23Dec

Confusion reigns as the European Union (EU) and the Financial Conduct Authority (FCA) appear to be blaming each other over the mortgage prisoners issue.

Mortgage prisoners are those trapped on an unfavourable mortgage deal, and who would be unable to re-mortgage to a cheaper deal because they would fail the stricter affordability checks imposed by the FCA’s Mortgage Market Review (MMR) in April 2014. This could have created an undesirable situation where customers were told ‘you can’t afford a new mortgage; so you need to stay on your existing, more expensive mortgage deal, that was granted to you when affordability checks were less strict. Even though the new deal is cheaper we can’t allow you to take it out’.

Hence, the FCA allowed lenders to grant re-mortgages where no additional borrowing was being considered, and where the repayments were lower, regardless of whether the client would have passed the new affordability checks. Not all lenders are allowing customers to make use of this, but that is a separate issue – at present the FCA’s rules definitely allow this exemption to be used.

Under MMR, in normal circumstances lenders are required to assess mortgage applications on whether the borrower would still be able to afford the repayments if base rates rose to 6%.

It has been widely reported in the financial press that the EU’s Mortgage Credit Directive would end this exemption. The Directive’s provisions will come into force on March 21 2016, and according to numerous reports, will stop lenders granting new deals to mortgage prisoners, thus forcing them to remain on the more expensive arrangement. The Directive theoretically still allows mortgage prisoners to re-mortgage with the same lender, but in practice this is unlikely to occur, as lenders will not have an incentive to make an offer of this kind.

However, a statement from the European Commission has cast doubt on these press reports. The statement reads:

“Reports that British homeowners are being prevented from getting a cheaper deal when they re-mortgage are clearly a cause for concern.

“This has been linked to the introduction of the Mortgage Credit Directive, but there is nothing in that directive which should prevent consumers changing their existing mortgage to a cheaper one.

“It seems that the problem may lie with how the UK’s new affordability tests are being applied. These stricter tests come from the UK’s Mortgage Market Review, not EU legislation. We suggest that those concerned about what’s happening take up the issue with mortgage providers or the relevant British authorities.”

This EU statement effectively says it is the FCA that is creating the problem, but the UK regulator responded by saying:

“The implementation of the Mortgage Credit Directive (MCD) means that, from 21 March 2016, an affordability assessment will be required if a lender takes on an existing borrower from another lender.

“While an unfortunate consequence of the MCD, it is likely to affect a very small number of borrowers.”

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.