How will the new mortgage regulations affect me? BLOGJune 1, 2016 10:16 am
On the 21st March 2016 new EU-wide rules will come into force that are designed to protect consumers who are taking out credit agreements for residential property.
These rules, known as the Mortgage Credit Directive (MCD), are far reaching and driven by two key considerations:
- That an owner-occupier’s own home is at risk, so there are potentially significant implications if these borrowers are not adequately protected
- That buy-to-let borrowers tend to be acting as a business
Whilst many people are already familiar with “buy to let” mortgages, they may not be aware that the new regulations will introduce two new types of mortgage:
- Consumer Buy to Let
- Investment Buy to Let
Consumer Buy to Let mortgages are designed for borrowers who have not entered into a mortgage contract for the purposes of a business, often known as “accidental landlords”. An example of this would be where the property has been inherited and either the borrower or a relation has occupied the property; or where a borrower is looking to let their current home and buy another. These types of mortgage will become regulated. They will benefit from a higher level of consumer protection, such as the right to complain to the Financial Ombudsman and the requirement for lenders to treat consumer arrears reasonably.
Investment Buy to Let mortgages (that are for business/investment purposes) fall outside the remit of these regulations and therefore will not come with any consumer rights. It is important to note that in the UK the majority of Buy to Let mortgage lenders have agreed to willingly provide information to customers in a way which is clear, fair and not misleading, as well as to lend responsibly and treat customers fairly.
The new MCD rules will also apply to Second Charge lending.
Second charge lending relates to loans secured against your home. These types of arrangement are commonly known as “secured loans” or “second charge mortgages”. At present second charge lenders are not obliged to “stress test” the affordability of the loans they grant, however from the 21st March 2016 robust affordability assessment will be undertaken before loans are granted. This could cause difficulties for borrowers with impaired credit because impaired credit loans usually carry a higher interest rate/monthly payment and are therefore less affordable.
Bringing the regulation of second charge lending within the same regime as mortgages means independent advisers will need to consider the suitability of these loans when providing advice to clients. This is a positive step for consumers, especially those looking to raise additional funds to pay for certain items such as home improvements because it may be financially advantageous for them to remain with their existing mortgage lender rather than re-mortgage to a new lender, particularly where they are currently benefiting from a favourable rate on their main mortgage.
Adrian Firth, Clayden Financial IFA