02Mar

There have been reports of a number of lenders not allowing concessions to customers who are trapped on unfavourable rates when applying the affordability criteria under the Mortgage Market Review (MMR), a new set of mortgage rules which were implemented in April 2014. Yet the problem could get worse when the European Union (EU)’s Mortgage Credit Directive comes into force on March 21 2016.

The Directive will insist that the lender carries out a comprehensive affordability assessment for all applicants, and that if they cannot meet the criteria, then their application would be rejected. This would apply even if the deal the customer is applying for is actually cheaper than their current arrangement, and they would therefore be forced to remain on their existing deal. This gives rise to a paradoxical situation whereby the borrower is told ‘you can’t afford this mortgage, so you need to stay on your existing, more expensive mortgage’.

There will be an exception for customers who re-mortgage to cheaper deals with the same lender, but in practice this is unlikely to help much, as a lender has little incentive to offer their current customers more attractive deals.

The present situation under MMR requires lenders to check if the mortgage repayments would be affordable if interest rates rose to 6%, before they grant a mortgage. It does allow lenders to use their discretion for ‘mortgage prisoners’ – those trapped on unfavourable deals as described above. In practice, only a few smaller lenders are actually making use of this facility, but when the Directive is implemented, it will not be available to anyone.

Martin Lewis, founder of the consumer website Moneysavingexpert.com, has announced that he intends to campaign against this element of the Directive. He will meet the EU’s commissioner for financial services, Jonathan Hill; and intends to write to the Financial Conduct Authority’s chief executive, Martin Wheatley; and a Minister from the Treasury in the new UK Government.

A few weeks previously, as part of the General Election campaign, Nigel Farage, leader of the anti-EU United Kingdom Independence Party, told Mr Lewis’ website that the Directive “will … cut many borrowers from the best rates.”

The chief executive of the Ipswich Building Society, one of the few lenders currently offering concessions to mortgage prisoners, also criticised the EU proposal. Paul Winter commented:

“There are almost 800,000 mortgage prisoners across the UK – including older borrowers, the self-employed and those who have experienced life changes. It should not be the case that those who are approaching the end of a deal are forced to continue on a more expensive SVR rate and are denied choice and entry to an otherwise competitive market. We’re calling for a more inclusive approach to mortgage lending.”

Other effects of the Directive will include:

• Second charge mortgages (often known as secured loans) will be subject to a similar regulatory regime as first charge mortgages, including requirements regarding affordability assessments and advisers’ qualifications
• Customers must be given a European Standardised Information Sheet – a new method of ensuring certain important information is disclosed to the customer. This document will replace the existing Key Features Illustration
• Additional regulation for buy-to-let mortgages

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.