The Mortgage Credit Directive comes into force on March 21st. A brainchild of Brussels, the new legislation is designed to bring mortgage lending in line across the EU member states. It has two aims: foster a single, homogenous mortgage market, and increase protection for consumers.
For such a major piece of legislation, the Mortgage Credit Directive has managed to keep a surprisingly low profile in the press. This is in part because its impact has already been felt in the UK through 2014’s Mortgage Market Review (MMR), designed to fit within the MCD. Processes and procedures dating from then mean its implementation will be less of a shock to the system for the UK, certainly compared to some of our continental counterparts.
While borrowers, advisers and lenders alike had to weather the MMR, the next wave of legislation will have a more obvious impact on the latter two. The knock-on effect for borrowers is largely positive; although the changes may cause foreign currency borrowers a few headaches, the emphasis is on educating and protecting against substandard lending practices. To that end, we thought it helpful to provide a breakdown of the main points of the MCD for those who will be affected.
The Mortgage Credit Directive introduces the new category – and concept – of ‘consumer buy to let’ (CBTL). The aim is to draw a distinction between those professional landlords who are operating a buy to let portfolio as a business, and those ‘accidental’ landlords who are not seeking finance ‘wholly or predominantly for the purposes of a business’. Henceforth the latter will need to take out a regulated product, giving them extra consumer protection.
Anyone who is letting out a property they have inherited, or is planning to rent out a home they previously lived in, will count as a CBTL borrower. The below flowchart should help you work out whether or not you will be affected.
Lenders will have some flexibility in interpreting the new legislation and will decide on a case-by-case basis which umbrella a customer comes under. The majority of buy to let borrowers will be unaffected.
Lenders who offer foreign currency loans have had to adapt quickly to accommodate the Mortgage Credit Directive.
A foreign currency loan is defined as a mortgage in a different currency to the customer’s income, or a mortgage in a different currency to the EEA State in which the customer resides.
The new regulations require lenders to monitor exchange rates and issue ‘sufficient’ warning to clients as to their level of exposure. If two currencies fluctuate by a certain percentage, lenders will need to offer the borrower the option of switching currency.
This increased burden of admin and risk led to a swathe of lenders withdrawing their foreign currency offerings from the market. More recently a handful of banks, including some big high street names, have offered borrowers a lifeline by pledging to stay in the space.
Under the Mortgage Credit Directive, the second charge market is to become regulated by the FCA, primarily because it currently has a high level of arrears – and the speed at which loans go into arrears is also striking.
One thing to bear in mind is that the new rules may temporarily clog up the market. Response times may increase as lenders implement the changes, so applications should be submitted in plenty of time.
The Mortgage Credit Directive comes into its own with its emphasis on greater transparency and clarity for borrowers. Henceforth lenders and advisers will be under an obligation to keep customers better informed.
Brokers must make their clients aware of alternative ways of raising funds –a remortgage, for example, second charge lending, and other types of loan should also be explored.
This extra information will allow borrowers to see the bigger picture throughout the process, and make a judgement based on all the facts.
The Mortgage Credit Directive requires lenders to issue ‘binding’ offers to borrowers – unless a material change occurs, or the information provided by the customer is proven to be inaccurate, the lender cannot re-underwrite the case or withdraw the offer at the last minute.
Borrowers then have the right to a 7-day reflection period, designed to ensure they have sufficient time to fully consider any offers they receive. At any point during that period, you are free to accept or reject the offer or allow it to lapse.
More transparency is the watchword here and, again, there is a focus on making sure the borrower is kept informed.
If an application is declined, the borrower must be told of the decision in a timely manner. If the decline is a result of the information held about the customer by a Credit Reference Agency, the applicant must be told which agency the lender used.
The intricacies of the Mortgage Credit Directive mean choosing a good broker is more important than ever.
Many of the changes are very much in line with our values here at Enness. We are committed to building close relationships with our clients built on full disclosure, trust and honesty.
We take the time to fully get to grips with a client’s financial situation, plans and goals, which allows us to explore all possible avenues and suggest a range of options when it comes to structuring the loan.
In line with our policy of keeping clients informed at every stage of the process, we produce and distribute weekly analysis highlighting key developments in the mortgage market, and we write our own guides to help various demographics navigate the market – the self-employed, buy to let landlords, ex-pats, and those receiving bonus income to name but a few. We don’t depend on receiving commission and use lenders whether or not they pay us.
If you have any questions about the MCD, please do get in touch. One of our specialist brokers will be more than happy to answer your queries.