Mortgages  

Clients face fee hit as lenders ‘over-interpret’ FCA rules

Existing homeowners that attempt to move home may have to part with thousands of pounds in early repayment fees as a result of their mortgage lenders “over-interpreting” new regulations that come into force on Saturday.

Under the Mortgage Market Review, lenders must treat every mortgage sale as advised and are tasked with conducting more thorough affordability assessments, including where existing borrowers move to new terms.

However, changes to the original drafting of the rules in late 2012 mean lenders are not required to test affordability for existing borrowers that are porting a mortgage or otherwise are moving house and not increasing the size of their outstanding loan.

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A number of commentators have cited lenders going much further than the rules demand, with trade bodies highlighting evidence of tougher affordability tests than those described in the Financial Conduct Authority’s rules.

In one case, Philip Dodd, chartered financial planner at Bolton-based advice firm Alan Cheetham, said two Natwest clients are effectively being forced to pay around £5,500 after failing an affordability assessment even though they are only seeking to port their loan.

The couple in their mid-50s, who have asked not to be named, have a 10 per cent loan-to-value mortgage on a £1.7m property and are downsizing to a similar sized loan on a £900,000 home. According to Mr Dodd they have eight months left on a two-year fixed rate interest-only mortgage.

Natwest could not provide comment at the time of publication.

Some in the industry have blamed the apparently overzealous actions of lenders on the combination of a strict tone but a lack of clarity from the regulator on how and when lenders should test affordability.

Mr Dodd said he has heard evidence of other banks undertaking similar activities. He cited figures from the Council of Mortgage Lenders to suggest more than £200m in early repayment fees could be triggered by the banks’ approach.

This is based on CML figures which revealed gross lending of £177bn for 2013, of which 83 per cent (£147bn) is accounted for by fixed-rate deals. Mr Dodd said if 5 per cent of these borrowers sought to move home, this could trigger £220m of fees, based on an ERC equal to 3 per cent of the outstanding aggregated balance.

He told FTAdviser: “Banks are over-interpreting the rules. The main issue the couple have experienced is box-ticking - it is a degree of inflexibility that will give the market indigestion. No matter how we go, it is impossible to show discretion.”

The FCA’s final mortgage market rules state: “... an affordability assessment is not required for an existing borrower, staying with their existing lender, if there is no increase in the current amount outstanding... unless there is a material impact on affordability. This is the case whether the transaction takes effect through a contract variation, or a new regulated mortgage contract.

“So, for example, an affordability assessment will not be required for a change that does not have a material impact on affordability, such as a rate switch or retention deal; or where the borrower is porting their mortgage or moving to a new property.”