LIBF CeMAP (Certificate in Mortgage Advice and Practice) — All Questions

A central principle of the Mortgage Market Review (in force April 2014) is that:

• a.Interest-only mortgages are banned outright
• b.Borrowers may self-certify their income without evidence, provided they can show a clean credit history over recent years
• c.The lender must assess and take responsibility for whether the mortgage is affordable, verifying income✓
• d.Affordability is the borrower's sole responsibility

The MMR placed responsibility for assessing affordability firmly on the lender, requiring income to be verified and effectively ending self-certification. Interest-only lending was not banned but is only permitted where there is a credible repayment strategy.

When assessing affordability under MCOB 11, a lender must consider whether the borrower could still afford the mortgage if:

• a.The borrower moved abroad
• b.Interest rates were to rise over the early years of the mortgage✓
• c.The borrower were to win the lottery or receive a large and unexpected inheritance during the term
• d.House prices were to double

MCOB 11 responsible-lending rules require an interest-rate stress test: the lender must assess whether repayments would remain affordable if interest rates rose during the early years, rather than assuming rates stay low. Net income and committed expenditure must also be assessed.

A lender may grant an interest-only mortgage under current rules where:

• a.The borrower is over 40 years old
• b.The borrower simply hopes that house prices will rise enough to cover the outstanding capital by the end of the term
• c.No repayment plan is needed at all
• d.There is a credible, clearly understood strategy to repay the capital at the end of the term✓

Interest-only mortgages are permitted only where the borrower has a credible and clearly understood strategy for repaying the capital, such as an investment or savings vehicle. Reliance on assumed future house-price rises is not an acceptable repayment strategy.

One effect of the Mortgage Credit Directive (2016) was to:

• a.Require all mortgages to be interest-only
• b.Abolish the FCA
• c.Bring second-charge mortgages fully within MCOB and create a regime for consumer buy-to-let✓
• d.Remove all conduct regulation from first-charge residential mortgages that are sold to individual consumers

The MCD brought second-charge mortgages (previously regulated under the Consumer Credit Act) fully within MCOB, introduced the ESIS and APRC, and created a registration regime for consumer buy-to-let lending to 'accidental' landlords who are acting as consumers.

The APRC (Annual Percentage Rate of Charge) shown on an ESIS represents:

• a.The valuation fee
• b.The rate of stamp duty
• c.The total cost of the mortgage to the borrower expressed as a yearly percentage✓
• d.The lender's own profit margin only, before any fees or charges are added to the loan

The APRC expresses the total cost of the mortgage (interest plus mandatory charges) as a single annual percentage rate, helping borrowers compare deals on a like-for-like basis. The MCD also requires a second APRC illustrating the effect of higher rates.

The core affordability requirement in MCOB 11.6 is that a lender must not enter into a regulated mortgage contract unless it can demonstrate that:

• a.The customer has a perfect credit score
• b.The property offered as security will reliably rise in value over the course of the whole mortgage term
• c.The customer can afford to meet the repayments, based on a proper assessment✓
• d.The loan is below £100,000

MCOB 11.6.2 places the responsibility on the lender to assess and be able to show that the mortgage is affordable for the customer, taking account of income and expenditure, rather than lending on the assumption that rising property values or the customer's optimism will cover the cost.

Under MCOB 11.6 the affordability assessment must take account of the customer's:

• a.Hobbies and holiday preferences only
• b.Estate agent's opinion of value
• c.Favourite lender
• d.Income and their committed and basic essential expenditure✓

The affordability assessment must consider the customer's net income together with committed expenditure, basic essential expenditure and basic quality-of-living costs (MCOB 11.6.5 to 11.6.11), so the lender lends only what the customer can realistically sustain.

Following the Mortgage Market Review, a lender must verify a customer's income by:

• a.Using the value of the property as a proxy for income
• b.Obtaining evidence such as payslips or accounts, rather than allowing self-certification✓
• c.Simply accepting the customer's own word about how much they earn, without ever seeing any supporting evidence
• d.Estimating it from the customer's postcode

The MMR ended self-certified lending: MCOB 11.6 requires the lender to verify the customer's income with independent evidence, such as payslips, bank statements, or, for the self-employed, accounts or an SA302 tax calculation, before relying on it in the affordability assessment.

In the MCOB 11.6 affordability assessment, 'committed expenditure' means:

• a.Credit and other contractual commitments the customer must continue to pay, such as loan and card repayments✓
• b.The estate agent's fee
• c.Discretionary money the customer might choose to spend on holidays and other luxuries that they could easily cut back
• d.The lender's own administration costs

Committed expenditure covers the customer's existing credit commitments and other contractual outgoings that will continue after the mortgage completes, for example personal loans, credit-card minimums, hire-purchase and maintenance payments. These must be deducted before deciding how much is left to service the mortgage.

'Basic essential expenditure' in the MCOB affordability rules refers to:

• a.Purely luxury and discretionary spending that the customer could easily cut back on or stop altogether if needed
• b.The lender's profit margin
• c.Essential household spending such as utilities, council tax, food and buildings insurance✓
• d.The customer's pension contributions only

Basic essential expenditure covers the essentials a household must pay, such as heating, water, electricity, council tax, food and essential insurance (MCOB 11.6.10). It is distinguished from basic quality-of-living costs and from expenditure the customer could reasonably reduce.

When applying the interest-rate stress test under MCOB 11.6, the lender must assume the interest rate could rise over the first five years by at least:

• a.Nothing, because rates never rise
• b.One percentage point, having regard to market expectations✓
• c.Ten percentage points in every case
• d.Half the Bank of England Bank Rate

MCOB 11.6.18 requires the lender to consider likely future interest-rate rises and to assume an increase over the first five years of at least one percentage point, or a higher figure if market expectations suggest it, testing whether the customer could still afford the payments.

The interest-rate stress test does NOT generally need to be applied where the mortgage has:

• a.A discounted variable rate
• b.A standard variable rate
• c.A tracker rate
• d.A fixed rate for five years or more from the outset✓

MCOB 11.6.18 disapplies the stress test where the interest rate is fixed for at least the first five years, because the customer's payments are already protected from rate rises during that period. For shorter fixes and variable rates the stress test applies.

For an interest-only mortgage, MCOB 11.6 requires the lender to assess affordability on the basis of:

• a.The monthly interest payments alone, giving no consideration whatsoever to how the capital will eventually be repaid
• b.The assumption that the property will be sold at a profit
• c.The interest payments plus evidence of a credible strategy to repay the capital✓
• d.The customer's gross income before tax only

MCOB 11.6.41 requires the lender, on interest-only lending, to assess affordability of the interest and to obtain evidence of a credible strategy for repaying the capital. The lender must not treat an interest-only mortgage as affordable simply because the interest is low.

Which of the following is an acceptable interest-only capital repayment strategy under MCOB?

• a.A regularly reviewed investment or savings plan projected to repay the capital✓
• b.A vague hope that the customer will inherit money one day
• c.A general assumption that house prices in the area will always keep on rising throughout the mortgage term
• d.No strategy, because the term is long

MCOB 11.6.41 to 11.6.49 require a clearly understood, credible repayment strategy, such as an ISA, pension lump sum, endowment or the planned sale of another asset. Reliance on speculative future events, like unspecified inheritances or assumed house-price growth, is not acceptable.

For an interest-only mortgage, MCOB requires the lender to check the repayment strategy:

• a.At the outset and to review it periodically during the term✓
• b.Never, once the mortgage has started
• c.Only if the customer requests a review
• d.Only at the very end of the term

The lender must be satisfied of a credible strategy at the outset and MCOB 11.6 expects the strategy to be reviewed at least once during the term, so that any shortfall is identified early and the customer can take corrective action before the capital falls due.

A self-employed applicant's income for affordability purposes is usually verified using:

• a.One single recent bank statement, taken on its own, without any accounts or HMRC tax calculations at all
• b.Accounts and/or HMRC tax calculations (such as SA302s) over a period✓
• c.The applicant's own spreadsheet with no supporting evidence
• d.The value of the applicant's car

For the self-employed, lenders typically verify income using two or three years of accounts or HMRC SA302 tax calculations and tax-year overviews, giving a reliable picture of sustainable income for the MCOB 11.6 affordability assessment rather than relying on self-declaration.

MCOB 11.6 requires a lender to take account of future changes to income and expenditure where they are:

• a.Impossible to foresee
• b.Known, or could reasonably be foreseen, to affect affordability during the term✓
• c.Purely speculative
• d.Only ever favourable

The lender must consider likely changes that it knows about or could reasonably foresee, such as the customer retiring during the term or a fixed-term income ending, where these would materially affect the customer's ability to keep up repayments (MCOB 11.6.14).

Where a customer's mortgage term extends into retirement, the lender must, for affordability purposes:

• a.Simply assume that the customer will carry on working and earning at exactly the same level indefinitely
• b.Base the whole assessment on the current salary alone
• c.Consider the customer's expected income in retirement, such as pensions✓
• d.Ignore the change in income at retirement

MCOB 11.6.14 requires the lender to take reasonable steps to establish the customer's likely retirement income where the term extends beyond the expected retirement date, so it can judge whether the mortgage remains affordable once earned income is replaced by pension income.

The responsible-lending rules in MCOB 11 require each lender to have and follow:

• a.A policy of lending to everyone who applies
• b.No policy, relying on the adviser's judgment alone
• c.A written responsible-lending policy setting out how it assesses affordability✓
• d.A single fixed interest rate that it applies uniformly to every customer regardless of their circumstances

MCOB 11.6.20 requires a lender to put in place, and operate in accordance with, a written policy setting out the factors it will take into account when assessing affordability, ensuring consistent and demonstrable responsible-lending decisions.

When a customer consolidates unsecured debts into a new mortgage, the affordability assessment should recognise that:

• a.The customer's income has automatically increased
• b.The debt is now secured over the home and spread over a longer term, which the lender must factor in✓
• c.The debts have disappeared entirely
• d.No affordability assessment is needed at all for a debt consolidation, because the monthly payments simply go down

MCOB 11.6 requires the lender to assess affordability of the whole consolidated borrowing. Although monthly outgoings may fall, the debt becomes secured on the home and may cost more overall over a longer term, so the lender must lend responsibly on the full picture.

The MCOB 11.6 affordability rules apply in full to which of the following?

• a.A bridging loan qualifying for the relevant exemption
• b.A standard first-charge residential mortgage to an ordinary consumer✓
• c.A regulated buy-to-let mortgage where the relevant business-lending exemption in MCOB clearly applies to it
• d.A high-net-worth mortgage meeting the specific exemption

The full affordability assessment applies to standard regulated residential mortgages. MCOB provides tailored or reduced requirements for certain categories, such as high-net-worth and business borrowers and some bridging loans, but the ordinary consumer mortgage is squarely within MCOB 11.6.

Even on an execution-only sale, where the customer chose the product themselves, the lender:

• a.Is released from all responsible-lending duties
• b.May ignore the customer's expenditure
• c.Need not verify income
• d.Must still carry out an affordability assessment under MCOB 11.6✓

The responsible-lending duty falls on the lender regardless of whether the sale was advised or execution-only. Even when the customer picked the product, MCOB 11.6 still requires the lender to verify income and assess affordability before lending.

'Basic quality-of-living costs' in MCOB 11.6 are:

• a.Everyday costs that the customer could immediately stop paying without any real impact on their standard of living
• b.The lender's marketing budget
• c.Optional luxury holidays
• d.Costs that are hard to reduce and provide a basic quality of living, beyond bare essentials✓

Basic quality-of-living costs are expenses that are hard to give up and maintain a reasonable standard of living, such as basic clothing, household goods and personal-care items. They sit between bare essentials and discretionary spending and must be considered in affordability (MCOB 11.6.11).

The affordability assessment under MCOB 11.6 is generally based on the customer's:

• a.The property's rental value
• b.Turnover of their employer
• c.Gross income before tax and National Insurance
• d.Net income after tax and other deductions✓

Affordability is assessed against net (take-home) income, because that is what the customer actually has available to meet the mortgage and other outgoings after tax, National Insurance and pension deductions (MCOB 11.6.5).

The transitional 'modified affordability' rules (MCOB 11.7 and related provisions) were introduced to help:

• a.Existing borrowers, sometimes called mortgage prisoners, remortgage to a cheaper deal without failing a new full affordability test✓
• b.First-time buyers with large deposits
• c.Professional buy-to-let landlords who wish to expand their property portfolios by borrowing considerably more against their existing rental homes
• d.Lenders avoid all affordability checks

The FCA introduced modified affordability provisions so that existing borrowers who are up to date but would fail a full assessment, often 'mortgage prisoners', can switch to a more affordable deal that does not increase their borrowing, without being blocked by the standard MCOB 11.6 test.

Lending into retirement or over a long term should prompt the lender to check that repayments remain affordable when:

• a.The customer's income is likely to fall, for example on retirement✓
• b.House prices rise
• c.The customer changes lender
• d.The Bank Rate is cut

MCOB 11.6.14 requires the lender to consider foreseeable reductions in income over the term, most obviously retirement, so that a mortgage stretching into later life is only granted where it will still be affordable once earned income ends.

A key reason the Mortgage Market Review moved affordability responsibility onto lenders was that, before it:

• a.Interest rates across the market had been set at levels that were simply too low for lenders to make any profit
• b.Self-certified and income-stretched lending had contributed to unaffordable borrowing✓
• c.Lenders verified income too strictly
• d.There were too few mortgage products

Before the MMR, self-certification and lax income checks allowed some borrowers to take on unaffordable mortgages. The MMR responded by requiring lenders to verify income and assess affordability robustly under MCOB 11.6, reducing the risk of irresponsible lending.

MCOB 11.6 does NOT apply in the usual way to:

• a.A residential remortgage with additional borrowing
• b.A completely standard residential capital-and-interest repayment mortgage taken out by an ordinary consumer
• c.A residential interest-only mortgage
• d.A pure buy-to-let loan that is not a regulated mortgage contract✓

The MCOB 11.6 residential affordability rules apply to regulated residential mortgages. A pure buy-to-let loan is generally not a regulated mortgage contract, so the residential affordability assessment does not apply in the same way, although lenders apply rental-cover and other tests.

If, after a proper MCOB 11.6 assessment, a mortgage would be unaffordable for the customer, the lender should:

• a.Extend the term to 60 years automatically
• b.Lend anyway if the property is valuable
• c.Reduce the interest rate to nil
• d.Not enter into the contract on those terms✓

MCOB 11.6.2 prohibits a lender from entering into a regulated mortgage contract unless it can show the customer can afford it. If the assessment shows it is unaffordable, the lender must not lend on those terms, however valuable the security, because the property alone does not make lending responsible.

Under the Consumer Duty's 'price and value' outcome, a mortgage product must:

• a.Be free of any interest
• b.Provide fair value, so the price is reasonable relative to the benefits customers receive✓
• c.Carry the highest fees the market will bear
• d.Always be priced as the single cheapest mortgage product available anywhere in the whole market at that time

The price-and-value outcome under PRIN 2A requires firms to ensure there is a reasonable relationship between the price paid and the benefits received, so products offer fair value. It does not require the lowest price, but it prohibits products that provide poor value.

A lender relying on bonus or commission income when assessing affordability should:

• a.Always count the bonus or commission income in full, treating it exactly as though it were guaranteed basic salary
• b.Ignore all regular income
• c.Assess how reliable and sustainable that income is before relying on it✓
• d.Assume it will double each year

MCOB 11.6 requires income used in the assessment to be evidenced and sustainable. Variable income such as bonuses or commission should be assessed for reliability, and lenders often use a prudent proportion or an average, so affordability is not overstated on uncertain earnings.

A borrower on an interest-only mortgage whose repayment vehicle is projected to fall short should be:

• a.Automatically moved to a longer interest-only term
• b.Charged a penalty and ignored
• c.Contacted so the shortfall can be addressed, in line with treating customers fairly✓
• d.Simply left to discover the shortfall entirely for themselves right at the very end of the mortgage term

MCOB and the Consumer Duty expect lenders to review interest-only repayment strategies and engage with customers where a shortfall is emerging, so options such as overpayments, switching to repayment or extending arrangements can be considered before the capital falls due (MCOB 11.6 and MCOB 13).

The affordability rules recognise that a longer mortgage term:

• a.Lowers the monthly payment but usually increases the total interest paid, which the lender should weigh✓
• b.Guarantees the loan will be repaid
• c.Always makes a mortgage more responsible and affordable, so extending it is invariably in the customer's interest
• d.Removes the need for a stress test

Extending the term reduces monthly payments and can improve affordability, but it increases total interest and may push borrowing into retirement. A responsible lender weighs these effects rather than simply lengthening the term to make an otherwise unaffordable loan appear affordable (MCOB 11.6).

A loan-to-value (LTV) ratio of 90% means the customer is:

• a.Borrowing 90% of the property's value, with a 10% deposit✓
• b.Paying 90% interest
• c.Borrowing 10% of the property's value
• d.Guaranteed the lowest rate

LTV expresses the loan as a percentage of the property's value, so a 90% LTV means a 10% deposit. Higher LTVs represent greater risk to the lender, usually attracting higher rates, and interact with, but do not replace, the MCOB 11.6 affordability assessment.

Verifying income before lending helps the lender comply with MCOB by ensuring that affordability is based on:

• a.Evidenced, reliable income figures✓
• b.The customer's optimism
• c.The lender's target lending volumes
• d.The estate agent's asking price

MCOB 11.6 requires income to be verified with independent evidence so the affordability assessment rests on reliable figures. Lending on unverified, optimistic income was a key failing the MMR was designed to prevent.

Which statement about interest-only lending under current MCOB rules is correct?

• a.They are permitted where there is a credible repayment strategy that the lender evidences✓
• b.No repayment strategy is ever required
• c.Interest-only mortgages are banned
• d.They are available only to customers who are over sixty years of age and already own a second property outright

Interest-only lending is allowed, not banned, provided the lender obtains evidence of a credible strategy to repay the capital and assesses affordability of the interest (MCOB 11.6.41). The MMR tightened the rules but did not prohibit interest-only mortgages.

The stress test in MCOB 11.6 is designed to protect against the risk that:

• a.House prices fall
• b.The customer moves house
• c.The customer changes job voluntarily
• d.Interest-rate rises during the early years make the mortgage unaffordable✓

The stress test requires the lender to check affordability against a plausible future rise in interest rates over the first five years, guarding against borrowers taking on payments they could only afford at unusually low rates (MCOB 11.6.18).

A lender that ignores a customer's large existing car-finance commitment when assessing affordability is likely to breach MCOB because it has failed to account for:

• a.Committed expenditure✓
• b.The APRC
• c.The property's rebuild cost
• d.The valuation fee

Existing finance such as car loans is committed expenditure that must be deducted from income in the MCOB 11.6 affordability assessment. Overlooking it overstates how much the customer can afford and risks irresponsible lending.

The responsible-lending framework treats the lender's decision to lend as depending primarily on:

• a.The customer's ability to repay from income and resources✓
• b.The customer's willingness to pay a high fee
• c.The value of the property offered as security alone, without any regard to the borrower's income at all
• d.The size of the deposit only

A central MMR principle is that lending must be based on the borrower's ability to repay, not on the security's value in the hope of selling it if the borrower defaults. MCOB 11.6 therefore centres on income and affordability rather than the property alone.

For a mortgage with a two-year fixed rate followed by a variable rate, the stress test under MCOB 11.6 must:

• a.Only apply if the customer asks
• b.Assume the rate can never change after the fix
• c.Be applied, because the fixed period is shorter than five years✓
• d.Be ignored because the first two years are fixed

The stress test is disapplied only where the rate is fixed for at least five years. A two-year fix is shorter than that, so the lender must apply the stress test, checking affordability against a plausible rate rise once the fixed period ends (MCOB 11.6.18).

A customer wants to borrow the maximum a lender's income-multiple calculator allows, but the affordability assessment shows the payments would leave too little for essential spending. The lender should:

• a.Reduce essential expenditure figures to make it fit
• b.Lend the customer the maximum income multiple regardless of what the detailed affordability figures actually show
• c.Lend only what the affordability assessment shows is sustainable✓
• d.Increase the income multiple

Income multiples are a cap, not a target. MCOB 11.6 requires the actual lending decision to be driven by a genuine affordability assessment, so where affordability is tighter than the maximum multiple, the lender must lend only the sustainable amount.

A responsible lender assessing affordability for a couple where one partner plans to stop work to care for a child should:

• a.Refuse to lend to any couple
• b.Assume both incomes continue unchanged
• c.Take account of the foreseeable reduction in household income✓
• d.Ignore the couple's expenditure

MCOB 11.6.14 requires foreseeable changes in income or expenditure that will affect affordability to be taken into account. A known plan for one partner to stop working reduces future household income and must be reflected in the assessment.

The Consumer Duty reinforces responsible lending by requiring firms to avoid causing:

• a.Any documentation
• b.Competition between lenders
• c.Any profit for the lender
• d.Foreseeable harm to customers✓

Under Principle 12 and PRIN 2A, firms must act to avoid causing foreseeable harm to retail customers. Lending that the firm can foresee will be unaffordable, or that offers poor value, would cause foreseeable harm and breach the Consumer Duty as well as MCOB 11.

Which document produced during the sales process most directly warns the customer how their payments could change if interest rates rise?

• a.The Land Registry title document for the property being purchased by the borrower under the mortgage
• b.The ESIS, including its illustrative higher APRC and payment information✓
• c.The buildings insurance schedule
• d.The estate agent's particulars

The ESIS sets out the payments and, under the MCD, an illustrative higher APRC, alerting the customer to how costs could rise. This customer-facing disclosure complements the lender's internal MCOB 11.6 stress test.

A lender offering a product transfer to an existing customer with no additional borrowing may, under the FCA's rules, apply:

• a.A full and complete new affordability assessment in every single case, exactly as for brand-new borrowing
• b.The Consumer Credit Act instead of MCOB
• c.A simplified approach, since a like-for-like switch does not increase the customer's debt✓
• d.No conduct rules at all

For a straight product transfer or rate switch with no extra borrowing, the customer's debt does not increase, so MCOB does not require a full new affordability assessment. This supports customers switching to a better rate without being trapped, echoing the modified-affordability aims.

MCOB 11.6 requires that the affordability of any additional borrowing (a further advance) is assessed:

• a.Without any income evidence
• b.Using only the income figure the customer had recorded back when they first took out the original mortgage
• c.By assuming income will rise
• d.On the customer's current income and expenditure at the time of the further advance✓

A further advance increases the customer's debt, so MCOB 11.6 requires a fresh affordability assessment based on current, verified income and expenditure, ensuring the increased borrowing is sustainable at the time it is taken on.

The affordability rules aim to ensure that mortgage lending is sustainable, meaning the customer can:

• a.Rely on the property being sold to clear the debt
• b.Stop paying whenever they wish
• c.Meet the repayments without undue difficulty over the life of the mortgage✓
• d.Repay the mortgage only in the event that they happen to win a large sum of money at some future point

Sustainable lending under MCOB 11.6 means the customer can realistically maintain the repayments from income and resources throughout the term, without the arrangement depending on selling the property or on unlikely windfalls.

A lender that grants a mortgage it knows the customer cannot afford, relying on repossessing and selling the home if the customer defaults, would breach the responsible-lending principle that:

• a.Affordability is the customer's problem
• b.Repossession is always the first step
• c.Lending must be based on the customer's ability to repay, not on the security✓
• d.Property value alone justifies lending

MCOB 11.6 was designed to stop lending that ignores affordability and relies on the property as security. Lending on that basis breaches the responsible-lending duty and the requirement to avoid foreseeable harm under the Consumer Duty.

Where a customer has an interest-only mortgage relying on the sale of the mortgaged property itself as the repayment strategy, MCOB requires the lender to:

• a.Assume the property will always be worth enough
• b.Be satisfied there will be sufficient equity, applying appropriate criteria and prudence✓
• c.Ban interest-only outright
• d.Accept the customer's plan to sell the property without question in absolutely every case that arises

Sale of the mortgaged property can be an acceptable interest-only strategy, but MCOB 11.6 requires the lender to apply prudent criteria, for example a suitable equity buffer and realistic assumptions, rather than assuming the sale will always cover the outstanding capital.

The affordability assessment should be carried out:

• a.Before the lender enters into the mortgage contract✓
• b.Only if the customer later falls into arrears
• c.Only after completion
• d.A year into the mortgage

MCOB 11.6.2 requires the affordability assessment to be completed before the lender enters into the regulated mortgage contract, because its purpose is to prevent unaffordable lending from being advanced in the first place.