The European Mortgage Credit Directive is a further example of European Union interference between mortgage lender and borrower, which in consequence reduces consumer choice, according to Ray Boulger, senior technical manager at broker John Charcol.
On 5 September, the government launched a consultation on incorporating new European regulations on mortgage lending into UK law.
Set out in the EU Mortgage Credit Directive, the regulations set common standards that EU members need to meet in order to protect consumers taking out loans to buy a residential property.
While the UK already complies with most of the EU rules, legislation implementing the directive contains some changes, including bringing the regulation of second charge mortgage lending into line with first charge mortgage lending and introducing new regulations for buy-to-let lending, where the lending is to consumers rather than for business purposes.
Speaking to FTAdviser, Mr Boulger said: “The more the EU interferes with the commercial arrangements between a lender and a borrower, the more effectively it reduces choice; so that is an area which is going to cause lenders some challenges.
“I suspect ultimately [it] will mean that even though at first sight consumers may be getting a better deal in practice will end up with less choice.”
Mr Boulger cited buy-to-let as an example of how the directive would impact the market.
“The Treasury and the Financial Conduct Authority basically took the view that buy-to-let shouldn’t be regulated because they see it as a commercial contract.
“The EU has thrown a spanner in the works by saying certain types of buy-to-let should be regulated and what the Treasury have done is looked at how they can minimise the types of products that will be regulated, on the basis that they don’t think they should be regulated at all, and they’ve come up with a proposal that says two types of buy-to-let will now be regulated.”
The first of these is where a person inherits a property and decides to keep it as an investment, taking out a mortgage on it. The other is where someone who lives in a property and decides to move, but keeps the property they were living in with a buy-to-let mortgage.
Mr Boulger said the problem with that is that if a consumer wishes to refinance onto a buy-to-let mortgage, “the fact that very few lenders offer regulated buy to let mortgages means that your choice will be much more limited”.
“The chances are that you will have to pay more, so actually its going to make consumer outcomes worse, when one of the prime FCA objectives is actually to improve consumer outcomes, and although it’s the Treasury driving this rather than the FCA, the impact will actually be to make things worse for the consumer not better.”
Mr Boulger’s words echo those of Paul Smee, director general of the CML, who last month expressed disappointment that the Treasury has found it necessary to make a “U-turn” on buy-to-let.
The other area Mr Boulger identified as being problematic in terms of the European Credit Mortgage Directive was around early repayment charges. The directive says that early repayment charges effectively have to be based on any loss the lender makes, he said.
“Introducing early repayment charges based on what the lender might lose effectively means we’ll have to bring back mark to market early repayment charges.”
Mr Boulger said that the problem with the EU rules are that, although they are very good in theory because lenders can only levy an early repayment charge that reflects the loss they are going to make, the only way this can be achieved is by having a very complicated maths formula, “which any consumer without a maths degree is not going to understand”.
“That is going to present a real challenge to lenders and its something the Council of Mortgage Lenders are looking at the moment.”
Mr Boulger added that one solution for the lenders would be to not have an early repayment charge, but if this is done it means they would have to charge a higher interest rate or higher fees.
ruth.gillbe@ft.com
