3 Remortgage or Additional Loans
Where an owner wishes to remortgage either with the same lender or a new lender the RSL should send out a copy of the letter/email set out in Annex 2(A) together with the form set out in Annex 2(B). The information engathered from the home owner will establish whether there is an increase in their original borrowing and the next step is to then establish whether the consent of Scottish Ministers is needed (and whether new shared equity documentation is required).
It should be noted that what is being set out in this section is additional lending or remortgaging with the Primary Lender (the current or a new lender) and not lending from another lender in addition to the Primary Lender. Scottish Ministers' position on additional lenders remains that third ranking lending secured against the property is not permitted.
No consent required
If an owner has paid back part of their mortgage and wishes to borrow up to their original mortgage amount with the same lender then no consent is required.
Original Purchase Price: £100,000
Original Loan Amount: £ 70,000
SG Stake: £ 30,000
So in the ranking agreement entered into among the owner, their original lender and Scottish Government, the parties would have agreed that the original lenders security ranks first against the property for up to £70,000, with SG ranking second for the amount of its equity loan.
In this example the owner has paid back £6,000 of their loan and now wishes to borrow £4,000 to do up their kitchen
Current Loan Amount: £ 64,000
Proposed Loan Amount: £ 68,000
As the owner is not increasing their mortgage with their current lender above their original loan amount no consent or new documentation are required as there is no increase in the amount by which the lender will rank ahead of Scottish Ministers (i.e. up to £70,000).
If an owner wishes to borrow in excess of their original mortgage, either with their existing or a new lender, then Scottish Ministers consent is required.
Original Purchase Price: £150,000
Original Loan Amount: £120,000
SG Stake: £ 30,000
So in the ranking agreement entered into among the owner, their original lender and Scottish Government, the parties would have agreed that the original lender's security ranks first against the property for up to £120,000, with SG ranking second for the amount of its equity loan.
In this example the owner has paid back £10,000 of their loan and now wishes to borrow £20,000 for home improvements or the owner wishes to re-mortgage with a new lender increasing their loan to £130,000
Current Loan Amount: £114,000
Proposed Loan Amount: £130,000
Consent in this example is required as the amount which the primary lender would expect to rank ahead of Scottish Ministers is increased (i.e. from £120,000 to £130,000, which would require the parties to enter into a new amended ranking agreement in order to document the increased amount of the primary lender's first preference).
If consent is required
If consent of the Scottish Ministers is required, the RSL acting as the administering agent will need to be satisfied that the property has increased in value and that the proposed increase in borrowing can be covered by the owners share of the equity. This ensures that the Scottish Ministers' equity stake is still protected if the amount that the lender ranks ahead of Scottish Ministers increases.
The administering agent will need a copy of a current valuation of the property. This may either be one instructed by the RSL on the owners behalf or a copy of the current valuation which has already been provided to the Primary Lender. If the valuation is provided from the Primary Lender then confirmation will also be required from that valuer that the valuation can be formally relied upon by Scottish Ministers. In each case the valuation must be addressed to the party in whose name the Shared Equity is held which will be either the RSL or Scottish Ministers depending on when the shared equity arrangements were originally put in place - see Section 12 on Valuations and Letter of Reliance.
A draft email to the Owner's solicitors together with a proposed Letter of Reliance is set out in Annex 2(D) and Annex 2(E) in the case of a re-financing and Annex 2(J) and 2(K) where the advance is from the Existing Lender.
If the valuation demonstrates that the property has increased in value then the administering agent should calculate whether the owner has sufficient equity to cover their increased borrowing before deciding whether to approve or reject the proposal. We have included a couple of worked examples below for an approval and rejection below.
Original Purchase Price: £ 70,000
Owner's Deposit: £ 3,500
Original Loan Amount: £ 52,500
SG Stake: £ 14,000
In this example the owners have a total 80% stake in the property. The owners have paid back £2,500 of their loan and now wish to borrow £9,000 to do up their bathroom. A fresh valuation values the property at £72,000.
Current Balance of Loan: £ 50,000 (£52,500 - £2,500 paid off)
Proposed Loan Amount: £ 59,000 (£50,000 + £9,000 new borrowing)
Home Report Valuation: £ 72,000
Value of owner's stake: £ 59,000 (81.9% of £72,000)
As the Valuation shows that there is not enough equity in the property then the owner will not be allowed to increase their loan amount. This is because there is an increase in the amount by which the lender will rank ahead of Scottish Ministers.
Original Purchase Price: £150,000
Owner's Deposit: £ 8,000
Original Loan Amount: £112,000
SG Stake: £ 30,000
In this example the owner has a total equity stake of 80% stake in the property. The owner has paid back £10,000 of their loan and now wishes to borrow £20,000 for home improvements. A new home report values the property at £165,000
Current Balance of Loan: £102,000 (£112,000 - £10,000 paid off)
Proposed Loan Amount: £132,000 (£102,000 + £20,000 new borrowing)
Home Report Valuation: £165,000
Value of owner's stake: £132,000 (80% of £165,000)
As the Home Report Valuation shows that there is enough equity in the property and that the proposed increase in the lender's prior ranking is covered by an increase in the valuation of the property then the owner will be allowed to increase their loan amount.
When the approval is granted, because the amount by which the lender will rank ahead of Scottish Ministers will increase (from £112,000 to £132,000) Harper Macleod will prepare a new Ranking Agreement for execution by the owner, the Primary Lender, and Scottish Ministers. In certain cases, Scottish Ministers or RSLs (for pre April 2008 transactions) may agree to enter into a separate letter with the Primary Lender and the owner which will not require to be registered in the Land Register. This will only be available, if at all, where there is an additional loan with the same Primary Lender. If this is not to be registered, arrangements for secure storage of both an electronic and the hard copy must be put in place in order to protect Scottish Ministers' interests.
An email confirming that the transaction has completed will be sent by Harper Macleod to the RSL (copying in Scottish Ministers) at the end of the transaction.
Deed of Postponement
From time to time RSLs and/or Scottish Government Shared Equity and Homeownership Team may be asked by a Primary Lender or its agents to sign a Deed of Postponement or some other form of Agreement - or even a letter regulating the ranking of their security with that of Scottish Ministers.
These should never be signed. The forms of Ranking Agreement used for the various shared equity transactions have evolved in discussion with the Council of Mortgage Lenders (now called UK Finance) and, among other matters, contain provisions for consultation and disclosure that Scottish Ministers require in all cases and the current templates are those which Scottish Ministers propose to use in all circumstances. No other forms are acceptable