MRT1 LO1: Mortgage definitions and regulated mortgage contracts

LO1 asks you to understand what a mortgage is in two senses: the regulatory definition, which decides whether the FCA's MCOB rules apply, and the legal definition, which describes the security a lender takes over land. It also covers regulated second charge loans, which moved into the mortgage regime in 2016. This is the foundation for the rest of the CeMAP® MRT1 unit.

The regulated mortgage contract (RMC)

The definition sits in article 61(3)(a) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO). MCOB uses the same term. A contract is a regulated mortgage contract if, at the time it is entered into, three conditions are met:

Condition	What it means
1. Borrower	A lender provides credit to an individual or to trustees.
2. Security	The borrower's obligation to repay is secured by a mortgage on land in the United Kingdom.
3. Use of the land	At least 40% of the land is used, or intended to be used, as or in connection with a dwelling. For trustees, the dwelling must be used by a beneficiary of the trust or a related person.

Supporting definitions in article 61(4):

• "Mortgage" includes a charge and, in Scotland, a heritable security.
• Floor area for the 40% test: where a building has two or more storeys, the area is the total floor area of all storeys.
• "Related person" means the person's spouse or civil partner, a person living with them as if married, or their parent, brother, sister, child, grandparent or grandchild.
• "Credit" includes a cash loan and any other form of financial accommodation.

Since the end of the Brexit transition period, the land must be in the UK for a new contract. Contracts entered into before then could also be secured on land in an EEA state.

The regulated activities

Article 61 makes two activities regulated:

1. Entering into an RMC as lender.
2. Administering an RMC: notifying the borrower of changes in rates or payments due, and taking steps to collect or recover payments. Merely having or exercising a right to enforce the contract is not administering.

Advising on and arranging RMCs are separate regulated activities. Together, MCOB groups firms as lenders, administrators, arrangers and advisers (MCOB 1.2.2G).

What is not an RMC

Some contracts meet the three conditions but are excluded by RAO article 61A. The main exclusions are:

• a regulated home purchase plan (Islamic home finance has its own category);
• an investment property loan: less than 40% of the land is used as a dwelling by the borrower or a related person, and the loan is wholly or mainly for the borrower's business. This is how most business buy-to-let falls outside MCOB;
• a second charge business loan;
• a limited payment second charge bridging loan;
• an exempt consumer buy-to-let contract (certain bridging and similar contracts);
• certain exempt equitable mortgage bridging loans and exempt housing authority loans;
• certain limited-interest second charge credit union loans.

A borrower can sign a business purpose declaration (art. 61A(3)). It states that the loan is wholly or mainly for business, that the borrower will not have the protection of FSMA regulation, and that they should take legal advice if unsure. The declaration creates a presumption of business purpose, but the presumption fails if the lender or anyone acting for it knows or has reasonable cause to suspect that the loan is not really for business (art. 61A(4)).

Loans to a limited company are not RMCs at all, because the borrower is not an individual or trustee.