Mortgages 2018/19 Summary of Changes

Transcription

1 Mortgages 2018/19 Summary of Changes Section reference (2018/19 edition) Brief Description of Change 1.4 Contemporary Market Facts & commentary updated Full Content Some facts and commentary: - The average residential property price in the UK at the beginning of December 2017 was 247,933, an increase of 2.7 per cent from the beginning of December This was lower than the 6.5 per cent average increase for the 12 months to December Cheltenham recorded the highest percentage price rise in the 12 months to the end of November 2017 at 13 per cent, followed by Bournemouth at 11.7 per cent and Brighton at 11.4 per cent. - In terms of house price rises to the end of November 2017, 15 of the top 20 towns were in London and southern England. - Some areas, mainly in Scotland and Northern England, saw price falls over the year, the highest being Perth, where prices fell by 5.3 per cent. The falls were attributed mainly to lower employment levels or relatively weaker economic conditions compared to those areas that saw growth in prices. Hounslow (London) and Bromley (Kent) were exceptions to the trend in London and the south, with prices dropping by 0.2 and 0.6 per cent respectively. - Price changes were not consistent in some regions. For example, in Huddersfield, Yorkshire, prices rose by 9.3 per cent, while Barnsley, Rotherham and Wakefield, also in Yorkshire, saw price falls ranging from 1.6 and 2.9 per cent. - Property supply remains low, which will support prices for Average prices to the end of 2018 are expected to be in the 0 3 per cent range. - However, Q figures suggest that increases in London and the south-east of England may lag behind other regions in 2018, which is a significant shift from previous years. In Q3 2017, average prices increased by 9.3 per cent in northern England, with strong performance in the East Midlands and north-west England. This contrasted with an increase of 2.6 per cent in London and, for the first time in over three years, price increases in south-east England rose at a lower rate than the rest of the UK. (Halifax, 2018; Halifax, 2017a) FTB figures added - There were 162,704 first-time buyers. - First-time buyers accounted for 47 per cent of property purchases using a mortgage. - The average price paid by first-time buyers in the UK was 207,693. This rose to 409,975 in London. - The average first-time buyer deposit was 32,899 in the first six months of This represented 16 per cent of the average firsttime buyer purchase price.

2 1.5.5 Bullet point added November 2017 budget information added - The average first-time buyer deposit in London was 106,577, an increase of 259 per cent over ten years. - In 2016, 56 per cent of first-time buyer mortgages were for a term of years, with mortgages between 20 and 25 years representing 26 per cent of the total. In 2007, the figures were 38 per cent and 48 per cent respectively. The increase in the number of longer term mortgages is largely due to affordability. - The average first-time buyer loan in August 2017 was 174,795 (Halifax, 2017b). - The average first-time buyer mortgage represented a household income multiple of 3.63 (UK Finance, 2017). First time buyer SDLT exemption In November 2017, the Budget contained the surprise announcement of a permanent exemption from stamp duty land tax on the first 300,000 of the purchase price for first-time buyers in England. This was followed by proposed changes to property purchase taxes in Scotland and Wales to encourage first-time buyers. The changes in Scotland had not been ratified by the Scottish Parliament at the time of writing (February 2018) Information box added LOCAL AUTHORITY MORTGAGE SCHEME The Local Authority Mortgage Scheme started in 2011 and is designed to increase the supply of affordable housing and assist first-time buyers who can afford a mortgage to buy a property. The scheme is a national initiative open to all local authorities and lenders who wish to participate. Participation is not compulsory, and few local authorities had chosen to take part by January The scheme is available only to first-time buyers and normal status and affordability checks will apply. Participating local authorities set aside funds to provide a financial indemnity for partner lenders. This enables the applicant to apply to a partner lender for a mortgage with a 5 per cent deposit. Each local authority sets a limit to the mortgage available under the scheme New section: The Consumer Protection (amendment) Regulations 2014 Information box Potential breaches of the CPRs - Deleted This legislation replaced previous legislation intended to control marketing and selling practices and covers all situations where professionals, including estate agents, engage with consumers. The legislation gives consumers certain rights and remedies where a firm is in breach of the regulations, and right to redress if they have been subject to misleading or aggressive practices. The legislation does not apply to financial services or consumer credit as these are covered by other regulations. There are three main parts to the regulations: - There is a general ban on unfair commercial practices. - Misleading and aggressive practices are assessed to determine their influence on the average consumers decisions, i.e. to assess whether their impact means that they are unfair. - There is a blacklist of practices that are banned because they are deemed to be unfair.

3 It is a breach of the regulations to omit or fail to disclose information that the average consumer would need to make an informed decision, or to provide information in a way that is misleading, unclear or unintelligible. From an estate agent s perspective, a consumer can be expected to make their own enquiries and find publicly available information, but agents are expected to point out important or unusual matters to consumers. For example, failing to disclose information about the condition of the property would be regarded as misleading by omission, and significantly exaggerating the dimensions of a property would be providing misleading information. If a business fails to follow a code of practice to which it has subscribed, it could be in breach of the regulations New section: Consumer Credit Legislation Sub section added unregistered land. Consumer credit legislation is intended to protect ordinary consumers and small businesses and uses the term individual to define those borrowers. An individual is defined as an ordinary borrower, a partnership with three or fewer members or an unincorporated association. Other businesses are outside the legislation. The key consumer credit legislation is the Consumer Credit Acts 1974 and In 2014, regulatory powers in relation to the Consumer Credit Acts were transferred to the FCA, with rules and guidance for lenders contained in the Consumer Credit sourcebook (CONC). The consumer credit legislation applies to unsecured loans, credit cards and similar lending. A loan that is a regulated mortgage contract or an MCD mortgage contract, i.e. regulated under MCOB, is exempt from the Consumer Credit Acts of 1974 and Second-charge lending became part of the MCOB regime as regulated mortgages as part of the rule changes that implemented the MCD from 21 March 2016 The lender that holds the title deeds as security will be regarded as the first-charge holder. Subsequent charges will be recorded in the Land Charges Registry, with their priority set in date order. If the first mortgagee fails to receive enough from the sale of the property to repay its loan, then subsequent mortgagees will get nothing. So, a lender will only accept a second or subsequent mortgage if it feels that there is sufficient equity (value) in the mortgaged property to comfortably cover both earlier mortgages and its own Sentences added re ground rent - Ground rent on a leasehold property is relatively low, typically between 50 and 200 a year. Many leases contain a clause allowing a ground rent increase after perhaps ten years and then another after a further ten years, and so on. Even with an increase, the ground rent will be a relatively small amount. - It is possible for a leaseholder to create a lease to allow another person to use the property, known as a sub-lease, as long as the

4 term is shorter than the original lease and the head lease does not prohibit it Information added about commonhold association Section added: Can commonhold replace leasehold Shares in the community association may not be equal and may be based on the size of each unit. For example, the owner of a twobedroom unit may be allocated two shares, while the owner of a one-bedroom unit may be allocated just one share and the owner of a studio flat half a share. In practice, commonhold is similar to a leasehold arrangement, but the maintenance of the building is the responsibility of a company owned by the unit owners (the commonhold association), rather than appointed by a freeholder. Only unit holders can be shareholders, although the association can appoint up to two directors who are not shareholders. As shareholders in the commonhold association, unit holders can vote at the annual general meeting. An important point is that, unlike leasehold, where the rights of the freeholder are superior to the leaseholder, with commonhold no individual has rights in the property that are superior to those of the unit holder. - As a company, the association is required to establish a memorandum of association, articles of association and a commonhold community statement. The community statement includes the rights and obligations of individual unit holders, voting majorities and other essential rules for the community. - The commonhold association would normally be expected to hold an annual general meeting where shareholders can vote on management issues and the running of the building, with voting on a simple majority basis. - The commonhold association is able to set a commonhold assessment, which is an annual charge to unit holders to cover the expenses of running the association and can also require unit holders to contribute to a reserve fund to cover the costs of maintenance and repairs to the common areas of the building. These charges are likely to vary depending on the size of each flat. - The land / property must be registered with the Land Registry as an estate in commonhold land. This can only be done after the commonhold association has been formed. This means that a developer intending to build a block of flats on a commonhold basis must register a commonhold association with the Land Registry before the property can be registered. Once flats are sold, shares in the association can be transferred to the new unit holders who will take over control. - The same rights and obligations that would exist between a freeholder and a leaseholder exist between the association and each unit holder. The association will collect a commonhold assessment, which replaces the management charge on leasehold property. The majority of neutral experts agree that, in many ways, the leasehold system of tenure is out of date, potentially unfair and fraught with problems, and that commonhold is a realistic and progressive alternative. However, although commonhold has been in place for 15 years, very few properties are owned on that basis. It was estimated in October 2017 that there were fewer than 50

5 Information added on selling the property before extending the lease commonhold blocks in England and Wales (Source: co.uk). There are three significant factors in the apparent lack of appetite for commonhold. As an alternative to buying the freehold, qualifying tenants who have held a long lease for more than two years have the right to buy a new lease, which will extend the existing lease by 90 years. No ground rent is payable during the extended lease term. For example, on a flat bought three years ago with 40 years left on the lease, exercising the right to extend the lease would result in a new lease of 130 years. The landlord cannot normally refuse the application, and the cost to the leaseholder must be a fair value based on open market values. No ground rent is payable on the extended period of the lease. In some cases, a leaseholder may qualify to extend their lease but may wish to sell the property before they have done so. If the property is on a short lease, this could significantly affect the sale price or even make a sale almost impossible. The vendor has two choices: - To extend the lease before sale. This will take some time, which could delay any potential sale and may be an expense the vendor cannot afford. - To exercise their right to extend the lease and begin the process, but then assign the rights to the new purchaser. The purchaser will be assured that they can extend the lease, even though they have not owned the lease for the minimum two years. The premium payable for extending the lease and any further costs will be the responsibility of the new owner Subsection added re Registration Registration Transfers of registered land should be registered within 30 days of completion. The 30 days is referred to as the priority period during which the new owner has priority over other claims and charges. Failure to register within 30 days could mean other interests may be registered and take higher priority Paragraph added on Phipps V Pears case In the Phipps v Pears case [1964], Lord Denning MR stated that: There are two kinds of easement known to the law: positive easements, such as a right of way, which gives the owner of land a right himself to do something on or to his neighbour s land, and negative easements, such as a right of light, which gives him a right to stop his neighbour doing something on his (the neighbour s) own land (Swarb.co.uk, 2017) Information box deleted what s in a name Information box deleted how can a buyer find out whether there is potential liability 6.5 Gazundering deleted

6 day window to file a stamp duty land tax return added File a stamp duty land tax return within 30 days of the effective date of the transaction and pay the applicable tax. The effective date is usually completion Paragraph added on what APR and APRC are designed for * The APR and APRC are both designed to show the true cost of borrowing over the term, expressed as an average annual interest rate. They take into account the interest charged and any additional fees or charges payable. The principle is simple for both, although the calculations are slightly different. The APR applies to regulated mortgages, unsecured loans, credit cards, etc. The APRC applies specifically to MCD regulated mortgages Section deleted: MCD adequate explanations Types of expenditure heading amended Potential increases bullet point extended Example added Basic Quality-of-life expenditure Where the mortgage rate would increase to the lender s standard variable rate (or another rate), which is referred to as the reversion rate, at the end of the product term the lender must use the reversion rate when applying the interest rate stress test. For example, on a three-year fixed-rate term that reverts to the lender s standard variable rate after three years, the lender must use the SVR as the starting point for the interest rate stress test, rather than the fixed rate. EXAMPLE John has applied for a 3 per cent fixed rate for three years, at which point the mortgage will revert to the lender s SVR of 4.5 per cent. When applying the interest rate stress test, the lender must assume a rate of 7.5 per cent at the end of the three-year term Payday loan definition updated Short term, very high interest unsecured lending designed to be paid off on the borrower s next payday Paragraph added about the Fraud Act 2006 The Fraud Act 2006 includes the offences of false representation and failing to disclose information where there may be a legal duty to disclose the information, as in a mortgage application. Fraud occurs whether or not the mortgage is actually granted. The value of a mortgage gained in this way will be regarded as proceeds of crime under the Proceeds of Crime Act 2002, and the borrower will be regarded as having committed a money-laundering offence. Sentences depend on the severity of the offence, ranging from community service orders through to large fines and / or prison sentences Section re-named Reference checks and Data Protection legislation 12.4 Paragraph added: FCA consultation on Interest Only mortgages available for people over a certain age The FCA launched a consultation in late 2017 with a view to introducing a new category of interest-only mortgage, available to those over a certain age who wish (or need) to extend their mortgage into retirement but are not seeking a lifetime mortgage. Such a mortgage would be repaid on the borrower s (or surviving borrower s) death or move into residential care. Normal affordability checks will be required, including income in retirement, but the lender will not be required to carry out a review of a repayment strategy because, unlike a standard

7 interest-only mortgage, sale of the property would be an acceptable repayment strategy Information on Marriage Value updated In simple terms, the marriage value is the difference between the value of the property with the current lease and the value if the lease was extended by 90 years. As the term of the existing lease reduces, the value of the property decreases, and so the difference in the two prices increases. A property with 80 years or more left automatically has no marriage value. The freeholder has a right to 50 per cent of the marriage value Example added In recent years, a large market has developed for specialist retirement apartments aimed at those aged 55 and over. The leasehold apartments are self-contained within a larger complex and offer communal facilities designed for older people. Many complexes employ full-time staff on site to provide 24-hour assistance. Prices vary but are usually higher than comparable normal apartments, and annual fees tend to be high. These retirement apartments are notoriously hard to sell when a resident dies, wants to move or goes into care; the combination of a limited market and high fees tends to deter many potential buyers Information box deleted: What cover is available if the builder becomes insolvent or commits fraud Indicative costs of valuations and surveys deleted Sentence explaining solicitor / conveyancer fees added 15.9 Section renamed and rewritten: Property transaction taxes The solicitor or conveyancer will charge a fee to cover the legal work carried out during the purchase process; it is payable on completion of the purchase. If the sale does not complete, some solicitors will reduce their charge, particularly if they are asked to carry out another purchase. Many solicitors now charge a flat fee, regardless of the property value. The Chancellor introduced a first-time buyer SDLT exemption in the November 2017 Budget, which became effective on purchases completing from 22 November 2017 and that will now be a permanent part of the SDLT regime. - First-time buyers will be exempt from SDLT on residential properties valued at 300,000 or lower. - On residential properties valued between 300,000 and 500,000, first-time buyers will be exempt from SDLT on the first 300,000 and will pay SDLT at the normal rate of 5 per cent on the balance. - The first-time buyer exemption does not apply to residential properties with a purchase price exceeding 500,000. In order to qualify for the first-time buyer exemption, the buyer and property must meet certain criteria as follows. - First-time buyer a buyer who does not own, or has not previously owned, a major interest in a dwelling in the UK* or an equivalent interest in land anywhere in the world. A major interest means that they are the person for whom the property is intended to be of benefit. So, a trustee would be named as the legal owner of property bought to provide a home for the absolute

8 beneficiary of the trust but, as they are not the person intended to benefit, they would not be deemed to have a major interest. Conversely, although the trust beneficiary would not be the legal owner, they would have a major interest because they are the person intended to benefit from the property. Ownership of non-residential or mixed-use property does not count as long as it does not include a dwelling. *If the buyer owned a property, but on a lease with less than 21 years to run, they would still be deemed a first-time buyer and would be eligible for the exemption. - Joint buyers in order to benefit from the first-time buyer exemption, both joint owners must meet the definition of a firsttime buyer. This means that if one of the joint owners owns, or previously owned, property then the exemption will not apply. - Main residence to benefit from the exemption, the buyer must intend to occupy the property as their only or main residence. There is no requirement for the buyer to occupy the dwelling immediately after purchase, but there must be a clear intention to occupy it as a main residence in the future. This allows for circumstances where it is not possible or practical for the buyer to move in immediately. - Definition of dwelling in simple terms, a dwelling is a building, or part of a building, where people will live or a building where they will be able to live once adaptation or construction has been carried out. The exemption applies only to the purchase of a single dwelling. For example, if a house has a self-contained granny annexe where the annexe has separate access and facilities enabling the occupier to live independently from those in the main house, the building would count as two dwellings and the exemption would not apply. - Shared ownership if the buyer is purchasing a property on a shared ownership scheme, the first-time buyer exemption is only available if they opt to pay SDLT on the full market value of the property at the time of purchase Subsections added Condition A The chargeable consideration (price paid) for the new property must be 40,000 or above. The 40,000 threshold applies to the total consideration rather than each joint owner, so regardless of whether the property will be purchased by one person or by joint purchasers, the surcharge will apply if the consideration is 40,000 or over. The increased SDLT is charged on the total consideration, including the first 40,000. Condition B The property to be purchased is freehold or leasehold. If it is freehold, the surcharge will apply (subject to the other conditions being met). If it is leasehold, the surcharge will apply if the original lease was granted for a period of more than seven years. For example, if the lease was originally granted for six years and there are five years left, it would not be subject to the surcharge. If the lease was originally granted for 99 years and there are six years left, the surcharge would apply.

9 Reversionary leases If the property is subject to a reversionary lease with 21 or fewer years to run, the surcharge will apply. In this context, a reversionary lease is one that gives someone else the right to use the property for a set term, at the end of which the property reverts to the freeholder or to a superior leaseholder. It can also apply when a lease extension has been arranged to take effect at the end of the existing lease. So, if the original lease has 21 or fewer years to run from the date of sale completion, and the lease term will be extended at the end of the original lease, the surcharge would apply. Condition C The surcharge applies where the buyer already owns a major interest in a property when they buy the second property. A major interest is defined as ownership on a freehold basis or on a leasehold basis where the lease was originally granted for a term of more than seven years. If the property is owned on a leasehold basis and is subject to a reversionary lease, as described in Condition B, the owner would have a major interest if the original lease has 21 or fewer years to run when the new purchase completes. One point hidden in the detail is that someone is only considered to have an interest in a property if their share of the property is worth 40,000 or more. So, for example, if a married couple own a flat worth 75,000 on a joint basis, they would each be deemed to have an interest worth 37,500. As this is below the 40,000 threshold, neither would be required to pay the 3 per cent surcharge when buying another property. The 40,000 threshold applies to each property owned rather than the total value of other property owned. So, someone owning interest in a number of properties would only be subject to the surcharge if one of those interests was valued at 40,000 or more. In most cases, the legal owner of the property will also be the beneficial owner. In other words, they are the legal owner but also benefit from living in it in this case Condition C will apply to them. In some cases, usually trusts, the legal owner may not be the beneficial owner. If the trust gives an individual absolute beneficial rights to the property, or it grants the right for a beneficiary to live in the property for life, or to receive income from the property, the beneficiary (rather than the trustees) will be treated as having a major interest in the property for the purposes of Condition C. In the case of discretionary trusts, the trustees will be regarded as having the major interest. Condition D The surcharge will apply if the new property is not a replacement for the buyer s only or main residence. In order for the purchase to be considered as a replacement, the buyer s interest in their previous main residence (or that of their spouse or civil partner) must be disposed of (e.g. sale, gift, as a result of a court order), and they must intend to live in the new property as their only or main residence (GOV.UK, 2016).

10 General Investors are required to declare that the property will not be used as their main residence effectively they are required to opt in to the SDLT surcharge. In the case of joint borrowers, the surcharge applies if just one of the buyers owns another property. If a homeowning parent agrees to help their child to buy a home, and as part of the agreement is registered as joint owner, the surcharge will apply, because the parent already owns their home. The surcharge also applies where someone owns a property abroad, even for holiday use, and buys a property in the UK for the first time. It is also important to understand that, from an SDLT perspective, HMRC considers married couples and civil partners to be one unit for property ownership. This means that as long as they are living together, property owned in the sole name of one partner will be regarded as being jointly-owned for the purposes of SDLT. So, if the property is registered in the sole name of the husband and the wife decides to buy her own property, her purchase will be subject to the second home surcharge, even though it is her only property. Living together is defined as married or in a civil partnership, and not divorced or legally separated Section added: Land transaction tax in Wales SDLT was replaced by Land Transaction Tax (LTT) in Wales from 1 April The Welsh government has set LTT rates as follows. (Please replicate previous table, with below) Residential Property First 180,000 LTT rate 0% 180, , % 250, ,000 5% 400, , % 750, M 10% Over % A 3% surcharge on each band applies to second properties and buy-to-let properties. The Welsh government confirmed that there will not be a firsttime buyer exemption from LTT. Instead it raised the nil-rate threshold from the originally announced 150,000 to 180,000, which it claims will mean that at least 45% of purchases will not be subject to LTT and the average first-time buyer will not have to pay it. NON-RESIDENTIAL PROPERTY (Table as above) Purchase Price First 150,000 LTT rate 0% 150, ,000 1% 250,001-1M 5%

11 Over 1m 6% 16.2 Monthly interest payment calculation added Monthly interest payments are easily calculated. The capital is multiplied by the interest rate and then divided by 12. For example, a 150,000 interest-only mortgage with an interest rate of 5 per cent would be: 150,000 x 5% = 7,500 / 12 = 625 per month Section deleted: Part and Part mortgages Information added on market value adjuster 17.3 Paragraph added about an advantage of a unit linked endowment If the policyholder cashes in the plan early, the policy might incur a market value adjuster (MVA) where the company will reduce the value of units transferred to protect the interests of other investors. This is usually invoked in times of poor fund performance when the value of the underlying with-profits fund assets is lower than the value of the plan built up, although some insurers apply some form of MVA in most encashment situations. One potential advantage of a unit-linked endowment is that, if growth exceeds expectations, the plan could hit its target earlier than the end of the term. In this case, the planholder could cash in the plan and there may be enough in the plan to repay the mortgage early and save interest charges Section added: Early surrender Most unit-linked endowments impose some sort of charge for cashing in the plan before the end of the term, usually within the first ten years of the plan. The most common method is to deduct a certain percentage of the units on encashment, with the percentage reducing each year during the penalty period Section added: Flexibility Changes to ISA rules in 2016 allow providers to offer flexible ISAs, although they are not obliged to do so. The key elements of a flexible ISA are: - They can be cash, stocks and shares or innovative finance ISAs. Help to Buy and Lifetime ISAs cannot be flexible ISAs, and some ISAs, such as those offering fixed rates or bonuses, are likely to have penalties for withdrawal and will not be flexible. - The flexibility only applies to cash held in the ISA. In the case of stocks and shares ISAs, this means cash held in the account, dividends received and the proceeds of selling investments. - The ISA holder can withdraw cash held in the account and then re-invest it in the same tax year without the re-investment counting as part of that tax year s ISA contribution allowance. Cash withdrawn can be from investments made in previous tax years. - Re-investment must be in the same account and must be made in the same tax year as the withdrawal. Some examples: Fred has 35,000 in his flexible cash ISA, having paid in 15,000 in May in the current tax year. In December of the same tax year, he withdraws 28,000 to cover a short-term need. Fred can replace the 28,000 withdrawn without affecting the current tax year allowance, so he can pay in 28,000 and still have 5,000 of this year s allowance left. Diane has 40,000 in a flexible stocks and shares ISA, 5,000 of which is cash received from share dividends in the ISA over the

12 years. Diane could withdraw the 5,000 cash and then replace it later in the same tax year without affecting that tax year s ISA allowance. George has 50,000 in a stocks and shares ISA, including the current year s investment of 15,000. He now needs to withdraw 30,000 to cover a short-term need but is confident he could replace the money before the end of the tax year. He could cash in 30,000 of his ISA investments and, once the cash is in his ISA, he can withdraw it. He can then replace the 30,000 withdrawn before the end of the same tax year without affecting that year s ISA limit. In fact, he would still have 5,000 of the current year s ISA limit available Death of the ISA holder explained - Death of the ISA holder if the Help to Buy ISA holder dies, the account will close and no bonus is payable. A surviving spouse could claim the additional permitted subscription (please refer to the upcoming box on what happens when an ISA holder dies) Section deleted: How are unit trusts and OIECs structured Section deleted: Unit trust and OIEC funds Section deleted: Prices, charges and taxation Section deleted: Using unit trusts and OIECs as mortgage repayment vehicles Section added: Unit trusts and OIECs the basics It is possible to use unit trusts and open-ended investment companies (OEICs) as mortgage repayment vehicles. However, since both these vehicles can be held within an ISA, it is more tax efficient, and more common, for them to be used as part of an ISA repayment package as a stocks and shares ISA permitted investment Unit trusts and OEICs the basics Unit trusts and OEICs are pooled (or collective) investments, with investments made via regular payments or single lump sums. Both types of investment fund are open-ended, which means that there is no limit on the number of units or shares that can be issued. Unit trust funds are managed by a fund manager and an OEIC fund is managed by the Authorised Corporate Director (ACD). The manager / ACD can create them to meet demand and must buy back units or shares from investors who want to cash in their investment. Unit trusts sell units to investors and OEICs sell shares, although there is little practical difference between the two methodologies. In simple terms, the fund value is divided by the number of units or shares to calculate the value of each individual unit or share. For example, if the fund is worth 1m and there are 1m units or shares, each is worth 1 at that time. Funds, and therefore units or shares, are valued daily and, as with any investment, prices can fluctuate.

13 There are technical differences between unit trusts and OEICs, but in practical terms they operate in much the same way, so much so that the Investment Association puts the 3,000 plus unit trust and OEIC funds available in the UK into the same categories and performance tables. The funds in both arrangements are held by a third party to protect investors interests, and both are subject to regulation by the PRA and the FCA to provide investor protection. Unit trusts and OEICs can be actively managed, where the manager reviews, assesses and changes the fund investments on a regular basis, or passively managed (trackers), where the fund tracks a benchmark, such as the FTSE 100. The manager of a tracker fund ensures that the fund s assets are representative of the benchmark in terms of its constituents and weightings but does not make day to day investment decisions. Unit trust and OEICs are subject to charges, the principal of these being the initial charge and the annual management charge. Taxation of unit trusts and OEICs depends on the nature of the underlying investments. If the fund is share based, income may be paid out as dividends, which will be subject to the income tax regime for dividends, including the availability of the 2,000 annual dividend allowance. If the fund has more than 60 per cent of its money in cash and fixed interest investments, income paid out is regarded as interest and is paid without tax deducted at source. Distributions are taxed under the savings regime as interest, including the availability of the personal savings allowance. The fund itself is exempt from capital gains tax, but the investor s gains on disposal are subject to capital gains tax Section deleted: Investment trusts Section deleted: Using investment trusts as mortgage repayment vehicles Tax implication example updated Review 2018/19 figures Lifetime allowance figure updated 1,030,000 from 6 April 2018 (index-linked each year) Note on portability option added PORTABILITY OPTION Many fixed-rate and special deal mortgages feature a portability option. This allows the borrower to take the existing arrangement to a new property without incurring an early repayment charge. The existing rate can be transferred to a new property for the same amount and the same remaining term as on the previous property. If the borrower needs a larger mortgage, the excess will be on whatever deal the lender offers at that point and, if the borrower requires a smaller mortgage, there is likely to be an early repayment charge on the difference between the old and new amount Section deleted: What is a hybrid mortgage 19.7 Offset mortgage information updated Some offset mortgages allow the borrower to link the mortgage to a current account as well, which means that a positive balance will be added to savings to be offset against the mortgage. Mortgage payments are based on the amount borrowed at the start, which means that a healthy savings balance will result in

14 lower interest each month and a payment surplus because the interest charged is lower than expected. The payment surplus will reduce the capital balance, so the term will reduce, as explained in the example that follows Section deleted: The current account mortgage 19.9 Section deleted: What is a low-start mortgage Section deleted: What is a CAT standard mortgage 20.9 Section deleted: What is a commercial mortgage 21.1 Subsection added: The lease The lease A shared ownership lease is different from a standard long lease. The lease holder of a shared ownership flat will only qualify for the statutory right to extend the lease once they own 100 per cent of the flat, although some landlords may allow an extension voluntarily. Most shared ownership leases are in a format approved by the Homes and Communities Agency (HCA), which will contain a number of core clauses common to all such leases, in addition to elements of a standard lease. These core clauses are: - Restrictions on sales, which could include maximum staircasing allowed, pre-emption period (see below), period between staircasing to 100 per cent and selling. - Subletting is not permitted. - Landlord s pre-emption rights if the leaseholder has not staircased to 100 per cent. The owner must first offer the flat to the landlord, or a buyer nominated by the landlord, at a price set by an independent valuer appointed by the landlord. If the right is not exercised within eight weeks, the leaseholder can sell in the open market. - The right of the landlord to take court action to gain possession in the event of rent arrears. The leaseholder would have no right to receive compensation to reflect any increase in the value of their share. - The requirement to pay a service charge based on the full value of the property Notes added on FTB exemption IMPORTANT: FIRST-TIME BUYER EXEMPTION The first-time buyer exemption is available to those who opt to pay SDLT on the full market value of the property when they buy their first share. If the market value of the property is 300,000 or less they will pay no SDLT. They will pay 5 per cent SDLT on the balance up to 500,000. If the value is above 500,000 they will not qualify for the exemption. IMPORTANT The first-time buyer exemption is not available for those who opt to pay SDLT in stages. As a result, advice should be sought for the most effective option when purchasing a share in a property valued at 300,000 or above.

15 SDLT FOR A FIRST-TIME BUYER Jack is buying his first home, a 50 per cent share in a property valued at 400,000. He has two options. Option 1 Pay SDLT on the full market value: - first 300,000 = nil; - next 100,000 x 5% = 5,000; - total SDLT = 5,000. Option 2 Pay SDLT in stages: - first 125,000 = nil; - next 75,000 x 2% 1,500; - initial SDLT = 1,500. Value increased to 430,000 staircases to 75%, no SDLT price of additional 25% = 107,500. Value increased to 475,000 staircases to 100%. SDLT payable price of final 25% = 118,750. Final SDLT calculation: Total price paid 200, , ,750 = 426, ,750 / 426,250 x 100 = 27.85% SDLT on 426,250: - first 125,000 = nil; - next 125,000 x 2% = 2,500; - balance = 176,250 x 5% = 8,812; - 2, ,812 x 27.85% = 3,150 SDLT to pay; - total SDLT paid 1, ,150 = 4,650. As we can see, in this scenario it would have worked out more cost effective to opt to pay SDLT in stages. However, if the property value increased more quickly, or the staircasing had taken place over a longer period allowing the value to increase, paying all the SDLT up front might have been more cost effective. If Jack staircased more gradually, for example from 75 per cent to 85 per cent, then 85 per cent to 100 per cent, SDLT would be paid on each event and the final calculation would have been even more complicated Limit figures update 175, Note added about abolition of RTB in Wales The right to buy was abolished in Wales by the Abolition of the Right to Buy and Associated Rights (Wales) Act, which received royal assent on 24 January Tenants in new social housing lost the right to buy or acquire from 24 March A new home is one that was not let as social housing for the six months before 24 March For existing social housing stock, tenants have until 26 January 2019 to exercise their right; the right to buy or acquire will end on that date Section deleted: Shared appreciation mortgages 22.2 Information on policy fee added All term insurance policies share the following characteristic: the sum assured is payable only on the death of the life assured within

16 the policy term. If the policyholder survives to the end of the policy, the policy lapses and there is no return payable. In other words, term insurance provides only protection and does not contain any element of investment. Term insurance plans charge a policy fee payable with each premium. The fee does not vary with the amount of premium or sum insured and can represent a significant part of the overall cost for lower premium policies. For example, a 1.50 monthly fee would represent 25 per cent of the monthly cost of a policy costing 6 a month Decreasing term plan potential weakness explained One potential weakness of using a decreasing term plan for mortgage purposes is that the sum insured reduces in line with the assumed capital owing at the end of each year. This works well with the original mortgage but, if the borrower wishes to take out another mortgage at some point, the debt reduction profile will not match the new mortgage. It is also likely to have a shorter term remaining than that of the new mortgage. It might be sensible for these reasons to take out a new policy to cover the whole new mortgage, rather than trying to incorporate the original plan. Further, keeping the original plan and adding a second plan would result in two regular policy fees, which could mean that the cost of a totally new plan to cover the mortgage would not be much higher PPI claims deadline added The majority of claims have been made, but the FCA has introduced a deadline of 29 August 2019 for all new PPI claims Section added: Providing advice on insurance contracts The following insurance products are pure protection products and the rules for providing advice and sales are contained in the Insurance Conduct of Business Sourcebook (ICOBS): n term insurance; n income protection insurance; n critical illness insurance; n accident and sickness insurance; n mortgage payment protection insurance. In simple terms, a pure protection product is one that provides protection against one or more perils but does not contain an investment element. So, term insurance is a pure protection product but most whole of life plans are not because they are linked to investment in with-profit or unit-linked investment. Firms can choose to provide advice on pure protection products using the COBS rules that apply to regulated investments, rather than ICOBS. This often happens when a firm also provides advice on regulated investments and means they need only apply one set of rules to the advice. Firms and advisers operating under MCOBS rules will be subject to ICOBS rules for any advice given relating to pure protection products. Detailed knowledge of ICOBS requirements is beyond the scope of this qualification, but you will need to be aware of a number of important rules, which we will consider now. - Authorisation In order to offer advice on insurance products, the firm must be authorised by the FCA. - Eligibility There is a requirement for advisers and firms to take reasonable steps to ensure that a customer only buys a policy for

17 which they are eligible to claim benefits. If only parts of the policy apply to the customer, they must be told so that they can make an informed decision about whether to go ahead. Until relatively recently, many people bought payment protection policies that would never pay out because they did not meet the eligibility criteria for claims. Examples would be sales of policies with redundancy cover to those who did not have a job, were selfemployed or retired. Millions of pounds have been paid in compensation as a result of complaints. - Suitability The adviser / firm must take reasonable care to ensure that advice given is suitable for the customer, based on their identified demands and needs and other relevant information, including details of existing cover. Suitability includes the level of cover, cost, limitations, excesses and other features appropriate to the customer s needs. - Statement of demands and needs There is no regulatory requirement to produce a suitability report for a customer when they buy a pure protection product, but they must be a given a statement of demands and needs before the contract is concluded. The statement summarises the customer s protection needs identified in discussion and outlines the underlying reason for the advice given. - Cancellation rights Customers entering into a pure protection contract have the right to cancel the contract within 30 days of receiving a cancellation notice. Customers must be given notice of their right to cancel the contract in good time before conclusion of the contract and in writing or another durable medium. The notice must include the cancellation period, the conditions for exercising the right and any costs to the customer of exercising it. - Buildings and contents insurance Buildings and contents insurance policies are also regulated under ICOBS. The rules detailed above apply to those sales, although they are subject to a cancellation period of 14 days (FCA, no date) Information on unregistered land added In the case of unregistered land, the lender holding the title deeds will be regarded as the first-charge holder. A second-charge lender s interest would be recorded by an entry in the Land Charges Registry. The length of a second charge would not usually run past the end of the first charge, although the lender could agree to a longer term if it felt it was appropriate. The existence of a second charge can be an early warning sign of problems, especially if the borrower has already been turned down for a further advance by the first lender. Finance houses tend to charge higher rates of interest in line with the higher risk, so a borrower choosing to use a finance house may indicate a need to secure a lump sum urgently Section added: FCA proposal The FCA published a consultation document in September 2017 outlining proposals for a change to the rules and guidance for a specific type of interest-only mortgage that runs into retirement. The current rules at the time of writing (February 2018) do not permit an interest-only mortgage to be repaid from the sale of a property. The proposed changes will create a new category, the retirement interest-only mortgage, which is restricted to older consumers and will not be repayable until the borrower either

18 sells the property, enters residential care or dies. The new category will be regarded as an interest-only mortgage, rather than a lifetime mortgage. The examples of acceptable repayment strategies for interest-only mortgages in MCOB 11.6 will include the sale of the property on the occurrence of certain specified life events. The new category recognises the needs of some borrowers who either have an interest-only mortgage that they will not be able to repay at the end of the term, or those who wish to release capital from the equity in their property in retirement. These borrowers do not want the perceived expense of rolling up interest over the longer term, as happens with a roll-up interest lifetime mortgage. As the new category will be treated as a standard interest-only mortgage, the lender must assess affordability in the usual way, which may prevent some borrowers from taking this option (FCA, 2017) Subsection added: Mortgage exit administration fee (MEAF) The MEAF is a fee often charged by the lender to cover the lender s costs in closing the account and carrying out the required procedures when the borrower redeems a mortgage. MEAFs used to be relatively low, often around 50, though in recent years many lenders have increased the fees for existing customers, often to amounts as high as 500, which has led to controversy, complaints and some refunds or reductions. MCOB rules require the lender to state the amount of any fees to be paid on redemption of the mortgage, although it is acceptable for the lender to state the current fee (i.e. it may change over the life of the mortgage). The FCA s guidance for lenders is based on principles of fairness outlined in the Consumer Rights Act The FCA considers the following to be acceptable components of the lender s costs of redeeming a mortgage: -Deed release fees; - Land Registry charges; - staff processing cost; - a reasonable proportion of general overheads. Where a borrower considers a MEAF to be unfair, they have the right to refer the case to the Financial Ombudsman Service where the case will be considered on the basis of fairness. An increase in a MEAF from the amount originally stated is likely to be reasonable if the contract contains a valid reason for an increase. The most likely valid reason would be increases in the lender s administration costs between the start of the contract and redemption. Any increases must represent the true costs to the lender and the right to vary the costs should be explained clearly in the contract.