Wednesday, October 18, 2017
 
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Participants and terminology

Creditor

The creditor has legal rights to the debt or other obligation secured by the mortgage. That debt is often the obligation to repay the loan by the creditor (or its predecessor lender) who provided the purchase money to acquire the property mortgaged. Typically, creditors are banks, insurers or other financial institutions who make loans available for the purpose of real estate purchase.

A creditor is sometimes referred to as the mortgagee or lender.

Debtor

The debtor is the person or entity who owes the obligation secured by the mortgage, and may be multiple parties. Generally, the debtor must meet the conditions of the underlying loan or other obligation and the conditions of the mortgage. Otherwise, the debtor usually runs the risk of foreclosure of the mortgage by the creditor to recover the debt. Typically the debtors will be the individual home-owners, landlords or businesses who are purchasing their property by way of a loan.

A debtor is sometimes referred to as the mortgagor, borrower, or obligor.

Other participants

Due to the complicated legal exchange, or conveyance, of the property, one or both of the main participants are likely to require legal representation. The terminology varies with legal jurisdiction; see lawyer, solicitor and conveyancer.

Because of the complex nature of many markets the debtor may approach a mortgage broker or financial adviser to help them source an appropriate creditor typically by finding the most competitive loan. Recently, many US consumers (particularly higher income borrowers) are choosing to work with Certified Mortgage Planners, industry experts that work closely with Certified Financial Planners to align the home finance position(s) of homeowners with their larger financial portfolio(s).

The debt is, in civil law jurisdictions, referred to as hypothecation, which may make use of the services of a hypothecary to assist in the hypothecation; that is, in obtaining a legal hypothec.

In addition to borrowers, lenders, government sponsored agencies, private agencies; there is also a fifth class of participants who are the source of funds - the Life Insurers, Pension Funds, etc.

Other terminologies

Like any other legal system, the mortgage business sometimes uses confusing jargon. Below are some terms explained in brief. If a term is not explained here it may be related to the mortgage loans rather than to the legal process.

Conveyance
    The legal document that transfers ownership of unregistered land.

Disbursements
    All the fees of the solicitors and governments, such as stamp duty, land registry, search fees, etc.

Freehold
    The ownership of a property and the land.

Land Registration
    A legal document that records the ownership of a property and land. This is also known as a Title.

Leasehold
    The ownership of the property and land for a specified period, which may be sold separately from freehold, which may be owned by another person.

Legal Charge
    A legal document that records the data of the rightful owner of a property or land.

Mortgage Deed
    A legal document that stated that the lender has a legal charge over the property.

Sealing Fee
    A fee made when the lender releases the legal charge over the property.

Seasoned mortgage
    A mortgage which has been paid in a timely manner by the mortgagor for a period of typically no less than six months, and often for more than one year. The term is associated with the secondary market, where mortgages with similar characteristics are bought and sold in bulk.


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Buy-to-Let Mortgage

Buy-to-let mortgage
Buy-to-Let mortgages have been on offer in the UK since the late nineties; they are specifically designed for investors to borrow money to purchase property in the private rented sector in order to let it out to tenants.
Lenders take different approaches. The amount of money investors can borrow is determined by the rental valuation of the property. Usually the annual rental income has to cover a certain percentage of the mortgage repayments, somewhere between 120% and 150%. This is to allow surplus rent to cover other costs such as property maintenance and void periods (periods when there are no tenants living in the property and therefore no rental income).
Other lenders will offer a three times' salary multiple and half the rental income.
Others base the amount that they will lend on your salary and the existing loan commitments that you have, but then apply the 'deduction rule'. This means that they will lend up to 3.5 times your income (or whatever salary multiple applies), minus a representative figure for annual mortgage payments worked out at a pre-set level of interest. Say you earn £40,000 and have an outstanding mortgage balance on your property of £120,000. Under the rule, the annual mortgage repayments may be calculated as £10,000. This would be deducted from your salary to leave £30,000, which is then multiplied by 3.5 to give £105,000 - the amount that you are able to borrow.
Typically the interest rates that are offered on BTL mortgages are fairly close to residential mortgage rates but will on average be higher and typically charge higher fees. This is due to the perception amongst banks and other lending institutions that BTL mortgages represent a greater risk than residential owner-occupier mortgages.
This type of investment has become very popular in the UK over the last five years or so, as house prices have dramatically increased. Another reason for their popularity is the tax advantages that are available to UK BTL investors. Rental income is considered in the same way as salary, and is therefore often taxed at 22% or even 40%. However, landlords can deduct costs from the taxable portion of their rental income, and these costs can include the interest portion of their BTL mortgage repayments as well as maintenance costs on the property. This tax set-up has made BTL investments more popular over the last few years.
Recent credit problems have had some investers maintaning the same percentage of equity in the propert should prices fall and so rapidly find money to cover these downturns.


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