will receive
from the lender.
Confirm that the fee he will receive from the lender will be less than
250.
Question 3
Which of the following products would be most suitable for Roy and Agnes to
provide the necessary life cover?
A
60
CeMAP Module 3
Question 4
Which of the following actions is the adviser obliged to take in order to comply
with the Mortgage Conduct of Business rules in dealing with Roy and Agnes?
A
Explain the lender's process for assessing their ability to repay the loan.
Give them a full list of mortgage lenders who offer a similar contract.
Inform them of any limitations on the range of products the firm can
offer.
Question 5
Which of the following statements is true in answer to Roy's point about the
need for valuation?
A
He can avoid the cost, but a lower loan-to-value ratio will apply.
It is required to ensure that the lender has adequate security for the
loan.
Question 6
Which of the following statements is true in relation to the proposed new
mortgage?
A
The amount of interest paid each month will gradually increase over the
term.
The balance of monthly interest and capital repaid is fixed at the start of
the mortgage.
The higher the interest rate charged, the more capital is repaid each
month.
61
Question 7
If Roy and Agnes accept their adviser's recommendation, which of the following
statements is true in respect of the interest rate charged?
A
It will rise and fall in line with the Bank of England base rate.
Question 8
Which of the following is true of a new mortgage? Roy and Agnes will:
A
have to pay a higher lending charge but will be able to claim a partial
refund of their original higher lending charge.
not have to pay a higher lending charge because they have already paid
one.
only have to pay a small top up higher lending charge because their
original fee can be carried forward to the new mortgage.
Question 9
Which of the following products would be most suitable in light of Roy's
needs?
A
62
CeMAP Module 3
Question 10
Which of the following would be included in Roy and Agnes's committed
expenditure figure?
A
Childcare costs.
Council tax.
Electricity bills.
Personal loan.
Case Study 2
Heather, aged 32, is employed as an area manager by a well-known soft drinks
company where she has worked for nine years. She earns a salary of 42,000
pa, plus an annual bonus which has grown to 5,000 this year. She is single with
no dependants.
Heather wishes to buy a new semi-detached house for 165,000 built by a
developer who is participating in the NewBuy Guarantee scheme.
Heather has applied for a 90% interest-only mortgage from Glen Building
Society, a NewBuy participating lender.The interest rate is discounted from the
standard variable rate by 1% for the first two years. The building societys
capped-rate product over the same period is currently 0.25% lower than the
discounted rate. The building society routinely carries out credit searches on
prospective borrowers through Equifax. Heather has asked why this is
necessary.
Her friend, who has recently purchased a property with an 85% mortgage, had
to pay a higher lending charge (HLC), and Heather would like to know if she
will have to pay a similar charge.
Heathers parents are elderly and, as an only child, she expects to inherit a
substantial lump sum of money before the end of the term of her proposed
mortgage. She is likely to use this money to reduce the outstanding balance at
that time.
Glen Building Society requires mortgage payments to be no more than 80% of
free disposable income, taking into account committed expenditure, basic
essential expenditure and basic quality of living costs.
ifs School of Finance 2013
63
Question 11
Why is it unlikely that Heather will have to pay a higher lending charge like her
friend?
A
Question 12
Which of the following is true in respect of the valuation options available to
Heather?
A
The lender will only require a basic valuation to confirm the value for
mortgage purposes and insurance reinstatement value.
The lender will require either a RICS HomeBuyer report plus a basic
valuation, or a building survey.
Question 13
What stamp duty land tax (SDLT), if any, will Heather have to pay on the
purchase of this property?
A
Nil.
400.
1,485.
1,650.
64
CeMAP Module 3
Question 14
MCOB rules state that early repayment charges must be capable of being
expressed as a cash value and be:
A
Question 15
If Heather decided to effect a life assurance policy to ensure that her mortgage
would be repaid in the event of her death, which type of policy would be most
appropriate?
A
Question 16
As part of the affordability assessment, Glen Building Society is likely to ask
Heather to provide evidence of income from employment:
A
65
Question 17
The search carried out on Heather by Glen Building Society was necessary:
A
Question 18
Which of the following statements is true in the event that Glen Building
Society has to make a claim on the government guarantee provided under the
NewBuy Guarantee scheme?
A
Glen Building Society will claim any shortfall from the house builder, who
will seek reimbursement from the government, not Heather.
Question 19
The interest rate offered by the building society means that Heather:
A
will pay increased payments from year three onwards in order to repay
the discount over the remaining term.
66
CeMAP Module 3
Question 20
When considering the building society's discounted and capped rate mortgage,
Heather should understand that:
A
both rates may fluctuate but the capped-rate may not go above a specific
ceiling.
the capped-rate will always be above the lender's standard variable rate.
Case Study 3
Andrew, a 29 year old higher-rate taxpayer, is in partnership with Eric in an
accountancy business. Andrew is selling his first house and has had an offer of
220,000 accepted on his next property. He recently received an inheritance
of 15,000 which he intends to use as a deposit, and he needs a mortgage for
the balance.
Andrew would like to combine the repayment of his new mortgage with his
retirement planning needs by using his existing personal pension as a
repayment vehicle. He started this personal pension in June 2006, and took out
a pension-linked life assurance at the same time. Andrews sister, Helen, intends
to use the spare bedroom in the house while she finishes her degree at the
nearby university.
His mortgage adviser, Anita, has recommended an interest-only, two-year base
rate tracker mortgage, at 1.8% above the Bank of England base rate.This is with
Northchester Building Society, and she will receive a procuration fee of 220
from them if the mortgage goes ahead.
Northchester Building Society require mortgage payments to be no more than
80% of free disposable income, taking into account committed expenditure,
basic essential expenditure and basic quality of living costs.
Andrew has a personal pension illustration related to his existing pension
which shows, at the lowest illustrated growth rate, a projected total pension
fund of 1,000,000 at his chosen retirement age.
ifs School of Finance 2013
67
Question 21
What is the minimum mortgage term Andrew could choose in order to tie in
with his preferred mortgage repayment vehicle?
A
21 years.
26 years.
31 years.
36 years.
Question 22
Assuming that the lowest projection rate is exactly achieved under Andrews
preferred mortgage repayment vehicle, what maximum tax-free surplus will be
available after the mortgage is repaid?
A
5,000.
20,000.
30,000.
45,000.
Question 23
Andrew has earmarked 2,000 for the cost of stamp duty land tax. Assuming
that everything goes ahead as planned, this will leave a shortfall of:
A
50.
200.
1,625.
4,600.
68
CeMAP Module 3
Question 24
To comply with the Mortgage Conduct of Business rules, what disclosure, if
any, must the adviser make to Andrew regarding the building society
procuration fee if the case goes ahead as planned?
A
None.
Question 25
What rate of tax relief, if any, will Andrew receive on payments into his
preferred mortgage repayment vehicle?
A
None.
18%.
20%.
40%.
Question 26
If Andrew opts for the recommended mortgage, what rate will he be paying on
his mortgage after the end of the second year?
A
1.8%.
69
Question 27
If Andrew takes his adviser's recommended mortgage product, the interest
rate paid by him during the first two years will be influenced by decisions made
by the:
A
Question 28
Assuming that Andrew chooses the recommended mortgage in conjunction
with his preferred mortgage repayment vehicle, what rate of tax relief, if any,
will apply to the monthly interest payments?
A
None.
10%.
22%
40%.
Question 29
What is Northchester Building Society likely to require from Andrew's sister
if she goes ahead with her intention to occupy Andrews spare room while she
finishes her studies?
A
70
CeMAP Module 3
Question 30
Compared with ordinary level term assurance, the key advantage of Andrews
existing form of mortgage protection is that it:
A
Case Study 4
Robert, aged 23, has been a self-employed sole-trading landscape gardener for
the last five years. Following his recent engagement to Jenny, a full-time student,
they are looking to buy their second property.
They have found a small house on sale for 128,000 but their initial conditional
offer of 124,500 was successful. They are funding the purchase with savings of
15,200 and a mortgage on the balance.
Robert and Jenny have recently held discussions with their mortgage adviser.
Due to the expense of their forthcoming wedding and Roberts business
expansion plans, they have expressed a strong desire to keep costs to an
absolute minimum for the first two or three years and have a fixed budget.
During discussions on repayment methods, Jenny has indicated a preference
for a repayment mortgage, whereas Robert likes the idea of a mortgage
supported by an equity ISA.
They have been recommended East Coast Bank, who pay procuration fees of
0.35% to all mortgage advisers, as a suitable lender. The lenders policy with
regard to self-employed applicants is to consider net profits for the previous
three years. In terms of affordability, East Coast Bank requires mortgage
payments to be no more than 85% of free disposable income, taking into
account committed expenditure, basic essential expenditure and basic quality
of living costs.
For Robert to meet his financial commitments should he be unable to work,
the adviser has recommended that he consider either an income protection
insurance (IPI) policy with Acme Life, or an accident sickness and
unemployment (ASU) policy with All-Cover plc.
ifs School of Finance 2013
71
A valuation has recently been carried out on the new house and the valuer
recommended a retention.
Question 31
In order to assess borrowing capacity and affordability, Robert and Jennys
mortgage application to East Coast Bank should be accompanied by proof of
Roberts earnings. Which specific document will best provide the figures
required by the bank?
A
Balance sheet.
Business plan.
Question 32
Assuming that Robert and Jenny proceed with the recommended lender, what
information regarding the fee will their adviser have to disclose to them in
order to comply with the Mortgage Conduct of Business rules?
A
Question 33
Which of the following types of mortgage product would best suit Robert and
Jennys needs?
A
Capped.
Discounted.
Fixed.
72
CeMAP Module 3
Question 34
What key advantage is obtained by opting for Roberts preferred mortgage
repayment method compared with Jennys?
A
Question 35
How much stamp duty land tax will Robert and Jenny save as a result of the
agreed reduction in asking price?
A
Nil.
35.
622.50.
1,280.
Question 36
If they proceed with Roberts preferred repayment vehicle, how would the
dividends received in the ISA be taxed?
A
They would be paid with a 10% tax credit that is not reclaimable.
They would be paid with a 20% tax credit that is not reclaimable.
73
Question 37
If Robert accepts their adviser's recommendation and starts a policy with
Acme Life, how would any benefits paid as a result of a successful claim be
treated for tax purposes?
A
Question 38
What are the likely implications of the retention recommended by the valuer
who carried out the valuation of the property Robert and Jenny wish to buy?
A
A short-term need for extra funds will exist for Robert and Jenny.
Question 39
Of what should Robert be aware regarding his preferred repayment vehicle?
A
74
CeMAP Module 3
Question 40
What potential advantage would Robert obtain by choosing Acmes protection
policy instead of All-Covers protection policy?
A
Case Study 5
Donald and Brenda, both aged 45, completed the purchase of their house on
5 November 2004 for 520,000. They have received a letter dated Friday 21
June from their mortgage lender, the Perthside Building Society, stating that
their last monthly payment has been missed.
The existing mortgage is on an interest-only basis, and Donald and Brenda are
both investing in ISAs with different providers to fund the final repayment of
the mortgage.
Brenda always invests the maximum allowed in a cash ISA and invests
additional contributions in a stocks and shares ISA, while Donald invests solely
in equity ISAs. However, neither has started funding into equity ISAs in the
current tax year. Brenda did not maximise her contributions for tax year
2012/13, only paying 2,500. They also have a level term assurance policy on a
joint life, first death basis.
The main reason for the arrears is the collapse in Donalds bonuses from his
high-flying City job, which he hopes will come on stream again in late 2013.
Donald and Brenda have always spent all of their income each month. Despite
the high bonuses, after repaying mounting credit card debts and earmarking
contributions to their respective repayment vehicles, they only have savings of
6,500. Donald and Brenda have now approached McConnells plc, their
mortgage adviser, as they have fallen into arrears.
75
Question 41
On which of the following dates would Perthside have been aware that the
account was in arrears?
A
18 March.
6 April.
18 May.
2 June.
Question 42
McConnells initial advice to Donald and Brenda will be to:
A
Question 43
Which of the following options would be most suitable in helping Donald and
Brenda to manage their present situation?
A
An interest-only concession.
Trading down.
76
CeMAP Module 3
Question 44
Assuming that Brenda pays the maximum possible into a cash ISA, how much,
if anything, can Donald and Brenda pay into their respective equity ISAs in the
2013/14 tax year?
A
Question 45
If Donald's bonuses do start again, as anticipated, and Brenda then increases
her contribution to ISAs to the maximum possible for her current tax year, by
how much will her annual contribution increase compared with last year?
A
3,260.
8,780.
9,020.
11,520.
Question 46
Donald asks McConnells if they think he has a chance of claiming Support for
Mortgage Interest (SMI), given his financial difficulties. They say that this is not
possible, because of Donald and Brendas:
A
employment status.
level of savings.
method of repayment.
size of mortgage.
77
Question 47
Donald and Brendas lender is likely to give them up to what maximum amount
of time to clear their mortgage arrears?
A
6 months.
12 months.
24 months.
36 months.
Question 48
A consolidating remortgage is often the best option for borrowers in a similar
situation to Donald and Brenda. However, there are a number of disadvantages
to this course of action, which include all of the following, except:
A
the debts being consolidated will run for the rest of the mortgage term.
the rate of interest on the new mortgage will be higher than the original
loan.
Question 49
Under MCOB rules, the letter received by Donald and Brenda dated 21 June
must contain all of the following, except:
A
78
CeMAP Module 3
Question 50
Given Donald and Brendas current financial difficulties, what does their
selected method of mortgage repayment specifically have in common with the
capital repayment method?
A
Case Study 6
Carol started her 25-year, interest-only mortgage ten years ago, using a unitlinked endowment policy as the repayment vehicle, which is assigned to her
lender, Lowtown Building Society. The current interest rate is 5.5% variable.
The loan amount was more than covered by her then salary of 27,000 but
since her redundancy six months ago, she has been unable to find work. She is
now three months in arrears, and has no insurance policy on which to claim,
although she did submit a claim for Support for Mortgage Interest (SMI) as
soon as she went into arrears.
The ten-year review on her endowment policy shows a projected maturity
value of 65,000, against the loan amount of 75,000. The insurer has
recommended that she increases her monthly premiums by 30. Carol does
not wish to do this and is looking for an alternative solution.
Her boyfriend, Harry, has returned from voluntary service overseas and will
shortly be moving in with her. They plan to marry when their joint financial
situation improves. Meanwhile, he will help to pay the household bills and is
anxious to help Carol clear the mortgage arrears. Carol wants Harry to be
added to the mortgage deed, and he has agreed to this.
They have also discussed renting their spare room to a lodger, which the
lender has provisionally indicated will be acceptable. Harry is starting a new job
as a warehouse manager, on an annual salary of 25,000. His employer offers
no other employee benefits.
ifs School of Finance 2013
79
Question 52
What is Carols situation regarding her claim for Support for Mortgage Interest
(SMI)?
A
50% of her interest will have been paid from the end of month 3.
100% of her interest will have been paid from the end of month 3.
Question 53
What proportion, if any, of Carols accumulated arrears will qualify for SMI?
A
None.
25%.
50%.
100%.
80
CeMAP Module 3
Question 54
Where an endowment policy is assigned to the lender, as in Carols case, what
type of right does the lender have?
A
Assignment.
Equitable.
Legal.
Surrender.
Question 55
Before Harry is added to the standard security, he should be made aware that
he:
A
Question 56
With regard to their proposals for their spare room, their adviser should point
out that:
A
the building society will collect the rent to offset the arrears.
81
Question 57
The adviser should point out that, with regard to the repayment method and
taking the long-term view, the least advantageous solution is likely to be:
A
Question 58
To minimise the potential problems in 15 years time, what action should the
adviser discuss with Carol and Harry?
A
Question 59
The results of the valuation will indicate to Gordon that, at this stage:
A
82
CeMAP Module 3
Question 60
If Carol and Harry marry and the suggested alteration to the standard security
has not proceeded, what difference does this make to their occupancy rights
under current law?
A
83
84
B U1.1
This is the amount that they want to borrow, which is less than the
maximum. The lender's affordability criteria would support a mortgage
of approximately 216,000, calculated as 3,100 income 1,350
expenditure = 1,750 x 80% = 1400/6.46 per thousand = 216.72 x
1,000 = 216,720.
This assumes their full free disposable income would be used in the
calculation. The lender's affordability criteria would support a mortgage
of approximately 216,000, calculated as 3,100 income 1,350
expenditure = 1,750 x 80% = 1400/6.46 per thousand = 216.72 x
1,000 = 216,720.
Q2
A U1.8
Correct. If the fee is over 250 MCOB 5 requires the actual amount to
be disclosed. In this case the fee is 0.3% of the agreed advance
(200,000) which is 600.
85
Q3
B U4.1
Q4
D U1.8
Under MCOB 4/4a the adviser must inform the customer of any
limitations on the range of products offered, which will cover whether
the mortgages on offer are from the whole market, a panel of lenders
or one provider only.
Under MCOB 4/4a the adviser must inform the customer of any
limitations on the range of products offered, which will cover whether
the mortgages on offer are from the whole market, a panel of lenders
or one provider only.
Under MCOB 4/4a the adviser must inform the customer of any
limitations on the range of products offered, which will cover whether
the mortgages on offer are from the whole market, a panel of lenders
or one provider only.
Correct. Under MCOB 4/4a the adviser must inform the customer of
any limitations on the range of products offered, which will cover
whether the mortgages on offer are from the whole market, a panel of
lenders or one provider only.
86
CeMAP Module 3
Q5
C U6.1
The lender will require a new survey and Roy will have to pay for this.
It is not the practice of lenders to reduce the loan-to-value offered in
exchange for not having a survey.
The lender will require a new survey and Roy will have to pay for this.
The availability of additional security is not relevant to the requirement
for a survey.
Correct. The lender will require a new survey to ensure that the
property provides sufficient security for the loan.
Q6
D U1.2
The higher the interest rate, the less capital is repaid each month. The
term will be shortened if the original payments are maintained when
interest rates reduce.
Correct. If the original payments are maintained but the interest rate
reduces, the term of the mortgage will be shortened.
87
Q7
D U2.2
The product recommended is a base rate tracker. This means that it has
a fixed relationship with the Bank of England base rate at the outset, say
base rate plus 0.25%, and will maintain that relationship rising and falling
in line with the base rate.
The product recommended is a base rate tracker. This means that it has
a fixed relationship with the Bank of England base rate at the outset, say
base rate plus 0.25%, and will maintain that relationship rising and falling
in line with the base rate.
The product recommended is a base rate tracker. This means that it has
a fixed relationship with the Bank of England base rate at the outset, say
base rate plus 0.25%, and will maintain that relationship rising and falling
in line with the base rate.
Q8
B U3.2
88
CeMAP Module 3
Q9
B U4.3
Roy is keen to protect the monthly payments in the event of his long
term illness. Critical illness cover only pays a lump sum in cases of
serious illness as defined in the policy.
Roy is keen to protect the monthly payments in the event of his long
term illness. Mortgage payment protection insurance only provides
cover for up to two years.
Roy is keen to protect the monthly payments in the event of his long
term illness. Private medical insurance effectively offers an alternative to
the NHS and would not provide the ongoing protection identified by
Roy.
Q10 D U1.3
A
89
Q12 C U6.1
A
90
CeMAP Module 3
Q13 D U4.9
A
Q14 A U1.8
A
91
Q15 D U4.1
A
Q16 D U1.1
A
92
CeMAP Module 3
Q17 C U1.1
A
Credit searches are an integral and routine part of the credit assessment
process. Equifax is an organisation that stores and maintains individuals'
credit histories. Their records will show credit problems for named
individuals.
Credit searches are an integral and routine part of the credit assessment
process. Equifax is an organisation that stores and maintains individuals'
credit histories. Their records will show credit problems for named
individuals.
Correct. Credit searches are an integral and routine part of the credit
assessment process. Equifax is an organisation that stores and maintains
individuals' credit histories. Their records will show credit problems for
named individuals.
Credit searches are an integral and routine part of the credit assessment
process. Equifax is an organisation that stores and maintains individuals'
credit histories. Their records will show credit problems for named
individuals.
Q18 A U3.2
A
93
Q19 A U2.4
A
The rate selected will be a discount against the standard variable rate
and can thus fluctuate while maintaining the 1% discount.
Q20 A U2.4
A
The discounted rate will move in line with the lender's standard variable
rate.
Both rates will fluctuate but the capped-rate will not go above a specific
ceiling.
94
CeMAP Module 3
Q22 D U1.4
A
95
Q23 B U4.9
A
50 is based on the assumption that only the loan amount is liable for
SDLT thus 205,000 @ 1% = 2,050 less 2,000.
Correct. The agreed purchase price is 220,000 and with the SDLT at
1% the liability will be 2,200 of which 2,000 is earmarked, leaving
200.
The agreed purchase price is 220,000 and with the SDLT at 1% the
liability will be 2,200 of which 2,000 is earmarked, leaving 200.
The agreed purchase price is 220,000 and with the SDLT at 1% the
liability will be 2,200 of which 2,000 is earmarked, leaving 200. This
calculation assumes an SDLT of 3%.
Q24 C U1.8
A
MCOB rules allow where the fee is less than 250 for a statement to be
made that the fee will be no more than 250. In this case we are told
the fee is 220.
MCOB rules allow where the fee is less than 250 for a statement to be
made that the fee will be no more than 250. In this case we are told
the fee is 220.
Correct. MCOB rules allow where the fee is less than 250 for a
statement to be made that the fee will be no more than 250. In this
case we are told the fee is 220.
MCOB rules allow where the fee is less than 250 for a statement to be
made that the fee will be no more than 250. In this case we are told
the fee is 220.
96
CeMAP Module 3
Q25 D U1.4
A
Andrew will receive tax relief on his personal pension contributions, but
at the higher rate of 40%.
Andrew will receive tax relief on his personal pension contributions, but
at the higher rate of 40% rather than the basic rate of 20%.
Q26 B U2.2
A
After the first two years, Andrew's mortgage is likely to revert to the
lender's standard variable rate at that time.
Correct. After the first two years, Andrew's mortgage is likely to revert
to the lender's standard variable rate at that time.
After the first two years, Andrew's mortgage is likely to revert to the
lender's standard variable rate at that time.
After the first two years, Andrew's mortgage is likely to revert to the
lender's standard variable rate at that time.
97
Q27 A U2.2
A
Correct. If Andrew opts for the two-year base rate tracker mortgage,
the interest rate he pays during this time will be linked to the Bank of
England base rate, which is decided by the Monetary Policy Committee.
If Andrew opts for the two-year base rate tracker mortgage, the interest
rate he pays during this time will be linked to the Bank of England base
rate, which is decided by the Monetary Policy Committee.
If Andrew opts for the two-year base rate tracker mortgage, the interest
rate he pays during this time will be linked to the Bank of England base
rate, which is decided by the Monetary Policy Committee.
If Andrew opts for the two-year base rate tracker mortgage, the interest
rate he pays during this time will be linked to the Bank of England base
rate, which is decided by the Monetary Policy Committee.
Q28 A U1.2
A
98
CeMAP Module 3
Q29 A U5.8
A
Q30 A U1.4
A
Pension term assurance does not include critical and terminal illness
cover.
Pension term assurance usually ceases at retirement age, but cannot run
beyond age 75.
99
A cash flow statement is a useful item but are predictive rather than
reflecting the full past experience.
Correct.The profit and loss account sets out a record of the income and
expenditure of a business and how it is allocated, allowing close scrutiny
by the lender.
Q32 B U1.8
A
MCOB rules require that the exact amount of fees is stated if they
exceed 250. In this case, the loan is 124,500 less a deposit of 15,200
= 109,300 @ 0.35% = 382.55.
Correct. MCOB rules require that the exact amount of fees is stated if
they exceed 250. In this case, the loan is 124,500 less a deposit of
15,200 = 109,300 @ 0.35% = 382.55.
MCOB rules require that the exact amount of fees is stated if they
exceed 250. In this case, the loan is 124,500 less a deposit of 15,200
= 109,300 @ 0.35% = 382.55.
MCOB rules require that the exact amount of fees is stated if they
exceed 250. In this case, the loan is 124,500 less a deposit of 15,200
= 109,300 @ 0.35% = 382.55.
100
CeMAP Module 3
Q33 C U2.4
A
Robert and Jenny have indicated that they wish to keep costs to an
absolute minimum for the first two or three years and have a fixed
budget. A capped-rate mortgage product will be typically higher than a
fixed-rate over this period.
Robert and Jenny have indicated that they wish to keep costs to an
absolute minimum for the first two or three years while on a fixed
budget. A discounted mortgage product will offer a genuine reduction
over this period but if interest rates rise, their monthly payment will also
rise and impact on their fixed budget.
Correct. Robert and Jenny have indicated that they wish to keep costs
to an absolute minimum for the first two or three years while on a fixed
budget. A fixed-rate mortgage product will offer them security that their
payment will not change over this period.
Robert and Jenny have indicated that they wish to keep costs to an
absolute minimum for the first two or three years while on a fixed
budget. A standard variable rate will fluctuate and will not provide them
with the security they need.
Q34 D U1.4
A
Correct. If the ISA performs well it could reach the value of the loan
early, allowing repayment.
101
Q35 D U4.9
A
Q36 A U1.4
A
Correct. Dividends are paid with a 10% tax credit that is not
reclaimable. However there is no further tax payable.
Dividends are paid with a 10% tax credit that is not reclaimable.
However there is no further tax payable.
Dividends are paid with a 10% tax credit that is not reclaimable.
However there is no further tax payable.
Dividends are paid with a 10% tax credit that is not reclaimable.
However there is no further tax payable.
102
CeMAP Module 3
Q37 C U4.3
A
Q38 D U6.1
A
103
Q39 B U1.4
A
Q40 A U4.3
A
Correct. Acme's product is an IPI which offers the potential for longterm claim payments up to retirement age. The ASU policy offered by
All-Cover will only pay out benefits for a maximum of 12 or 24 months.
The ASU policy offers redundancy benefits, but an IPI will not. In any
event Robert is self-employed.
An IPI policy usually has a longer deferred period than an ASU policy.
104
CeMAP Module 3
Q42 B U5.1
A
105
Q43 D U4.2
A
Q44 C U1.4
A
Donald can invest the maximum equity ISA limit of 11,520. Brenda can
pay 5,760, as she is already investing the maximum 5,760 in her cash
ISA.
Correct. Donald can invest the maximum equity ISA limit of 11,520.
Brenda is already investing the maximum in a cash ISA (5,760), so the
most she can invest is 5,760 into an equity ISA.
11,520 each is the maximum for equity ISAs. Brenda, however, also
invests in a cash ISA, so her equity ISA contribution is restricted.
Q45 C U1.4
A
This implies that Brenda is only paying into a cash ISA. 5,760 2,500
= 3,260.
This relates to the previous year's ISA limit of 11,280. 11,280 2,500
= 8,780
11,520 is the maximum that can be invested in ISAs in the 2013/14 tax
year. However, this ignores the fact that the question relates to the
increase in amount.
106
CeMAP Module 3
Q46 A U6.1
A
As Donald and Brenda's employment status has not changed, they will
not be eligible for SMI, irrespective of any other issues.
As Donald and Brenda's employment status has not changed, they will
not be eligible for SMI, irrespective of any other issues.
As Donald and Brenda's employment status has not changed, they will
not be eligible for SMI, irrespective of any other issues.
Q47 B U4.2
A
Q48 D U1.4
A
The debts being consolidated will now run for the rest of the mortgage
term, rather than for their original term (maybe five to seven years, or
less), so this is a disadvantage.
107
Q49 D U1.4
A
The letter must contain a list of due payments, either missed or partly
paid.
Correct. Although the letter must contain the total outstanding debt,
this excludes charges that may be made on redemption.
Q50 A U1.4
A
SMI does not fund capital or repayment vehicles. It pays interest only. SMI
would not be appropriate as their job situation has not changed.
108
CeMAP Module 3
Correct. All the indications signal increased income coming into the
house in the near future. The lender's approach is likely to be to request
repayment of the arrears over a specified period of time.
Q52 C U6.1
A
Carol is eligible to claim under the Support for Mortgage Interest (SMI)
scheme, which provides 100% of her interest-only payments after 13
weeks.
Carol is eligible to claim under the Support for Mortgage Interest (SMI)
scheme, which provides 100% of her interest-only payments after 13
weeks.
Carol is eligible to claim under the Support for Mortgage Interest (SMI)
scheme, which provides 100% of her interest-only payments after 13
weeks.
109
Q53 A U6.1
A
Correct. SMI is not paid on arrears that accumulate during the exclusion
period.
SMI is not paid on arrears that accumulate during the exclusion period.
SMI is not paid on arrears that accumulate during the exclusion period.
SMI is not paid on arrears that accumulate during the exclusion period.
Q54 C U6.1
A
Assignment gives the lender legal rights over the policy, giving them the
right to receive the policy proceeds to repay the mortgage on death or
maturity.
Assignment gives the lender legal rights over the policy, giving them the
right to receive the policy proceeds to repay the mortgage on death or
maturity.
Correct. Assignment gives the lender legal rights over the policy, giving
them the right to receive the policy proceeds to repay the mortgage on
death or maturity.
Assignment gives the lender legal rights over the policy, giving them the
right to receive the policy proceeds to repay the mortgage on death or
maturity.
Q55 D U1.1
A
The endowment policy is on a single life basis and will pay out on Carol's
death or at the end of the term. It is unlikely that this could be changed
to a joint-life basis. Harry may need level term assurance.
110
CeMAP Module 3
Q56 B U5.8
A
Carol will be allowed to collect the rent which she may choose to use
to service the repayment agreement.
While various issues can affect SMI, the time periods are legally laid
down.
Q57 B U1.8
A
Correct. The endowment policy has only been in force for a relatively
short period and the probability is that surrender would be
uneconomic. This option is only usually used in cases of serious default.
Spreading the arrears allows them to be paid off gradually probably the
most suitable solution.
The term could be extended, with the endowment still repaying the
majority of the mortgage after 25 years.
Q58 A U2.3
A
Changing to joint life assured will not affect the performance of the plan.
Extending the term on its own, without funding the final repayment, is
just deferring the problem.
111
Q59 D U6.1
A
Correct. As the 75,000 loan is easily exceeded by the current value, the
property offers good protection to the building society.
Q60 C U5.8
A
112