27-09-2015

Mortgage Credit Directive ‘Paid in a foreign currency? No mortgage for you then.’

European Mortgage Credit Directive (MCD) starts to have a major impact.

New rules on mortgage lending imposed by Europe are starting to filter through ahead of their implementation in March 2016. The Mortgage Credit Directive, will introduce new rules that will affect the way UK lenders lend to you including Buy to let changes and lending to UK nationals that receive income in a foreign currency.

Lenders such as Nationwide have already stated they won’t accept income in a foreign currency but only last week Skipton Building Society and Lloyds banking group which includes lending giants Halifax and specialist buy to let lender BM Solutions confirmed they would no longer accept mortgages for mortgage applicants earning income in a foreign currency. More lenders will follow suit over the coming months.

The reason for the change is due to the legislation which states that if the exchange rate between the two currencies (sterling and the currency the client is paid in) fluctuates by more than 20% then the MCD will force lenders to offer borrowers the option of switching their mortgage to the currency of their earnings or their country of residence.

This move would be complicated and very costly for lenders many of which don’t have the systems or the desire to handle such changes. Currency fluctuations could result in a client’s sterling equivalent loan increasing which would affect loan to values and it’s just not workable. Multi-currency loans that are available through specialist or private bank lenders are only available to low loan to value mortgages for high net worth clients usually borrowing large sums and so a blanket policy like this just won’t work for mainstream lending. Lenders are pulling out of this type of lending as a result.

Fox Davidson, are a specialist mortgage broker in the expatriate and foreign national mortgage market and believes the rules are badly thought out and will do more harm than good. With many of our clients living in the UK but working for large multi-nationals, foreign banks or investment banks (and certainly expatriates) that receive income in sterling and/or in a foreign currency this move will mean that mainstream lenders will no longer lend to them, this is definitely not ‘treating customers fairly’ which is a key policy of the FCA. We hope that there may be a client opt out clause for mortgage applicants that receive any element of their pay in a foreign currency, but at present lenders are simply removing themselves from the potential risk and not offering loans to clients paid in anything but GBP.

The new legislation will mean that even more clients will become mortgage prisoners as they fall foul of the new rules and are therefore unable to move to another lender. The new legislation is huge and will affect thousands of people with mortgages in the UK.

Kris Brewster, head of products at Skipton BS commented on a popular mortgage broker website “At Skipton we always aim to say it like it is. The issue on foreign currency stems from not being in the Euro. The regulations require a lender to give a customer the right to convert the credit agreement into an alternative currency or put other arrangements in place limit the exchange rate risk a consumer is exposed to under the credit agreement. We’d love to help customers who earn in currencies other than sterling but the costs are disproportionate to the benefits for us. Let’s hope some other lenders are able to help.”

Lenders such as Santander still offer loans to clients paid in a foreign currency and they have already safeguarded against currency fluctuations when assessing a clients affordability. Santander will deduct 25% for currency fluctuations from the applicant’s gross annual income. As more lenders pull out lenders such as Santander will become the go to bank(s) for this type of lending and will understandably likely withdrawal from lending to clients with a foreign income leaving them high and dry.

The MCD will introduce other rules including changes to Buy to let mortgages meaning that clients will be treated differently depending on how they come about their buy to let. E.g. If you can’t sell your house and decide to take out a buy to let mortgage on it you will be treated differently to someone buying their 5th/6th/10th buy to let as part of a portfolio. Other changes include not allowing lenders discretion to waive affordability checks for clients simply changing rate with no further borrowing.

As a final word we would say that the UK mortgage and property market is a complex one and to be told how to lend by a directive covering 28 countries is both stupid and the end result is certainly not treating customers fairly.

Fox Davidson secure mortgages for British expats and foreign Nationals with a foreign income source. Read more on our expat page here.