Progressing to exchange of contracts - Finance and mortgages

Learning Outcomes

This article outlines the essential financial considerations and mortgage procedures relevant to progressing a residential property transaction towards the exchange of contracts. It covers the buyer's funding options, the solicitor's role in advising on finance and representing lenders, the key elements of a mortgage offer, and the necessary steps to secure funding before the parties become legally bound. Understanding these processes is essential for advising clients effectively and managing the financial aspects of conveyancing prior to exchange.

SQE1 Syllabus

For SQE1, you are required to understand the practical steps and legal principles involved in securing finance for a property purchase, particularly leading up to the exchange of contracts. This includes advising clients on funding sources, understanding mortgage documentation, and managing the relationship with lenders. Key areas for revision include:

  • Identifying and advising on sources of finance for property purchase, including cash, mortgages, and third-party contributions.
  • Understanding the solicitor's professional conduct obligations when dealing with client finance, including anti-money laundering checks and advising limits under FSMA 2000.
  • Recognising the main types of mortgages (repayment and interest-only) and interest rate options available to buyers.
  • Explaining the process of obtaining a mortgage offer, including the lender's valuation and assessment criteria.
  • Managing the solicitor's role when acting for both buyer and lender, including identifying potential conflicts of interest and complying with the UK Finance Mortgage Lender's Handbook.
  • Understanding the purpose and process of obtaining a Certificate of Title for the lender.
  • Advising on the implications of different funding arrangements on the conveyancing timeline leading to exchange.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. A solicitor acting for both a buyer and their lender discovers the buyer is funding part of the deposit with a loan from a family member, which must be repaid. What immediate step should the solicitor take?
    1. Advise the buyer to proceed without informing the lender.
    2. Obtain the buyer's consent to disclose this information to the lender.
    3. Draft a separate loan agreement for the family member.
    4. Inform the lender directly without the buyer's consent.
  2. Which document formally requests the release of mortgage funds from the lender after confirming the property title is acceptable?
    1. Mortgage Offer
    2. UK Finance Mortgage Lender’s Handbook
    3. Certificate of Title
    4. SDLT Return
  3. Under the UK Finance Mortgage Lender's Handbook, when must a solicitor report discrepancies between the property valuation description and the title documents?
    1. Only if the discrepancy significantly affects the property value.
    2. Immediately upon discovery.
    3. After exchange of contracts but before completion.
    4. Only if the borrower requests it.

Introduction

Securing finance is a critical step in most property purchase transactions, occurring during the pre-contract stage before the exchange of contracts renders the agreement legally binding. Solicitors play a key role in guiding buyers through the financial aspects, from understanding funding sources to handling mortgage applications and lender requirements. This involves not only advising the client on their options and obligations but also complying with strict professional conduct rules, especially when representing both the buyer and the lender. Ensuring that financial arrangements are robust and satisfactory before exchange is essential to prevent delays and protect the client's interests.

Buyer's Funding Arrangements

A fundamental aspect of the pre-contract stage is establishing how the buyer intends to fund the purchase. The buyer's solicitor must clarify this early on, as the source and availability of funds directly impact the transaction's progression towards exchange.

Sources of Finance

Buyers typically fund property purchases through one or a combination of the following sources:

  • Cash: The buyer uses personal savings or proceeds from the sale of another asset.
  • Mortgage: The buyer obtains a loan from a financial institution (eg, bank or building society) secured against the property being purchased.
  • Gifted Deposit: A portion of the purchase price, usually the deposit, is provided as a gift, often by family members.
  • Private Loan: Funds are borrowed from a private individual or entity, distinct from institutional lenders.

Where cash is involved, particularly substantial amounts, the solicitor has a duty to conduct anti-money laundering checks to verify the source of funds and source of wealth.

Solicitor's Role and Advice Limitations

While solicitors must advise on the financial implications of the transaction (eg, calculating total costs including SDLT, Land Registry fees, etc.), there are limitations on the financial advice they can provide concerning mortgages.

  • Generic vs Specific Advice: Under the Financial Services and Markets Act 2000 (FSMA 2000), solicitors can typically only provide generic advice about mortgage types unless specifically authorised or exempt (eg, under the s 327 exemption for professional firms when the activity is incidental to legal services). Advising on specific mortgage products usually requires referral to an independent financial advisor (IFA).
  • Due Diligence: Solicitors must perform due diligence regarding the source of funds, particularly cash payments, to comply with anti-money laundering regulations. This involves verifying the origin and legitimacy of the money.

Mortgages: Offers and Types

For most buyers, a mortgage is the primary means of funding. Understanding the process and types of mortgages is essential for the solicitor.

The Mortgage Application and Offer Process

  1. Application: The buyer applies directly to a lender or via a mortgage broker.
  2. Valuation: The lender commissions a valuation to assess the property's suitability as security for the loan. This valuation primarily serves the lender's interest.
  3. Affordability Checks: The lender assesses the buyer's ability to meet mortgage repayments.
  4. Mortgage Offer: If satisfied, the lender issues a formal mortgage offer detailing the loan amount, interest rate, term, conditions, and fees. This offer is usually sent to both the buyer and their solicitor.

Key Term: Mortgage Offer
A formal document issued by a lender detailing the terms and conditions upon which they are prepared to lend money for a property purchase, secured by a mortgage over that property.

The solicitor must review the mortgage offer carefully with the buyer, ensuring all conditions (eg, required repairs, specific insurance) are understood and achievable before exchange.

Types of Mortgage

While specific product advice is restricted, solicitors should be aware of the basic mortgage types to provide context for clients.

Key Term: Repayment Mortgage
A mortgage where monthly payments cover both the interest and a portion of the capital loan amount, ensuring the loan is fully repaid by the end of the term.

Key Term: Interest-only Mortgage
A mortgage where monthly payments cover only the interest accrued on the loan. The capital amount remains outstanding and must be repaid in full at the end of the mortgage term, typically via a separate repayment vehicle (eg, savings, investment plan).

Other types exist, such as endowment or pension mortgages, but repayment and interest-only are the most common. Interest rates can be fixed for a period, variable, or track a benchmark like the Bank of England base rate.

Acting for Buyer and Lender

In residential conveyancing, it is common for the buyer's solicitor to also be instructed by the mortgage lender. This dual representation is permissible under SRA rules provided there is no conflict of interest (or significant risk thereof) and certain conditions are met, primarily that it is a standard mortgage transaction for the buyer's residence.

Potential Conflicts of Interest

A conflict arises if the solicitor's duty to one client clashes with the duty to the other. Examples include:

  • The buyer providing misleading information to the lender.
  • The buyer intending to breach mortgage conditions (eg, by letting the property without consent).
  • The mortgage terms being disadvantageous to the buyer.
  • The buyer receiving funds from a source they do not wish to disclose to the lender (eg, a repayable private loan for the deposit).

Key Term: Conflict of Interest
A situation where a solicitor's separate duties to act in the best interests of two or more clients in relation to the same or related matters conflict.

If a conflict arises, the solicitor must typically cease acting for the lender, and potentially for the buyer as well, depending on confidentiality obligations.

UK Finance Mortgage Lender’s Handbook

When acting for institutional lenders, solicitors must comply with the instructions outlined in the UK Finance Mortgage Lender's Handbook.

Key Term: UK Finance Mortgage Lender’s Handbook
A set of standardised instructions from mortgage lenders to conveyancers, detailing requirements for investigating title, searches, reporting, and managing the mortgage process. It comprises Part 1 (general instructions) and Part 2 (lender-specific requirements).

Key duties under the Handbook include verifying title, carrying out required searches, reporting adverse matters, and checking for discrepancies between the valuation report and title documents.

Certificate of Title

Before the lender releases funds, the solicitor must provide a Certificate of Title (CoT).

Key Term: Certificate of Title (CoT)
A formal report submitted by the solicitor to the lender confirming that the property title is good, marketable, and acceptable as security for the mortgage loan. It also acts as the formal request for the release of the mortgage funds.

The CoT confirms that the solicitor has investigated the title and is satisfied with it, subject to any reported issues. Submitting an inaccurate CoT can lead to liability for the solicitor if the lender suffers loss.

Worked Example 1.1

Scenario: A solicitor acts for Sarah (buyer) and Premier Bank (lender). Sarah reveals she is funding her deposit partly with a £10,000 loan from her brother, which she plans to repay after completion. The mortgage offer states the deposit must come from Sarah's own funds.

Question: What must the solicitor do?

Answer: The solicitor has identified a potential conflict of interest and a breach of the mortgage offer terms. The solicitor must explain the situation to Sarah and seek her consent to disclose the source of the deposit funds (the private loan) to Premier Bank. If Sarah refuses consent, the solicitor must cease acting for Premier Bank due to the conflict and the duty of confidentiality owed to Sarah. They may also need to cease acting for Sarah if continuing would involve misleading the lender.

Preparing for Exchange: Financial Checks

Before proceeding to exchange, the buyer's solicitor must confirm several financial elements:

  • Mortgage Offer: A formal, satisfactory offer is in place and accepted.
  • Lender Requirements: All pre-exchange conditions set by the lender have been met.
  • Deposit Funds: Cleared funds for the deposit are held in the solicitor's client account.
  • Balance Funds: Confirmation that the remaining balance (including purchase price, costs, SDLT/LTT) will be available for completion, either from the buyer's own resources or the mortgage advance.

Worked Example 1.2

Scenario: Ben is buying a house for £250,000. He has a mortgage offer for £200,000. He paid a £1,000 reservation fee to the developer. The contract requires a 10% deposit on exchange. Estimated legal fees and disbursements (including SDLT) are £5,000.

Question: How much money does Ben need to provide to his solicitor before exchange, assuming the lender does not fund the deposit?

Answer: Deposit required (10% of £250,000) = £25,000 Less reservation fee paid = - £1,000 Net deposit needed = £24,000 Ben needs to provide £24,000 in cleared funds before exchange. The remaining purchase price (£25,000) plus costs (£5,000) = £30,000 will be needed for completion, covered by the mortgage advance (£200,000) and Ben's further contribution (£ -170,000 - Ben will receive money back on completion if mortgage used fully, or more realistically, solicitor requests less from lender). The key point is the deposit fund required before exchange.

Protecting the Lender: Occupier's Consent

If adults other than the borrower(s) will occupy the property, the lender usually requires them to sign a consent form. This form typically waives any rights they might have in the property and confirms they will vacate if the lender needs to enforce its security (eg, repossess). This prevents occupiers from later claiming overriding interests that could frustrate the lender's power of sale. The solicitor must ensure any occupiers receive independent legal advice before signing.

Key Point Checklist

This article has covered the following key knowledge points:

  • Establishing the source of funds (cash, mortgage, gift) is a key pre-contract step.
  • Solicitors must conduct anti-money laundering checks on cash funds.
  • Solicitors face restrictions under FSMA 2000 regarding specific mortgage advice.
  • The mortgage process involves valuation, affordability checks, and the issuance of a formal mortgage offer.
  • Repayment and interest-only are the main mortgage types.
  • Acting for both buyer and lender is common in residential transactions but requires careful conflict management.
  • The UK Finance Mortgage Lender's Handbook dictates procedures when acting for institutional lenders.
  • A Certificate of Title confirms the property's suitability as security and requests funds.
  • Discrepancies between valuation and title must be reported to the lender immediately.
  • Third-party contributions (gifts, private loans) must be disclosed to the lender if required by the mortgage offer.
  • Occupier consent forms are needed to protect the lender against potential third-party claims.
  • Financial readiness (deposit, confirmation of balance) must be confirmed before exchange.

Key Terms and Concepts

  • Mortgage Offer
  • Repayment Mortgage
  • Interest-only Mortgage
  • Conflict of Interest
  • UK Finance Mortgage Lender’s Handbook
  • Certificate of Title (CoT)
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Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

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