The Mortgage Credit Directive - what does it mean for borrowers?
In the UK, the MCD is regulated by the Financial Conduct Authority (FCA) and comes into effect from 21 March 2016.
The implications for the UK property market
In general, this directive brings in stricter affordability criteria for borrowers. This is partly to protect them from being given mortgages they can't afford to pay back. It also means that lenders need to have a minimum code of conduct in all aspects of dealing with customers. Many of the changes this directive makes supplement those already made in the UK in April 2014 by the Mortgage Market Review, however, here are two examples of further changes brought about by this MCD from the European Union:
Overall, the broking of buy-to-let mortgages will no longer be a regulated activity. However, this new legislation classifies buy-to-let landlords into two categories, consumer landlords and professional landlords. Consumer landlords are those who rent out a property due to circumstances such as inheriting a property. This is in contrast to a professional landlord where renting out property is their main job. Now, a consumer landlord will have to go through the same application and affordability tests that come with a residential mortgage. This wasn't the case before, and it could make getting a consumer buy-to-let mortgage (CBTL), as its now called, more difficult. Yet, at the same time, the new legislation gives borrowers greater protection as lenders have to abide by the new standards that come with this European Commission directive.
Foreign currency mortgages
The new directive means that if the two relevant currencies in a foreign currency mortgage fluctuate by 20% or more, the lender is obliged to offer a borrower the option of switching the mortgage currency to that of the borrower's income or country of residence. Due to exchange rates, this could be expensive for lenders. As a result, some lenders may stop offering foreign currency mortgages as it's seen as too risky. Many lenders will also not take into account income paid in a foreign currency when processing loans. This rule could affect borrowers looking to buy a holiday home or looking for a home loan in the UK but who are paid in a foreign currency.
Other changes brought about by this new directive
Any mortgage offer given becomes a binding offer. Lenders must then give borrowers at least seven days 'reflection time' pre-contract or post-contract before transactions become legally bound.
Lenders must be trained and have ethical standards as well as sufficient product knowledge to meet new competence levels required by this directive.
Borrowers must receive a European standard information sheet (ESIS) which allows them to compare information from different lenders.
A number of lenders have already implemented the Mortgage Credit Directive from September 2015. However, it's only with time that the full effect of this new directive on the UK mortgage market will be seen.