Stephanie McMahon
Head of Research
The European Mortgage Credit Directive changes the way banks approve mortgages. Stephanie McMahon, Strutt & Parker’s Head of Research talks with Simon Checkley, managing director of Private Finance, about what it means in reality.
The European Mortgage Credit Directive changes the way banks approve mortgages. Stephanie McMahon, Strutt & Parker’s Head of Research talks with Simon Checkley, managing director of Private Finance, about what it means in reality.
What will the European Mortgage Credit Directive do?
The European Mortgage Credit Directive (MCD) aims to protect consumers by testing their ability to repay a mortgage in changing economic circumstances.
Some changes introduced under the MCD include:
• Buy-to-let: A number of ‘consumer buy-to-let’ mortgages are to be regulated by the FCA. This could lead to a slowdown in the currently buoyant sector.
• Foreign currency loans: changes to the lending requirements for foreign currency loans could make them less attractive for lenders to offer. A number of lenders have already pulled out of this market as a result. Other lenders, though, have already factored currency risk into their assessment of the applicant's total income, so are prepared for this change.
• Review of documentation: Lenders' sales processes and documentation are to be reviewed for compliance.
• Disclosure information: A standardised set of disclosure information aims to be introduced across Europe called the European Standardised Information Sheet (ESIS).
When do they comes into effect?
While these changes won’t officially come into effect until March next year, many banks have already started to react in order to protect themselves in advance. We started to see these pre-emptive changes being implemented from September 21, 2015.
Although the stated aim of the MCD is to offer more protection for consumers, it actually doesn’t offer more than the current UK regulatory framework, which was updated in the recent Mortgage Market Review.
How will they affect the market?
A worry is that the stricter conditions could lead to fewer mortgage options for some applicants and a slowdown in the market.
Nearly three quarters of mortgage brokers in the UK are concerned about its impact, with nearly the same amount of lenders (71%) sharing their concerns, according to Intermediary Mortgage Lenders Association research.
Some major lenders are, obviously, better prepared than the media reports would have you think. Nationwide recently set out its approach to the new rules, with plans to implement the requirements ahead of the deadline on 21 March 2016.
These include a questionnaire on mortgage applications to identify ‘consumer buy-to-let’ customers. Nationwide has notified brokers that they will also need to have the appropriate permissions and be fully registered with the Financial Conduct Authority (FCA) to conduct consumer buy-to-let business.
Apart from these adjustments, Nationwide is making no material changes to its lending policy and has stated the changes will have a minimal impact on lending activity.
Will it affect the mortgage market?
Private Finance’s initial assessment is that the changes are unlikely to cause lending activity to stall in 2016 as the UK has a dynamic and innovative mortgage market that can adjust to the MCD, just as it has adjusted to new regulatory requirements in the past.