Is the Mortgage Credit Directive a Regulatory-step too far? Two years’ ago I wrote about impending changes to property financing and how lending would be affected by new European legislation. Well the European Union Mortgage Credit Directive (MCD) comes into force in 2016 and lenders are already changing policy ahead of time, to ensure compliance.
Only sensible you would have thought?…
Well yes, and indeed over the last 12 months there have been attention-grabbing stories of buyers in Hungary, or Poland or Cyprus, where some home loans have been taken out in a foreign currency, such as the Swiss franc, only to come a cropper. Swiss Franc mortgages have, historically, attracted lower repayment interest rates than some domestic currencies. However, when exchange rates have changed suddenly, or currencies been devalued, this has had a dramatic inflationary effect on the size of the borrowings and in turn the borrower’s ability to pay.
The new European law on mortgages not only seeks to harmonise mortgage regulation across Europe, but also to protect buyers more against undue exposure.
What does MCD mean for home buyers?
Well one of the main issues appears to be around lenders’ obligations to ensure affordability, which in turn includes exposure to exchange rates. But the new regulation, designed to help buyers, will affect foreign nationals as well as the British who have travelled abroad, or who are expatriates, or workers for multinationals with overseas head offices. Indeed this could affect Holiday Home owners who have a Euro-denominated mortgage, or a home in Spain or Cyprus and who want to use it as collateral for borrowing in the UK.
For homeowners who want a mortgage denominated in a foreign currency, lenders will be obliged to offer borrowers the option of switching the loan into sterling, thereby transferring the currency risk from homeowner to the lender.
As a result, fewer lenders will continue to offer UK mortgages to foreign currency earners. The few that do, will only consider doing so for buyers with higher deposits. This lessens the risk for the lender, by creating greater level of financial padding against exchange rate fluctuations.
What are the homebuyer or investor options?
Higher earners may be less affected given they have access to a wider pool of lenders, including access to private banks.
Generally speaking it has been good practice to get a mortgage in the currency of the buyer’s main source of income. These lending changes place greater emphasis on this adage.
It is also an environment which favours more cash purchases of property. And for investors, fractional investments may become more attractive, given there is a lower entry price threshold which makes a cash purchase more digestable.
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