CeMAP MRT1: Mortgage Law, Practice and Application

20 free MRT1 practice questions with answers

Try each one, then open the answer. For a timed experience use the free mock exam.

1. 1. Victor is a high net worth mortgage customer with evidence of his status. He wants a remortgage, mainly to consolidate debts, on an execution-only basis. May the firm proceed?

   1. A. No, unless he first takes advice and then rejects it
   2. B. Yes, because the debt consolidation ban does not apply to high net worth customers
   3. C. Yes, but only if the remortgage is with his existing lender
   4. D. No, because debt consolidation can never be arranged on an execution-only basis
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   B. Yes, because the debt consolidation ban does not apply to high net worth customers

   MCOB 4.8A.7R bans execution-only sales where the main purpose is debt consolidation, but MCOB 4.8A.9R says that ban does not apply to a high net worth mortgage customer. The firm should first have evidence under MCOB 1.2.9CR.

2. 2. Why do eligible counterparties receive less regulatory protection than retail customers?

   1. A. They are only ever borrowers, never lenders, in financial transactions
   2. B. They always borrow only from overseas lenders outside the FCA's remit
   3. C. They are institutions treated as able to look after their own interests
   4. D. They have opted out of all regulation by signing a written waiver
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   C. They are institutions treated as able to look after their own interests

   Eligible counterparties are professional institutions such as banks, insurers and governments (COBS 3.6.2R). They are regarded as the most expert class of client and so receive the lowest level of conduct protection.

3. 3. A firm's staff tell customers that taking advice will 'slow things down' and suggest they go execution-only. Which MCOB rule does this breach?

   1. A. MCOB 4.8A.5R, which bans encouraging customers to opt out of advice
   2. B. MCOB 11.6.24R, which requires an annual review of the lending policy
   3. C. MCOB 6A.3.4R, which sets the minimum length of the reflection period
   4. D. MCOB 7.5.1R, which requires an annual statement to be sent
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   A. MCOB 4.8A.5R, which bans encouraging customers to opt out of advice

   MCOB 4.8A.5R says a firm must not encourage a customer to opt out of receiving advice, or to reject advice. MCOB 4.8A.6G adds that firms should not steer customers into execution-only sales.

4. 4. Mia has a £100,000 interest-only mortgage at 4%. She extends the term from 20 to 30 years at the same rate. What happens?

   1. A. The monthly payment rises, because the interest is spread over more years
   2. B. The monthly payment falls, because the capital is spread over more years
   3. C. The monthly payment stays at £333.33, but she pays interest for ten more years
   4. D. The monthly payment stays the same, and the total interest falls
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   C. The monthly payment stays at £333.33, but she pays interest for ten more years

   On interest-only, the payment is the interest alone: £100,000 × 4% ÷ 12 = £333.33, whatever the term. A longer term means paying interest for ten more years, and the capital is still due at the end.

5. 5. A lender is weighing two flats of equal value. Flat A is in a low-rise block with a long lease. Flat B has a 55-year lease. Why does the lender prefer Flat A?

   1. A. Flat B's shorter lease makes it a weaker, declining security
   2. B. Flat A will automatically become freehold after ten years
   3. C. Flat B cannot be insured because of its lease length
   4. D. Flat A attracts a lower rate of stamp duty
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   A. Flat B's shorter lease makes it a weaker, declining security

   A lease is a wasting asset: as the unexpired term falls, value and saleability decline, and the cost of extending rises. A lender wants security that holds its value over the mortgage term, so a long lease is stronger security than a short one.

6. 6. Under the Consumer Rights Act 2015, what standard must a surveyor meet when providing a RICS Home Survey to a consumer?

   1. A. The surveyor must guarantee the property has no defects
   2. B. The service must be performed with reasonable care and skill
   3. C. The survey must be completed within seven days
   4. D. The surveyor must match the lender's valuation
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   B. The service must be performed with reasonable care and skill

   Section 49 of the Consumer Rights Act 2015 implies a term into every contract for a trader to supply a service that it will be performed with reasonable care and skill. A surveyor does not guarantee that a property is defect-free.

7. 7. Kai wins an unconditional auction, but his mortgage lender cannot complete within the 20 business days allowed. Which type of finance is commonly used to complete on time?

   1. A. A personal loan secured on his car for the balance
   2. B. A credit card cash advance for the full purchase price
   3. C. A short-term bridging loan, later refinanced by a mortgage
   4. D. A lifetime mortgage on the auction property itself
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   C. A short-term bridging loan, later refinanced by a mortgage

   Bridging finance can be arranged quickly to complete an auction purchase within a short deadline, with a term mortgage taken later to repay it. The buyer needs a credible exit strategy, as MCOB 4.7A.12R requires for regulated bridging loans.

8. 8. Bank Rate is 3.75%. Josie has a £200,000 interest-only tracker mortgage at Bank Rate plus 1%. What is her monthly interest payment?

   1. A. £9,500.00
   2. B. £791.67
   3. C. £625.00
   4. D. £166.67
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   B. £791.67

   Her rate is 3.75% + 1% = 4.75%. Annual interest is £200,000 × 4.75% = £9,500, so the monthly payment is £9,500 ÷ 12 = £791.67. A tracker payment changes whenever Bank Rate changes.

9. 9. A lender has no previous relationship with Ella, who says she has net assets of £4 million. What must it obtain before treating her as a high net worth mortgage customer?

   1. A. A signed declaration from Ella herself confirming that her net assets exceed £3 million
   2. B. A signed statement from the lender's in-house accountant confirming her net assets
   3. C. A valuation report showing that the property she is buying is worth over £3 million
   4. D. A signed statement from her own qualified professional adviser confirming her status for a stated period
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   D. A signed statement from her own qualified professional adviser confirming her status for a stated period

   MCOB 1.2.9CR allows HNW treatment only where the firm already holds evidence from an existing business relationship, or has a written statement confirming the status. The statement must give a validity period covering the date of the contract and be signed by a suitably qualified professional adviser who is not an associate of the firm or the customer.

10. 10. A lender takes an assignment of Ravi's life assurance policy as additional security for his interest-only mortgage. What does the lender gain?

    1. A. Ownership of the property free of Ravi's interest
    2. B. The right to increase the premiums without Ravi's consent
    3. C. The right to change the life assured on the policy
    4. D. The right to receive the policy proceeds to repay the loan
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    D. The right to receive the policy proceeds to repay the loan

    By assignment the lender becomes entitled to the policy proceeds, which it applies to reduce or repay the debt. Assignment of life policies was common with endowment mortgages and is still used for some interest-only and business lending.

11. 11. Where must a lender set out its arrangement, booking and valuation fees so that a customer can compare deals before committing?

    1. A. In the ESIS
    2. B. In the energy performance certificate
    3. C. In the local authority search
    4. D. In the title register
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    A. In the ESIS

    MCOB 5A requires a European Standardised Information Sheet (ESIS) that sets out the costs of the mortgage, including fees payable to the lender and to third parties. Fees are also reflected in the APRC.

12. 12. The owner of a house on clay soil removed a large mature oak close to the building. A year later the floors are lifting. What is the most likely cause?

    1. A. Subsidence caused by the clay drying out
    2. B. Rising damp from a failed damp-proof course
    3. C. Heave, as the clay reabsorbs moisture and swells
    4. D. Settlement of new foundations
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    C. Heave, as the clay reabsorbs moisture and swells

    Trees draw moisture from clay soils. When a mature tree is removed, the clay slowly rehydrates and swells, pushing the building upwards. This upward movement is heave, the opposite of subsidence.

13. 13. Lisa moves in with her partner and lets out the flat she used to live in. She owns no other let property. How is a new mortgage on the flat most likely to be classified?

    1. A. As a business buy-to-let, because every let property is a business
    2. B. As a commercial mortgage, because the tenant will pay rent
    3. C. As a consumer buy-to-let mortgage contract, as she is not treated as acting for business
    4. D. As a regulated mortgage contract, because she once lived there
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    C. As a consumer buy-to-let mortgage contract, as she is not treated as acting for business

    Under article 4 of the MCD Order 2015, a borrower is treated as acting for business only if, for example, they bought the land to let and never lived in it, or already own other let property. Lisa lived in the flat and owns no other let property, so she is a typical accidental landlord within consumer buy-to-let.

14. 14. Chloe wants to buy a flat directly above a hot-food takeaway. Why might she struggle to obtain a mortgage on it?

    1. A. Flats above shops are always classed as commercial property
    2. B. Stamp duty is charged at the non-residential rates
    3. C. The flat cannot be insured against any risks
    4. D. Some lenders restrict lending because of fire, smell and noise risks
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    D. Some lenders restrict lending because of fire, smell and noise risks

    Flats above commercial premises, especially takeaways and pubs, carry extra fire risk, odours and noise. Many lenders restrict or decline them, and resale can be harder. Insurance is available but may cost more.

15. 15. What is the main risk for a borrower with an interest-only mortgage?

    1. A. The capital may not be repaid at the end of the term if the strategy falls short
    2. B. The lender can demand the capital back at any time during the term
    3. C. Interest is charged at double the rate of an equivalent repayment loan
    4. D. The monthly payments include more capital than a repayment mortgage would
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    A. The capital may not be repaid at the end of the term if the strategy falls short

    With interest-only, the full capital is owed at the end of the term. If the repayment strategy underperforms, the borrower may not be able to repay. This is why MCOB 11.6.41R requires a credible strategy and MCOB 11.6.49R requires a review during the term.

16. 16. Why would a conveyancer order a coal mining report for a house in a former coalfield?

    1. A. To value mineral rights beneath the garden
    2. B. To confirm the seller paid council tax
    3. C. To check for past mining that could cause ground movement
    4. D. To find out whether coal fires are allowed
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    C. To check for past mining that could cause ground movement

    In coalfield areas, past or present mining can cause subsidence and other ground problems. A coal mining report shows whether the property is affected by mine entries, workings or claims, which matters for value, insurance and lending.

17. 17. Which RICS Home Survey suits a conventional property in reasonable condition, simple in layout, and adds advice on future repairs and maintenance?

    1. A. Level 3
    2. B. An EWS1 assessment
    3. C. Level 2
    4. D. Level 1
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    C. Level 2

    The RICS Level 2 survey suits conventional properties in reasonable condition that are simple in form and have few alterations. It adds advice on repairs and ongoing maintenance and is available as survey only or survey and valuation.

18. 18. Kim's main reason for remortgaging is to consolidate £25,000 of unsecured debts. Beyond the normal factors, what must the adviser take into account under MCOB 4.7A.15R?

    1. A. Only whether the new mortgage rate is lower than the rates on the unsecured debts
    2. B. Only whether Kim's credit score will improve once the debts have been cleared
    3. C. Only whether the lender will pay the creditors directly on completion
    4. D. The cost of a longer repayment period and whether securing the debt is appropriate
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    D. The cost of a longer repayment period and whether securing the debt is appropriate

    MCOB 4.7A.15R requires the adviser to consider the costs of increasing the period over which a debt is repaid and whether it is appropriate to secure a previously unsecured loan. If the customer has payment difficulties, they must also consider whether an arrangement with creditors would be better.

19. 19. Following repossession, Leanne's house sells for £18,000 less than her mortgage debt. The lender's higher lending charge policy pays the lender £12,000. What is Leanne's position on the shortfall?

    1. A. She owes nothing, because the insurance has settled the claim
    2. B. She owes only the £6,000 not covered by the insurer
    3. C. She is liable only if she agreed to a personal guarantee
    4. D. The insurer may pursue her for the £12,000 it paid out
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    D. The insurer may pursue her for the £12,000 it paid out

    The higher lending charge policy protects the lender, not the borrower. Having paid the claim, the insurer can step into the lender's shoes (subrogation) and recover the £12,000 from the borrower. The lender can also pursue her for the remaining £6,000, so she remains liable for the full £18,000 shortfall.

20. 20. Two lenders offer equally suitable products. An adviser recommends one only because it pays the firm a higher procuration fee. Which MCOB principle is this most likely to breach?

    1. A. Providing an ESIS before the application under MCOB 5A.4.1R
    2. B. Acting in the customer's best interests under MCOB 2.5A.1R
    3. C. Sending an annual statement under MCOB 7.5.1R
    4. D. Giving a reflection period under MCOB 6A.3.4R
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    B. Acting in the customer's best interests under MCOB 2.5A.1R

    Letting the firm's own remuneration drive the choice conflicts with the duty to act honestly, fairly and professionally in the customer's best interests (MCOB 2.5A.1R). Where products differ in cost, MCOB 4.7A.23AR also requires the reason for not choosing the cheaper one to be explained.

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