RE WS1 – Tasking Instructions TIFF LIAO
Chapter 9 – Finance for the Buyer Page 109
SUMMARY
Buyer may get finance for their purchase from a:
(a) Bank
(b) Building society
(c) Employer
(d) Relative
(e) Finance house.
Commercial lenders will have lending criteria that must be met in order to obtain finance – often will:
(a) Have a maximum loan to value ratio and
(b) usually carry out their own valuation of the property.
A buyer will usually choose from a repayment mortgage or an interest only mortgage.
The interest rate on the loan may be fixed, variable or capped, or track the base rate set by the Bank of England.
Residential mortgages are specified investments for the purposes of the FSMA 2000 – advising/arranging such a mortgage is a
regulated activity.
INTRODUCTION
The BUYER’S solicitor should check that the client has sufficient funds available to meet the cost of the purchase and related
expenses. This matter should be raised with the client when taking instructions, and a further check should be made just before exchange
of contracts to ensure that any factors which have altered since instructions were first obtained have been taken into account in
calculating the client’s financial situation. The client should be advised against entering into a binding contract for purchase unless the
financial arrangements are settled and adequate to meet the commitments involved.
This chapter is concerned with debt finance= where the lender lends money in return for interest. There are other ways of obtaining
finance for property purchase and development (including sale and leaseback and equity funding) but these are beyond the scope of this
book.
This chapter is also restricted to secured lending= where the borrower grants the lender a legal mortgage over the property +,
additional security (such as a fixed charge over fixtures, plant and machinery, an assignment of the rental income and, if the borrower is
a company, a floating charge over all the assets not covered by the other security).
It is possible to obtain unsecured loans for property transactions, BUT the loan amount will be smaller and the interest rate higher.
To reflect the fact that if the borrower becomes insolvent, the lender will be an unsecured creditor = will rank below all secured
creditors in any distribution of the borrower’s assets and may, therefore, lose some or all of its money.
1
TIFF LIAO
, RE WS1 – Tasking Instructions TIFF LIAO
Chapter 9 – Finance for the Buyer Page 109
Many clients will have already considered the financial implications of the transaction before instructing the solicitor
to act.
CLIENT HAS - Thus, all the solicitor needs to do is to check through the figures with the client to ensure that all necessary items
ALREADY of expenditure have been taken into account.
ARRANGED
A - In this situation, the client is likely to have submitted a mortgage application to a lender already, and will not require
MORTGAGE advice on the sources and types of finance available for the purchase of property.
- The solicitor should NOT interfere with arrangements which the client has made.
- If it appears that the mortgage arrangements are patently unsatisfactory (eg, an exorbitant interest rate is to be
charged on the loan), there may be a duty on the solicitor to suggest that the client reconsiders their choice of
finance on the basis that more advantageous terms could be obtained from another source.
If you are carrying out a ‘specified activity’ in relation to a regulated mortgage contract, you must be authorised
under the Financial Services and Markets Act 2000 (FSMA 2000).
‘Specified activities’ will include:
arranging OR
advising on a regulated mortgage contract,
unless you are arranging the execution of a mortgage chosen independently by the client or on the advice of an
authorised person.
FINANCIAL General advice as to what type of loan to take out will NOT require authorisation as it will not amount to a ‘specified
SERVICE activity’.
AND
MARKETS - A regulated mortgage contract is a contract which meets the following conditions at the time it is entered into:
ACT 2000 (a) The BORROWER is an individual/trustee
(b) The LENDER takes a first legal charge over property in the UK; AND
(c) At least 40% of the property is occupied by the borrower or a member of their immediate family or is intended
for their occupation.
- If a specified activity is involved and you are not authorised by the Financial Conduct Authority (FCA) or the
Prudential Regulation Authority (PRA) to carry out regulated activities (which most firms will not be), you will need
to rely on the so-called ‘professional firms exemption’.
This exemption will allow firms operating under it to arrange or advise on a regulated mortgage
contract, subject to certain conditions, even though they are not authorised by the regulators.
It should be noted that the ability to ‘advise’ under the professional firms exemption DOES
NOT INCLUDE recommending a client to enter into a regulated mortgage contract, except
where that advice consists of an endorsement of a recommendation given to the client by an
authorised person.
2
TIFF LIAO
Chapter 9 – Finance for the Buyer Page 109
SUMMARY
Buyer may get finance for their purchase from a:
(a) Bank
(b) Building society
(c) Employer
(d) Relative
(e) Finance house.
Commercial lenders will have lending criteria that must be met in order to obtain finance – often will:
(a) Have a maximum loan to value ratio and
(b) usually carry out their own valuation of the property.
A buyer will usually choose from a repayment mortgage or an interest only mortgage.
The interest rate on the loan may be fixed, variable or capped, or track the base rate set by the Bank of England.
Residential mortgages are specified investments for the purposes of the FSMA 2000 – advising/arranging such a mortgage is a
regulated activity.
INTRODUCTION
The BUYER’S solicitor should check that the client has sufficient funds available to meet the cost of the purchase and related
expenses. This matter should be raised with the client when taking instructions, and a further check should be made just before exchange
of contracts to ensure that any factors which have altered since instructions were first obtained have been taken into account in
calculating the client’s financial situation. The client should be advised against entering into a binding contract for purchase unless the
financial arrangements are settled and adequate to meet the commitments involved.
This chapter is concerned with debt finance= where the lender lends money in return for interest. There are other ways of obtaining
finance for property purchase and development (including sale and leaseback and equity funding) but these are beyond the scope of this
book.
This chapter is also restricted to secured lending= where the borrower grants the lender a legal mortgage over the property +,
additional security (such as a fixed charge over fixtures, plant and machinery, an assignment of the rental income and, if the borrower is
a company, a floating charge over all the assets not covered by the other security).
It is possible to obtain unsecured loans for property transactions, BUT the loan amount will be smaller and the interest rate higher.
To reflect the fact that if the borrower becomes insolvent, the lender will be an unsecured creditor = will rank below all secured
creditors in any distribution of the borrower’s assets and may, therefore, lose some or all of its money.
1
TIFF LIAO
, RE WS1 – Tasking Instructions TIFF LIAO
Chapter 9 – Finance for the Buyer Page 109
Many clients will have already considered the financial implications of the transaction before instructing the solicitor
to act.
CLIENT HAS - Thus, all the solicitor needs to do is to check through the figures with the client to ensure that all necessary items
ALREADY of expenditure have been taken into account.
ARRANGED
A - In this situation, the client is likely to have submitted a mortgage application to a lender already, and will not require
MORTGAGE advice on the sources and types of finance available for the purchase of property.
- The solicitor should NOT interfere with arrangements which the client has made.
- If it appears that the mortgage arrangements are patently unsatisfactory (eg, an exorbitant interest rate is to be
charged on the loan), there may be a duty on the solicitor to suggest that the client reconsiders their choice of
finance on the basis that more advantageous terms could be obtained from another source.
If you are carrying out a ‘specified activity’ in relation to a regulated mortgage contract, you must be authorised
under the Financial Services and Markets Act 2000 (FSMA 2000).
‘Specified activities’ will include:
arranging OR
advising on a regulated mortgage contract,
unless you are arranging the execution of a mortgage chosen independently by the client or on the advice of an
authorised person.
FINANCIAL General advice as to what type of loan to take out will NOT require authorisation as it will not amount to a ‘specified
SERVICE activity’.
AND
MARKETS - A regulated mortgage contract is a contract which meets the following conditions at the time it is entered into:
ACT 2000 (a) The BORROWER is an individual/trustee
(b) The LENDER takes a first legal charge over property in the UK; AND
(c) At least 40% of the property is occupied by the borrower or a member of their immediate family or is intended
for their occupation.
- If a specified activity is involved and you are not authorised by the Financial Conduct Authority (FCA) or the
Prudential Regulation Authority (PRA) to carry out regulated activities (which most firms will not be), you will need
to rely on the so-called ‘professional firms exemption’.
This exemption will allow firms operating under it to arrange or advise on a regulated mortgage
contract, subject to certain conditions, even though they are not authorised by the regulators.
It should be noted that the ability to ‘advise’ under the professional firms exemption DOES
NOT INCLUDE recommending a client to enter into a regulated mortgage contract, except
where that advice consists of an endorsement of a recommendation given to the client by an
authorised person.
2
TIFF LIAO
