Progressing to exchange of contracts - Sources of finance an...

Learning Outcomes

This article outlines the primary methods by which buyers finance property purchases, focusing on mortgages. It details the different types of mortgage products commonly available and the solicitor's role in advising clients and acting for lenders. For the SQE1 assessment, you will need to understand the key characteristics of various finance options, including their regulatory context, and the practical implications for clients and solicitors leading up to the exchange of contracts. This knowledge will help you apply relevant legal principles to SQE1-style single best answer questions concerning property financing.

You should be able to distinguish repayment and interest-only products and evaluate rate structures (fixed, tracker, discount, SVR), early repayment implications, and portability. You should understand the limits of a solicitor’s financial advice under FSMA 2000 and the need to refer clients for product-specific advice. You will also develop awareness of common lender requirements in the UK Finance Mortgage Lenders’ Handbook, including minimum lease terms, new-build incentives, ground rent/service charge review clauses, satisfactory searches and enquiries, occupier consents, insurance and valuation issues. You will be able to explain the function and timing of the Certificate of Title, the mechanics of requesting drawdown, and key pre-completion protections (bankruptcy and priority searches). Finally, you should be able to identify risks and reporting obligations relating to third-party deposits, private loans, employer loans, shared ownership and Sharia-compliant arrangements, and the steps a prudent solicitor should take before advising a client to exchange.

SQE1 Syllabus

For SQE1, you are required to understand how property purchases are funded, particularly the legal aspects surrounding mortgages, and to identify appropriate financing routes or advise on the implications of different mortgage types, with a focus on the following syllabus points:

• the common sources of finance for property purchases (eg mortgages from banks/building societies)
• the main types of mortgages available (eg repayment, interest-only) and their key features
• the solicitor’s role and professional conduct duties when advising buyers and acting for lenders
• key documentation involved, such as the mortgage offer and Certificate of Title.
• limitations on financial advice (FSMA 2000 scope/safe harbour; referral to authorised advisers)
• UK Finance Mortgage Lenders’ Handbook: structure, common Part 2 requirements, and reporting
• lender-driven title, search, valuation and insurance requirements (including new-build incentives disclosure)
• occupiers’ consents/waivers and undue influence safeguards (Etridge guidance)
• pre-completion protections for lender and buyer (bankruptcy search; OS1/OS2 priority)
• mortgage deed execution and registration; Companies House registration of corporate charges
• funding the deposit: stakeholder vs agent, third-party contributions, and lender disclosure duties
• special features of government-backed initiatives (eg shared ownership/equity arrangements) and Sharia-compliant finance

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. Which of the following statements regarding a solicitor acting for both a buyer and their mortgage lender in a residential transaction is most accurate?
   1. The solicitor must always cease acting for both if any potential conflict arises, regardless of client consent.
   2. The solicitor owes a primary duty to the lender, overriding the duty to the buyer.
   3. Acting for both is generally permissible if it is a standard mortgage on standard terms and no conflict exists or is likely.
   4. The solicitor can share all information received from the buyer with the lender without the buyer's consent.
2. A buyer takes out an interest-only mortgage. What is the primary risk associated with this type of mortgage?
   1. The monthly repayments will fluctuate significantly based on interest rate changes.
   2. The capital sum borrowed must be repaid at the end of the mortgage term, requiring a separate repayment plan.
   3. Early repayment charges are always higher than for repayment mortgages.
   4. The interest rate is typically higher than for a standard repayment mortgage.
3. What is the primary purpose of the Certificate of Title provided by the buyer's solicitor to the lender?
   1. To confirm the buyer has sufficient funds for the deposit.
   2. To request the release of the mortgage advance and confirm the property title is good and marketable security.
   3. To detail the results of the property survey.
   4. To provide the lender with the buyer's personal financial details.

Introduction

Securing adequate finance is a critical step for any buyer before they commit to purchasing property by exchanging contracts. The buyer’s solicitor plays a key role in ensuring the financial aspects of the transaction are properly managed, advising the client on funding options, liaising with lenders, and ensuring compliance with regulatory requirements. This article examines the common sources of finance, the different types of mortgages available, and the solicitor’s responsibilities in this context, focusing on the information needed to progress safely towards exchange.

Sources of Finance

Buyers typically fund property purchases through personal savings, gifts, or borrowing. Borrowing, usually secured by a mortgage, is the most common method.

Mortgages from Banks and Building Societies

The primary source of mortgage finance comes from banks and building societies. These institutions offer various mortgage products but are subject to strict regulation.

Key Term: Mortgage
A loan secured against property. The lender (mortgagee) provides funds to the borrower (mortgagor), and the property serves as security. If the borrower defaults, the lender usually has the right to take possession of the property and sell it to recover the debt.

Solicitors acting for buyers who require a mortgage will need to manage the relationship with the lender. This often involves verifying the buyer meets the lender's criteria, explaining the terms of the mortgage offer, and coordinating the drawdown of funds for completion. On many transactions the same solicitor acts for both borrower and lender, but only where it is a standard residential mortgage on standard terms and there is no conflict or likelihood of one arising. The solicitor must comply with lender instructions and the UK Finance Mortgage Lenders’ Handbook.

Key Term: Mortgage Offer
A conditional offer issued by a lender setting out the loan amount, product type, rate, term, special conditions (e.g. retentions or documents required), and expiry. It is typically relied upon by the conveyancer before exchange.

Related Topic: Professional Conduct 🔗

Solicitors must be mindful of potential conflicts of interest when acting for both a buyer and their lender. Confidentiality and disclosure duties require careful management.

Employer Loans

Some employers offer mortgage assistance schemes. These loans are often linked to the employment contract, and termination of employment may affect the loan terms or require immediate repayment. Solicitors should review the loan and employment agreements carefully. Where the loan is to be secured on the property, a registrable legal charge will be required; if the borrower is a company, any charge must also be registered at Companies House within the statutory time limit.

Private Mortgages

Finance may also come from private individuals, such as family members. While potentially less formal, it is important to document these loans properly with a formal loan agreement and register any charge against the property to protect the lender's interest and avoid future disputes. Consider ranking issues (e.g. whether the family charge will be postponed to the main lender’s first legal charge). Where a family contribution is a pure gift, it must still be reported to the lender and may require a signed gifted deposit letter and ID/AML evidence.

Government Schemes

Various government schemes (eg, Help to Buy) exist to assist buyers, particularly first-time buyers. These often involve complex equity loan or shared ownership structures, requiring careful explanation of the legal implications and obligations to the buyer.

Shared ownership combines a leasehold interest in a share (e.g. 25%-75%) with payment of rent on the unsold share to a housing provider. The lease contains staircasing provisions for acquiring further shares, valuation mechanisms, and restrictions on assignments. A lender’s ability to recover on repossession is typically governed by mortgagee protection provisions in the shared ownership lease, which the solicitor must check against lender Part 2 Handbook requirements. Modern first-time buyer policies also include First Homes or developer affordable schemes; on any discounted market sale the solicitor must confirm the restriction mechanism, eligibility and resale control matches lender requirements.

Sharia-compliant arrangements remain available for buyers who cannot pay or receive interest. Common structures include Murabaha (purchase and resale at a markup) and Diminishing Musharaka/Ijara (co-ownership with rent on the bank’s share). These may involve two-step transfers or a lease-back structure. The solicitor must ensure SDLT and registration are correctly addressed and the client understands that rent or profit replaces interest.

Types of Mortgage

Understanding the different mortgage types is essential for advising clients appropriately.

Repayment Mortgages

With a repayment mortgage, the borrower's monthly payments consist of both capital repayment and interest. Over the mortgage term, the entire loan is paid off.

Key Term: Repayment Mortgage
A mortgage where each monthly payment includes both an interest payment and a capital repayment, designed to fully repay the loan by the end of the term.

This is the most common type, offering the certainty that the debt will be cleared at the end of the term if all payments are made. Many products are “portable” (the lender may allow transfer to a new property subject to underwriting) and may carry early repayment charges (ERCs) during any fixed or discount period. Offset and flexible variants allow the borrower to offset savings to reduce interest or make overpayments/underpayments within agreed limits.

Interest-Only Mortgages

Borrowers with interest-only mortgages pay only the interest each month. The capital amount borrowed remains outstanding and must be repaid in a lump sum at the end of the mortgage term.

Key Term: Interest-Only Mortgage
A mortgage where monthly payments cover only the interest on the loan, with the capital amount remaining due for repayment at the end of the mortgage term.

This results in lower monthly payments but requires the borrower to have a clear and credible strategy (eg, an investment plan, sale of another asset) for repaying the capital at the end of the term. Failure to do so can lead to significant financial difficulty. Lenders often require specific approved repayment vehicles (such as sale of the secured property for buy-to-let, or investments) and will assess plausibility at underwriting. A solicitor should not opine on the suitability of the repayment vehicle but should warn the client of the legal consequences if it fails.

Exam Warning

Clients opting for interest-only mortgages must be advised strongly on the need for a viable capital repayment plan. Solicitors should document this advice clearly.

Fixed and Variable Rate Mortgages

Mortgages can also be categorised by their interest rate structure.

• Fixed-Rate: The interest rate remains unchanged for a specified initial period (eg, 2, 3, or 5 years), offering payment certainty. Early repayment charges often apply during the fixed period. At the end, most products revert to the lender’s Standard Variable Rate (SVR) unless the borrower remortgages or product-switches.

• Variable-Rate: The interest rate can fluctuate. Common types include:

  • Tracker Mortgages: The rate tracks an external benchmark, typically the Bank of England base rate, plus a set margin.
  • Discount Mortgages: Offers a discount off the lender's Standard Variable Rate (SVR) for a set period.
  • Standard Variable Rate (SVR): The lender's default rate, which they can change at their discretion, often after an initial fixed or tracker period ends.

Borrowers should understand ERCs, reversion risk (SVR may be materially higher), and portability rules. Buy-to-let lending typically assesses rent coverage (Interest Coverage Ratio) and affordability differently to owner-occupied lending.

Sharia-Compliant Finance

For clients unable to engage in transactions involving interest (riba) for religious reasons, alternative Sharia-compliant products are available, structured as purchase and lease-back or diminishing partnership arrangements.

The Solicitor's Role: Buyer and Lender

When a buyer requires a mortgage, the solicitor has several key responsibilities.

Advising the Buyer

The solicitor must ensure the buyer understands the financial commitment they are undertaking, the terms of the specific mortgage product, and any associated risks (eg, implications of interest rate rises on variable rate products, the need for a repayment vehicle for interest-only mortgages). While solicitors can provide generic advice, specific financial advice should come from an authorised financial advisor.

The solicitor should also explain legal consequences of any special conditions in the mortgage offer: for example, retentions for remedial works, requirements for specific insurance (buildings insurance from exchange under SC or SCPC unless otherwise agreed), or additional documentary evidence (such as the Disclosure of Incentives Form on new-build purchases). The buyer must be told not to exchange until non-delegable conditions can be satisfied by completion or the lender has agreed to vary them.

Acting for the Lender

In many residential transactions, the buyer’s solicitor also acts for the lender. This is permissible under conduct rules provided it is a standard mortgage on standard terms and no conflict of interest exists or is likely.

Key Term: Standard Mortgage
Typically refers to a mortgage offered by an institutional lender in the normal course of business, using non-negotiated, standard documentation for a residential property purchase.

The solicitor owes duties to both clients. They must follow the lender's instructions, often detailed in the UK Finance Mortgage Lenders’ Handbook.

Key Term: Lender's Handbook
A manual detailing standardised instructions and lender-specific requirements for conveyancers acting on behalf of mortgage lenders in the UK. Part 1 contains general instructions; Part 2 contains lender-specific variations.

A key task is providing the Certificate of Title (CoT) to the lender before completion.

Key Term: Certificate of Title (CoT)
A standard form report provided by the solicitor to the lender confirming that the property's title is good, marketable, and acceptable as security for the mortgage loan, and requesting the release of mortgage funds.

Common handbook points include: acceptable lease terms (minimum remaining years; ground rent terms and indexation), new-build requirements (CML/UK Finance Disclosure of Incentives), buildings insurance on exchange, satisfactory pre-completion searches, occupier consents, and reporting obligations for third-party contributions, incentives, cashbacks, or price reductions.

Key Term: Mortgage Deed
The deed executed by the borrower in favour of the lender creating a legal charge over the property. It is registrable at HM Land Registry and, for corporate borrowers, the charge must also be registered at Companies House within the statutory time limit.

Worked Example 1.1

Sarah is buying her first home for £250,000 with a 10% deposit from savings and a 90% mortgage. Her solicitor also acts for the lender, MegaBank PLC. During the investigation of title, Sarah tells her solicitor that her parents are gifting her an additional £10,000 towards the purchase, but she doesn't want the bank to know as she fears it might affect her mortgage offer.

What advice should the solicitor give Sarah?

Answer:
The solicitor must explain to Sarah that they have a duty to disclose all relevant information to the lender (MegaBank) regarding the source of funds for the purchase, as per the Lender's Handbook requirements. The undisclosed gift represents a material fact that could influence the lender's decision. The solicitor must advise Sarah that non-disclosure is not an option. If Sarah insists on withholding the information, the solicitor must cease acting for the lender due to the conflict of interest and may also have to cease acting for Sarah.

Worked Example 1.2

A solicitor is acting for joint buyers, Mr and Mrs Jones, and their lender, County Building Society. Mr Jones runs a small business and the mortgage is being secured on their jointly owned home primarily to raise funds for his business. The mortgage documentation requires both Mr and Mrs Jones to sign. Mrs Jones seems hesitant.

What steps must the solicitor take regarding Mrs Jones?

Answer:
The solicitor must ensure Mrs Jones receives independent legal advice or, if advising her themselves, must strictly follow the Etridge guidelines. This involves meeting her separately from Mr Jones, explaining the practical implications and risks of the transaction (ie, the home could be repossessed if the business loan is not repaid), confirming she understands she has a choice, and obtaining her express authority before proceeding or confirming advice to the lender. The solicitor must be satisfied she is entering into the transaction freely and with full knowledge.

Lender Requirements: Title, Property and Incentives

The solicitor must confirm the title is good and marketable, free of adverse entries that would materially affect value or marketability. Particular care is needed for:

• Leaseholds: minimum unexpired term; no onerous ground rent or review clauses; service charge obligations; proper consents; landlord’s title; building safety obligations where applicable.
• New-builds: disclosure of incentives/cashbacks/upgrades; NHBC or equivalent warranty; practical completion and longstop dates; search validity periods.
• Environmental/planning/building regulation matters: serious issues must be reported if required by Part 2.

Where incentives exist on a new-build purchase, the Disclosure of Incentives Form must be completed and any price adjustment must be consistent across the contract, lender’s valuation and mortgage offer. Unreported incentives can render the transaction unacceptable to the lender.

Occupiers’ Rights and Consents

Non-owning adult occupiers can have rights which may override the lender unless properly postponed. Most lenders require such occupiers to sign a consent/waiver postponing any rights they might have in favour of the lender and agreeing to vacate if the lender enforces security.

Key Term: Occupier's Consent
A signed acknowledgment by a non-owning adult occupier that any rights they might have are postponed to the lender’s charge and that they will vacate if the lender enforces its security.

Proper independent explanation is needed to avoid allegations of undue influence or misrepresentation. The consent is normally executed before exchange (or certainly before completion).

Pre-Completion Protections and Drawdown

Lenders usually require the solicitor to submit a Certificate of Title within a specified timeframe before completion (commonly five working days) and to carry out searches such as:

Key Term: Priority Search (OS1)
An official search at HM Land Registry against a registered title that confirms entries since the last official copies and gives a 30-working-day priority period to protect the pending application.

Key Term: Bankruptcy Search
A search (K16 for individuals, company search for corporates) to ensure the borrower is not bankrupt or subject to insolvency proceedings at completion; required when acting for a lender.

If the buyer is a company and grants a charge, the charge must be filed at Companies House (form MR01) within 21 days of creation to ensure it is effective against a liquidator/administrator and third parties.

Worked Example 1.3

Amir is purchasing a new-build flat. The developer has offered £7,500 towards legal fees and upgrades, and a furniture package. The price on the reservation form is £325,000. The lender’s valuation matches £325,000. The mortgage offer is issued, but no incentives are mentioned.

What must Amir’s solicitor do before exchange?

Answer:
The incentives must be disclosed to the lender using the lender’s approved form (e.g. Disclosure of Incentives). The solicitor must ensure the contract price, valuation and offer are aligned, report the incentives per the Handbook, and not exchange until the lender confirms it remains willing to lend on the revised basis. Failure to disclose could amount to mortgage fraud and breach of lender instructions.

Worked Example 1.4

Lily is buying a leasehold flat with 89 years left on the lease. Ground rent is £250 per year, doubling every 15 years. The lender’s Part 2 indicates it will not lend on leases with doubling ground rents faster than RPI or exceeding an affordability cap.

How should the solicitor proceed?

Answer:
The solicitor must report the rent terms to the lender and confirm they conflict with the lender’s Part 2. Options include seeking a deed of variation (e.g. converting to an acceptable rent formula) or advising the client that finance on current terms is unlikely and not to exchange until the lender confirms acceptability. Proceeding without resolution risks breach of the Handbook and future mortgageability problems.

Funding the Deposit

The buyer's solicitor must ensure the deposit funds (usually 10% of the purchase price) are available in cleared funds before exchange. If the buyer is funding the deposit from a related sale, the solicitor must manage the chain carefully. Under the Standard Conditions it is common for the deposit to be held as stakeholder (safest for the buyer). The deposit can be reduced by agreement; however, if a reduced deposit is agreed, the buyer may have to “top up” to 10% on service of a notice to complete. Deposits funded by credit cards, short-term personal loans or cryptocurrency liquidation may be unacceptable to lenders or raise AML issues, and must be discussed and cleared with the lender in advance.

If bridging finance is needed, the risks (short term, higher interest, possible second charge) must be explained. Any second charge lender will need to postpone to (or otherwise rank behind) the main lender; your ability to act for both may be restricted.

Revision Tip

Always verify the source of the deposit funds and report any third-party contributions (like gifts) to the lender, as required by the Lender's Handbook. This is important for money laundering checks and lender requirements.

Exam Warning​

Check the mortgage offer expiry before proposing exchange dates. Exchanging with an offer about to expire may expose the borrower to completion risk if the lender declines to extend.

Additional Practical Points Before Exchange

• Confirm buildings insurance arrangements from exchange if the risk passes to the buyer (SC/SCPC). Lenders generally require the policy to meet stated perils and sum insured.
• For leaseholds, ensure service charge/ground rent statements are available and no material arrears or disputes are outstanding that require reporting.
• For high-rise/residential buildings where relevant, consider whether any external wall system or building safety documentation required by the lender has been produced and whether statutory leaseholder protections are in place; report issues per Part 2.
• Ensure client identity, AML/source of funds and politically exposed person checks are complete; lenders may require evidence.
• On company purchases or charges, diarise Companies House filings to avoid the charge being void against insolvency office-holders.

Worked Example 1.5

Tom’s mortgage offer contains a retention of £8,000 for damp proofing, to be released once works are certified. Tom has only £5,000 spare cash and wishes to exchange.

What should Tom’s solicitor advise?

Answer:
The retention reduces funds available on completion. Tom must have sufficient non-borrowed funds to complete despite the retention or obtain lender consent to remove/alter the retention before exchange. The solicitor should not exchange until funding is fully secured or the lender confirms drawdown of sufficient funds to complete.

Summary

• Buyers primarily finance property purchases through mortgages obtained from banks or building societies, though employer loans, private loans, and government schemes are other possibilities.
• Common mortgage types include repayment mortgages (capital and interest paid off over the term) and interest-only mortgages (only interest paid monthly, capital due at end). Rates can be fixed or variable, and products may include ERCs and portability features.
• Solicitors must advise buyers on the legal implications of their chosen finance method but refer clients for specific financial advice under FSMA 2000 restrictions.
• When acting for both buyer and lender (common in residential standard mortgages), solicitors must manage potential conflicts, follow the Lender's Handbook, and report material facts (including gifts, incentives and rent/lease terms).
• The Certificate of Title (CoT) is a key document confirming to the lender that the title is good and the charge will be registered, enabling the release of funds.
• Pre-completion protections include bankruptcy searches, OS1 priority, and (if applicable) Companies House charge registration for corporate borrowers.
• Understanding the source of the deposit and reporting third-party contributions is essential for compliance and lender requirements. Do not exchange until offer conditions and funding are secure.

Key Point Checklist

This article has covered the following key knowledge points:

• the main sources of finance available for property buyers, including mortgages from institutional lenders, private arrangements, and government schemes
• the key differences between repayment and interest-only mortgages and the implications of fixed versus variable interest rates
• professional conduct limits on financial advice and when to refer the client to an authorised adviser
• the solicitor's duty to advise the buyer on mortgage risks and to satisfy lender Handbook requirements when acting for the lender
• lender requirements commonly encountered (lease terms, incentives, occupier consents, insurance, searches)
• the purpose and timing of the Certificate of Title (CoT) and drawdown mechanics
• pre-completion protections including bankruptcy searches and priority searches
• deposit funding checks, stakeholder vs agent deposits, and disclosure of third-party funds to lenders

Key Terms and Concepts

• Mortgage
• Repayment Mortgage
• Interest-Only Mortgage
• Standard Mortgage
• Lender's Handbook
• Certificate of Title (CoT)
• Mortgage Offer
• Mortgage Deed
• Occupier's Consent
• Priority Search (OS1)
• Bankruptcy Search