In the biggest shake-up of the mortgage market for years, mortgages on residential and semi commercial property to unincorporated entities may now be caught by regulation. The regulations stem from the EU Mortgage Credit Directive (MCD) and the new rules came into force in the UK on the 21st of March 2016.
Key changes include:
- Definition of a regulated loan no longer refers to a first charge on property
- For non-bridging mortgages, there is no longer a requirement for the borrower or a related person to occupy the property
- It is possible for a loan secured on less than 40% residential property to be regulated if it is not predominantly for business purposes
At first glance it sounds like the majority of lending will become regulated. However there are two key exceptions:
- Investment properties – where the funds are predominantly for business purpose and the site is occupied less than 40% by the borrower or a related person
- Buy To Let properties – a subset of investment property where the property is let but cannot be occupied at any time by the borrower or a related person, so long as it does not qualify as a Consumer Buy To Let.
A Consumer Buy To Let, a new term brought in for MCD, is where the borrower or related person has occupied the property at any time (since purchase if the property was bought by the borrower as opposed to inherited) and doesn’t have another Buy To Let. This captures the so called ‘accidental landlord’ – those who inherit or don’t sell when buying their next property.
All the complexity means that lenders will need to ask more questions and make sure they get the right declarations to avoid being caught out – you can only write loans covered by MCD regulation with specific permission from the FCA.
One of the reasons for this is that MCD loans must follow a very specific process. For instance, the Key Facts Illustration (KFI) has now been replaced by the European Standardised Information Sheet (ESIS). The ESIS means that now across the EU, all mortgage information documents will be presented in the same format. This will make it much simpler for Britons purchasing properties overseas to understand any loans they take out to finance the purchase.
After the ESIS, lenders issue a Binding Offer with a mandatory 7 day reflection period during which the offer can only be withdrawn in very limited circumstances. More importantly, the lender may not contact the borrower during the cooling off period. Fortunately, the borrower may waive their cooling-off period so it needn’t hold up completion.
As with any kind of regulatory change, it will be hard to assess the true impact of MCD until well after its implementation. Borrowers, brokers, and lenders have been focused on aligning their processes with the new rules. It is only once these new processes have been tested that we can assess whether MCD is a success.