European Mortgage Credit Directive – How are you affected?
In the week that Europe brought in the European Mortgage Credit Directive (EMCD) we take a look at the changes and discuss how you the consumer will be affected.
The European Mortgage credit directive was put in place to create certain financial standards across the EU so that consumers could expect minimum standards and set processes. It sounds like a good idea but can you really apply one rule to the whole of the EU? The UK is a leading financial services hub and we already have put in place legislation to protect the consumer since the mess of the crash of 2008. So is intervention from Europe a good thing?
We currently use the ‘Key Facts Illustration’ (KFI) it is clear and easy to understand and I don’t think anything is wrong with it and if it isn’t broken, don’t fix it.
Well, Europe did fix it and since Monday 21st when the European legislation came into play, we now have the poorly named European Standardised Information Sheet or ESIS for short.
Having looked at both documents I still favour the KFI and both can still be produced although from March 2019 we will be expected to use the ESIS only. I don’t like the format and it is not as clear as our current KFI. When you next get a quote for a mortgage ask for both the KFI and the ESIS and let us have your feedback.
APR and APRC
We currently use the APR which stands for the annual percentage rate. This tells you that if you keep your loan over the full period of say 25 years and don’t remortgage after your 2 years fixed rate ends then taking account of all fees and interest the APR would be ‘X%’.
The EMCD has now brought us the APRC – Annual percentage rate charge. The APRC is calculated in a similar way to the APR but in the case of a tracker or variable rate the APRC will show you a worse case scenario based on 20 year high interest rate data.
In my opinion the APR and APRC or whatever else you want to call it, is a waste of time. OK, some of you may decide after your low 2 years fix rate that paying a higher rate of variable interest set by the lender at will is an adventurous way to live, but for 99% of us we will ask our mortgage broker to remortgage us on to a new 2/3/5/10 years fixed rate or lower tracker deal and at that point the APRC becomes redundant as it is a measure of your mortgage rate for the term. I would do away with the APR and it’s European Cousin the APRC.
Options for Additional Borrowing
So you have your mortgage in place and one of the many ‘storms’ that batter the UK during the early months of the year blow your roof off. You now need some extra borrowing to pay for a new roof. A decent mortgage broker would have either looked to remortgage and secure extra funds or if you were tied in they would have looked at a further advance with the existing lender.
Under the new EMCD rules when a clients comes to you to remortgage, all brokers must look at ‘Alternative Finance Options’. The alternative finance options could be second charge lending or an unsecured loan. Not all brokers will offer second charges and those that don’t will not be able to call themselves independent. Fox Davidson are putting in place measures to allow us to offer second charge lending and remain ‘independent’.
The Mortgage Offer
Under the new rules you have 7 days to consider a mortgage offer, this will be known as a reflection period.
Lenders will issue Binding mortgage offers. The mortgage offer will not be able to be re-underwritten unless there are material changes or the customer has provided inaccurate information.
This is a good thing for the consumer as we have seen incidences over the years where offers have been withdrawn without reason which has left the customer in an awkward position. A binding offer is good.
Foreign Currency Loans
The EMCD says that if a client is paid in Euros or Dollars but the loan is being offered in Sterling (GBP) then new rules apply which state that if the currency fluctuation between the 2 currencies is more than 20% then the lender is obliged to offer to change the loan into the currency that client is paid in.
It was no surprise then to see lenders pull out of lending to clients wishing to borrow and whom were paid in a foreign currency. Even those that are paid in GBP but get bonuses in $ such as many of our London banker clients are now affected. The market has greatly retracted for these clients.
Luckily as a whole of market mortgage broker we have plenty of aces up our sleeves and are still securing very attractive terms for clients paid in a foreign currency, including expatriates.
Regulated Buy to Let’s
We have already looked at those in previous blogs but essentially the EMCD has made some buy to lets regulated under the FCA. Situations that would give rise to a regulated or ‘Consumer Buy to Let’ include the remortgage of your existing residence to buy to let.
The non-regulated buy to let is now referred to as the ‘Professional buy to let’ or the ‘Investment Buy to let’ and applies to anyone who is purposely buying a property for the intention of renting it out. The idea is that if you are actively buying to rent out then you therefore know what you are doing whereas someone re-mortgaging their main residence to buy to let is an amateur and needs heavier regulation.
So there you have it, a summary of the changes that came in this week thanks to the EU. The papers and news will now be full of Brexit stories as we head into quarter 2 leading up to the referendum. Already Government ministers are being whipped into shape and advising that leaving the EU is bad for this and bad for that. I for one won’t be listening to any of them or any surveys clearly backed by the government. I will look to find independent reports and will assess how leaving or staying in the EU will affect me and my family and my work. From looking at what the EMCD has brought so far, I am not impressed.
One good thing is that the EMCD allows a UK regulated firm to apply for ‘a passport’ to conduct mortgage activities in an EEA state……We’re all off to Sunny Spain!